Werlinich Asset Management, LLC

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May 21, 2013

Is Dow 16,000 Around The Corner?

Current Market Analysis
Last Month's Results
Statistics to Watch
Trends To Watch
What I'm Thinking and Doing
Professional News and Notes

Current Market Analysis

As I write this in the middle of the trading day, the Dow Jones Industrial Average stands at 15,371, up 671 points, or 4.5%, from when I wrote to you less than five weeks ago, and up 17.3% from the year-end closing price of 13,104. The market has blown through every warning signal, every potential pratfall, and zoomed to ever higher highs. With the Dow Jones Industrial and Transportation averages concurrently achieving new all time high levels on Friday, all is well according to Dow Theory.

Investors who followed the old market bromide to "sell in May and go away" have been very disappointed (so far). Still, we have entered the historically weak time of year. Indeed, there were severe market corrections in the summers of 2010, 2011 and 2012 and the summer of 2013 is just around the corner. That should give one pause. On the the hard, the Fed, in conjunction with central bankers around the world, continue to flood global markets with liquidity, forcing up equity prices as low paying cash seeks a better yield in stocks. So for now, it remains full steam ahead.

The day I wrote to you last month the market tanked and I asked if that was going to be a minor bump in the rally or the beginning of a larger correction. Looking at the chart below, you can see that the decline of about 3% was barely a hiccup in the seemingly unstoppable upward trend for the market. The DJIA blew right past 15k and is taking aim at 16k, as hard as that may be to believe. It will only take a gain of about 4% to get us there. While I would expect another bump sometime soon to take some of the froth out of the market, there doesn't seem anything, other than the Fed turning off the monetary spigots, that can stop this rally.

The Dow Jones Transportation Average, after a bumpy April, has returned to its upward trajectory. It's hard to imagine a major correction without the transports leading the way down. As it stands, the index is telling us that the economy is doing just fine, thank you.

The recent action in the Dow Jones Utility Average belies all the positive trends in most of the other broad averages. Should this 5% correction continue a little longer, this could provide a buying opportunity similar to the one offered, and taken advantage of, last November. I think this is simply a rotation out of a defensive sector into more aggressive parts of the market during an historic rally. Nothing fundamental has changed about the utility sector. The first level of support will come on the rising blue trendline. The second will be around 487. It already appears that 510 may hold. We'll see over the next few weeks.

Interest rates on the 10-year Treasury are once again rising towards resistance at 2.1% (dotted green line). It isn't surprising that investors are rotating out of bonds and into equities given the current market action. If rates move, and stay, above 2% without harming the market or the economy, would that give the Fed the courage to reduce their QE program? Time will tell. In the meantime, this chart doesn't concern me at all.

Last Month's Results

The rocket ship that is the stock market continued in April, and remains in force so far in May. In less than five months we've had a great year with double digit returns in all the broad averages. The bond market, not surprisingly, continues to lag with virtually no return for the year. Value stocks, those that tend to pay a higher dividend, continue to lead the way in a yield starved world. Even European stocks, with all of the fears of economic collapse, have joined the party like it's 1999.

Name of Index





S&P 500




Large-cap stocks

Dow Jones Industrial Average




Large-cap stocks

NASDAQ Composite




Large-cap tech stocks

Russell 1000 Growth




Large-cap growth stocks

Russell 1000 Value




Large-cap value stocks

Russell 2000 Growth




Small-cap growth stocks

Russell 2000 Value




Small-cap value stocks





Europe, Australia, Far East

Barclays Aggregate




US government bonds

Barclays High Yield




High-yield corporate bonds

* Return numbers include the reinvestment of dividends

Statistics To Watch

  • According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended May 11 was 360,000, an increase of 32,000 from the prior week's revised figure. The four-week average of 339,250 is about 18,750 lower than the tally from five weeks ago. According to the seasonal average, about 3.0 million people continue to collect unemployment insurance, which is roughly 100,000 less than five weeks ago. Overall, this picture is looking better.
  • Non-farm payroll employment in April was a pleasant surprise. The establishment survey reported that a solid 165,000 jobs were added in the month, and February and March were revised much higher than originally reported, adding an additional 114,000 jobs. The household survey said that the unemployment rate fell to 7.5%. The 11.7 million workers counted as unemployed was essentially unchanged, as was the labor force participation rate of 63.3%. The more comprehensive U-6 "underemployment" rate inched up to 13.9% thanks to a jump in the number of part-time workers.
  • A lower 4.4 million people continued to be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work rose to 7.9 million and the number of marginally attached workers fell to 2.3 million. The number of people holding multiple jobs moved lower to 7.0 million. The average hourly wages for blue collar workers inched higher to $20.06 while the average work week slipped to 33.7 hours. Overall, the picture remains one of slow, incremental improvements.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget surplus of $112 billion in April, thanks to stronger than expected tax collections and the effects of the sequester, and a deficit of $489 billion for the first seven months of fiscal 2013. This is $231 billion less than the record figure reported for the same period of fiscal 2012. The CBO anticipates a much smaller deficit this year, which is a good thing.
  • The Census Bureau reported that the U.S. trade deficit of goods and services was $38.8 billion in March, down about $4.8 billion from February. The trade deficit should continue to shrink. Indeed, it's possible that we'll have a trade surplus sometime in the next few years.
  • The Census Bureau reported that privately owned housing starts tanked in April, falling 16.5%, yet they remained 13.1% higher than a year ago, to a seasonally adjusted annual rate of 853,000 units. Fortunately, new building permits rose 14.3% from the prior month to easily the highest level in more than a year, and were 35.8% higher than the year before.
  • The National Association of Homebuilders/Wells Fargo Confidence Index broke a three month losing streak in May, rising from 41 to 44. While this is a good sign, and likely a result of a very tight housing market with too little inventory, sentiment remains below a healthy figure of 50 or above.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, 417,000 new homes were sold in March, a 1.5% increase after a weak February, and still 18.5% higher than a year ago. The estimate of number of homes for sale was 153,000, which represents a tiny 4.4 months of inventory at the current rate of sales. The median sales price dropped to $247,000 after a large February increase, which is equivalent to the rising 12-month moving average price of $246,767. For the past year the average sales prices have remained between $240,000 and $255,000. Still, the overall trend remains positive as a tight market augurs well for future price increases and the spring selling season should continue to reduce the inventory of foreclosures and short-sales.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes dropped in March, to 4.92 million units, but remained 10.3% higher than a year ago. The estimate of homes for sale rose to 1.93 million as the more robust market spurred more homeowners to put their homes up for sale. The median sales price jumped to $184,300, which is slightly above the rising 12-month average of $179,867. As with new homes, the existing home market is likely to pop in the spring.
  • The Institute for Supply Management (ISM) index of manufacturing activity suggests that the economy has been growing for five straight months, albeit at a lower rate, as the index declined to 50.7 in April. In addition, the ISM index of non-manufacturing activity was 53.1, which marked growth in the service sector for 40 consecutive months. But like manufacturing, growth in the service sector also slowed in the month. This type of data allows the Fed to continue their program of monetary stimulus.
  • The Conference Board reported that it's index of Leading Economic Indicators increased by 0.6% in April following a 0.2% decline in March. Says Ataman Ozyildirim, economist at The Conference Board: "After a slight decline in March, the U.S. LEI rebounded in April, led by housing permits and the interest rate spread. Labor market conditions also contributed, although consumers’ outlook on the economy remains weak. In general, the LEI points to a continuing economic expansion with some upside potential." Says Ken Goldstein, economist at The Conference Board: "“The index is 3.5 percent higher (annualized) than six months ago, suggesting expansion. However, the biggest risk right now is the adverse impact of cuts in federal spending. The biggest positive factor is the potential for improvement in the recovering housing and labor markets. The biggest unknown is the resiliency in confidence, both consumer and business."
  • According to the Bureau of Economic Analysis, the "advance" estimate of GDP growth for Q1 2013 was 2.5%, a marked improvement over the anemic growth of 0.4% in Q4 2012. For comparison, growth was 3.1% in Q3, 1.3% in Q2 and 2.0% in Q1. This level of growth will not spur the Fed to reduce their policies of monetary expansion.
  • The Federal Reserve reported in that in March the amount of outstanding consumer credit was $2.81 trillion, up from the prior month and growing at a 3.5% annualized rate. Consumer credit grew for the eight consecutive month. Even so, it's barely affecting retail sales.
  • The Conference Board's Consumer Confidence Index increased to 68.1 in April after falling to 61.9 in March. Says Lynn Franco, Director of The Conference Board Consumer Research Center "Consumer Confidence improved in April, as consumers’ expectations about the short-term economic outlook and their income prospects improved. However, consumers’ confidence has been challenged several times over the past few months by such events as the fiscal cliff, the payroll tax hike and the sequester. Thus, while expectations appear to have bounced back, it is too soon to tell if confidence is actually on the mend."
  • According to the FDIC, 6 banks failed in April, bringing the total for the year to 10, versus 22 through the same month last year. I would be surprised if more than 20 banks go under this year.

Trends To Watch

The dollar index has clearly broken out of the tight range between 78.5 and 81.75 (the two dotted red lines) and is making a serious attempt to break through resistance around 84. The last (failed) attempt happened last July. Clearly the dollar remains a "safe" and desired currency, no matter how hard the Fed tries to kill it. As the Bank of Japan, and other countries, work to devalue their currencies, the dollar continue to strengthen. That has negative implications for the commodities markets in the short-term.

To give you some perspective, here is chart of the dollar looking back 25 years. You can clearly see that while the dollar appears very strong right now, it has a long way to go before it gets anywhere near truly high levels. Indeed, at 85, it is near the bottom of its historical trading range. And if you remember the mid- to late-90s, when the dollar soared in value, the stock market rode the same wave higher, until the bubble finally burst.

The trading in gold this year, and really for almost a year and a half, has been a disaster for gold bulls like me. One can make the argument that gold is down because there is little to no risk of imminent inflation. Or you could posit that investors are abandoning hedges like gold for the glitter of risky equities. Or you could suggest that since gold pays no interest or has no yield it has lost its appeal. Or you could pound the table and swear that the gold market is being manipulated by some evil financial forces. I would say that all of the above is correct.

So where does that leave things? Looked at through a longer-term lens, we can see that the next major support level is around $1,227 so there is room for further weakness. With all the bad news I can't help but feel that we will see another rally before the year is over so I'm not throwing in the towel just yet. The severity of the current decline is not without recent precedent. There was a 22.6% correction from peak to trough in 2006, and a 29.5% correction in 2008. The price of gold has now dropped about 30% since the peak in late 2011. So while the twelve year bull run in the price of gold has certainly stalled, I don't think the final chapter has been written just yet.

The chart for silver is very grim for those of us with long positions. The price of silver plunged below support around 26 and is headed for the next level around 20. Should that level not hold, the price could fall back to around 15. We're overdue for a bounce so let's see what happens next.

Dr. Copper is looking pretty sickly right now. How can the stock market be doing so well while the putative proxy for the economy is doing so badly? I think it all comes back to China, which continues to flounder. I'm wondering if the price of copper can claim predictive powers for the domestic economy any longer. Maybe it's become a proxy for China's economy rather than ours. If that's true, I may eliminate this chart going forward.

The price of West Texas crude is holding up better than many of the other commodities. The current price is just above the midpoint of the trading range (dotted green line) and both moving averages and has rallied strongly since the big decline last month. The potential fly in the ointment is that, going back to last September, the last four rallies has stopped at increasingly lower levels. The current rally would have to take the price above $98 to break that trend. If that happens, we could see $100 again.

The financial index is in the midst of an almost two year bull market, the last six months of which has seen nary a correction as it powers to higher and higher levels. The current price remains well above the trendline and both moving averages. With Q1 earnings in the bank (pun intended), there's no reason to think anything will change for the next few months.

The housing index also remains solidly bullish after taking a little breather last month. As you can see below, the index continues to move higher after taking some time to consolidate. If the past is any prelude, and given my expectation of a strong summer selling season, I would expect this sector to move even higher for the next few months.

Amazingly, the index for the developed international markets has broken through resistance at 62 and powered to a new multi-year high. The one note of caution is that RSI is overbought, but during a rally, the market can remain overbought for a while. So for now, everything looks bullish.

China remains the proverbial fly in the ointment. The Shanghai Composite simply cannot seem to levitate no matter the success of stock markets around the rest of the world. Could it be because China is one of the few economies not overtly increasing their money supply? Could it be because things are worse there than their tight lipped government would admit? Or is there another problem we don't even know about? The good news is that the index has a little breathing room between the current level and the recent lows. The bad news is that the last rally could not pierce resistance around 2,475. The weakness in China has put a lot of pressure on copper and other base metal prices. If China were to get with the program, the sky would be the limit to the worldwide stock market rally.

The NYSE Bullish sentiment index is once again at the top of the trading range. In addition, it's been about six months since the index fell below 60%. That's the longest such period in about two years. And yet, RSI has just touched overbought, and history suggests there is often an extended period of bullishness before a significant correction, so I'd say the bull still has legs.

Next we see that almost 80% of stocks traded on the New York Stock Exchange are currently trading above their 50-day moving average. While that isn't overly excessive, it does suggest a quick return to frothy levels after a quick respite last month. Again, I'm not overly concerned.

Finally, the VIX, or the "fear index", showed the spike in volatility last month, and the ensuing return to complacency quickly thereafter. I hate to admit it, but it appears that the market accepts levels of complacency today that would be unheard of in prior years. Maybe we are indeed in a "new normal". So for now, a VIX of 13 doesn't bother me too much.

What I'm Thinking and Doing

If you took the time to read through the earlier parts of the newsletter you'd probably notice that all things considered, I'm feeling pretty good about the market right now. It has truly been an amazing run, and one that far too many people have missed because they've been too afraid to return to the stock market after the debacle of 2008. That fear has created a tremendous lost opportunity.

It can be reasonably argued that the entire bull market of the past few years has been artificially created by Ben Bernanke and his printing press. That argument has caused too many private and professional investors to miss out on massive profits because they derided the reason for the rally rather than simply accepting that it was happening, for whatever reason. There's an old adage in the market that has never been more true: "don't fight the Fed". Until the central bankers around the world change their accommodative stance there is no reason to leave the equity market.

That being said, there's nothing wrong with taking a little money off the table to have some buying power available for the inevitable correction. I started raising some cash for clients in February by selling some of my smaller or under performing holdings, and I've continued that process ever since. I much prefer to sell into a rising market whenever possible. In the past two months I've eliminated almost a dozen holdings, most of which are in the commodity sector. Until China joins the festivities, base metals will continue to lag. I even culled one of my smaller gold mining stocks. I don't plan on eliminating my gold holdings; I'm simply trimming a couple of the worst performers while I hang onto the core positions. Owning gold has held back the performance in my portfolios for the past two years, after providing a boost in the prior nine years, yet the thesis for owning the sector remains, so I'm not selling yet.

Professional News and Notes

There isn't much to report this month. My website is up and running and seems to be working just fine. I would love to get some feedback from my readers, so please take a few minutes to check out the site by clicking here then let me know what you think.

I recently hit a minor milestone when I passed 500 followers on Twitter. At last look I was up to 524. If you aren't already following me and my daily market tweets, take a moment and follow me.

While this isn't strictly business, I'd like to promote something that's coming up next month. On June 11, I'll be hosting an event in support of the Westchester Community College Scholarship Foundation. We hope to have 50 people at my home to meet and listen to Brandon Steiner of Steiner Sports, one of the premier collectibles companies in the country. All of the proceeds will go towards scholarships for needy students of WCC. Some tickets are still available so if you're interested, let me know right away. It should be a wonderful evening of great food and wine, with an interesting speaker, supporting a great cause. I hope to see some of you here.

As always, I thank you, my readers, and remind you that this newsletter is for you. I have been writing News and Views for over nine years now. If you'd like to read any prior edition, simply go to my website and click on the link to my newsletter archives. I hope you have learned something about our economy and our stock market, and that you will continue to follow along with me in the future. If you have any thoughts or suggestions on how to make it better, please let me know. And if you'd like to speak with me about your investment needs, or if you know someone that might benefit from my guidance, I'd be pleased to be of service. Simply give me a call or drop me an email.

Best regards,

Greg Werlinich

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