December 19, 2013

Last month we highlighted the aftermath of the government shutdown and the near default on debt. Following that the markets continued on their ascent. We noted that positive seasonality and the Bull's control were dominating the equity markets. That continued into the Thanksgiving holiday. Black Friday appeared to be a short-term top, it least in the eyes of the Bears, but a belief began that Scrooge was going interrupt the holiday season.

A better-than-expected monthly employment report ushered in the Santa Claus Rally, erasing the losses of the previous week, and bring the benchmarks back within reach of their all-time highs, set earlier in November.

For the month of November, the S&P 500 Index (SPX—1,805.81) rose 2.8% and the Dow Jones Industrial Average (DJIA—16,086.41) gained 3.5% last month. The Nasdaq Composite Index (COMPQ—4,059.89) added 3.6% and the Russell 2000 Index (RUT—1,142.89) climbed 3.9%. While the indices and averages have been on the rise, the internal market indicators have not confirmed the advance. From investors to managers stock selection has become more important, especially as end-of-year positioning overshadows investment selection.

Some important market leaders have showed signs of topping. For example, Boeing Co. (BA—$134.25), a DJIA leader, up 78.1% year-to-date, as seen momentum slow. However other issues are beginning to show signs of leadership.

European shares were generally higher last month but began December lower. Hong Kong was higher and Japan began November strong and ended below its best intramonth levels.

Commodities Ease

West Texas Intermediate Crude Oil Jan 2014 futures (CL/F4—$97.82) prices dropped for the third consecutive month to the lowest level since June. Conversely, Brent Crude Jan 2014 futures (CO/F4—$111.61) were higher, rising to a four month high as December began.

Precious metals resumed their negative trend after bouncing in mid-October, with several contracts testing and failing at their respective trend lines. The bounce last month in the Gold Jan 2014 Futures (GC/F4—$1230.00) fell 5.4% in November and Silver Jan 2014 Futures (SI/F4—$19.52) sank 8.7%. While High Grade Copper Jan 2014 (HG/F4—$3.241) was down 2.7% month/month, prices bounced and set a higher low during the beginning of December. Agricultural prices were slightly higher while livestock values rose. As a result, food prices have been on the rise.


Last month we noted that the Eurozone economy had reportedly exited recession. There was some confirmation from the rise in the Euro vs. the US Dollar, which gained in November. Also exhibiting strength against the "greenback" was the British Pound and the Swiss Franc.

In the Asian arena the Dollar is strong against the Japanese Yen and against the Aussie Dollar.

The Fed

The Senate is slated to vote this month, and is expected to approve Janet Yellen as the next chair-person of the Federal Reserve. Her comments during confirmation hearings addressed unemployment and economic growth.

There is a lot of focus on when the Fed will begin to "taper" its quantitative easing program. Bears have been using the expectation to pressure prices lower. We believe that there is too much focus on this pending event, and that when it actually does occur it could be a good thing. Tapering is not the same as changing the accommodative stance. In fact, tapering would be an acknowledgement of economic expansion and that concerns should be lowered.

The Economy

Problems and realities over the Affordable Care Act (a.k.a. ACA or Obamacare) continue to surface, and some believe that it might have negative implications on the economy. There are many calls for changes and postponements of segments of ACA. Businesses remain concerned about the costs of the program and doctors and medical professionals are worried about payments and reimbursements.

Meanwhile, the revision to the third quarter Gross Domestic Product (GDP) report showed that the economy grew at a 3.6% annual rate versus a previous rate of 2.5%. It is the largest growth rate since the first quarter of 2012.

In November, the US Unemployment Rate dropped to 7.0% from 7.3%, according to the Bureau of Labor Statistics.
The US Unemployment Rate dropped to 7.0% from 7.3%, according to the Bureau of Labor Statistics.

Last Friday the Bureau of Labor Statistics reported that 203,000 jobs were created in November, well above the consensus estimate of 183,000. The unemployment rate dropped to 7.0% from 7.3%, the lowest reading in five years (see chart). That report forced short-sellers to cover positions, which resulted in a nearly 200 point rise for DJIA and 20 point gain for SPX.

Inflationary pressures remain in check, allowing the Fed to keep its accommodative stance.

Equities, A Deeper View

As we noted earlier, the internal market indicators have not been confirming the rise in the benchmarks. That shows that the leadership is narrow. Yet, prices are rising, in a rotating fashion, driven by expectations of future economic grow and a strong debt market. Stock repurchases and mergers continue to fuel prices.

Last month the groups that led the equities markets were office electronics (+14.5%), oil & gas refiners (+11.5%), diversified financial services (+11.0%), managed health (+10.3%), and Internet retailers (+9.7%). The lagging groups were home entertainment software (-15.5%), gold (-8.9%), healthcare facilities (-8.6%), computers & electronics (-7.7%), and specialty REITS (-6.9%).

As this is the season of giving, and in order to give we have to buy, focus on retailers, whom earn the majority of their profits during the holiday shop-ping season, is very important. Last month the SPDR S&P Retail ETF (XRT—$88.46) rose 5.1%, and is up 41.8% year-to-date.

What To Watch For

Stock selection has become increasingly important as the number of participants have contracted despite the indexes and averages setting new all-time highs last month. This is likely to continue for the remainder of the year as investors look toward portfolio and tax management.

Market Bears have been frustrated by the lack of a traditional 10% correction. There have been several untraditional corrections, measuring between 4% and 7%, which have been buying opportunities for the Bulls.

We anticipate that volume will wane as year-end approaches, with most managers closing their books in the next week or so.

We wish all of our readers a happy and healthy holiday and prosperous New Year.

Michael J. Levas has been in the investment management business for over twenty years and is the founder,senior managing principal & director of trading at the Olympian Group ...