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A Federal Confirmation, and Half-Year Review

The U.S. economy is still struggling, but many indicators are pointing to a gradually improving economic climate.

Traders and investors were looking for a correction for stocks in May but they were a bit early. An unofficial correction of less than 10%, so far, did emerge in June, breaking the winning streak for the widely watched S&P 500 Index (SPX—1,606.28). Commodities continued to sink and treasury prices dropped. Renewed political and economic tensions strengthened the US Dollar. Prospects remain favorable for the equities markets.

Following a seven month winning streak, SPX lost 1.5% in June but ended the month well above its lows. From the all-time high to the intramonth low, SPX corrected 7.5%. The Dow Jones Industrial Average (DJIA—14,909.60) was down 1.4% and had a 6.4% correction. For the month, the Nasdaq Composite Index (COMPQ—3,403.25) sank 1.5% while the Russell 2000 Index (RUT—977.41) was off 0.7%.

However, the unofficial correction has become a buying opportunity for would-be buyers. For example, RUT rose to a new all-time high, closing above the 1,000 level for the first time.

Several combined factors have fueled the recent rise. First, is that the US Dollar has strengthened. Second, is a sell off in the treasury market resulted in investors searching for an alternative place to put their money. Let's examine the markets for some answers.

Commodities Down and Bounce

Last month we noted that gold and silver prices had dropped to a 2-1/2 year low. The weakness in precious metals continued into June, with prices sinking to a 34-month low. Other metals also followed the trend, which included high-grade copper. However, there has been a bounce in prices.

Most energy futures have been in consolidation phases, but they have recently strengthened. West Texas Intermediate Crude Oil August Futures (CL/Q3—$103.10) broke out of its consolidation. A combination of oversold technical readings and political/economic conditions could be attributed to the change. The upheaval/coup in Egypt pushed oil prices higher while renewed concerns about problem euro zone countries have resulted in a flight to gold and the US Dollar


The "Green Back" has become the currency of safety. Last Friday the US Dollar Index (DXY-I—84.71) gaped higher, rising to a three-year high. The Euro sank to a new three-month low but other currencies were also dropping versus the dollar. Among them was the Aussie Dollar, Canadian Dollar and British Pound.

Also helping the dollar was the Fed. A rise in interest rates along with expectations for further increases, have also pushed the currency higher.

The Fed

Last month's meeting of the Federal Open Market Committee (FOMC) resulted in comments from the Fed Chairman that indicated that the Fed might begin to ease or "taper" its quantitative easing program. This resulted in some "urgent" selling in US treasuries. Many investors believe that even a slight easing is similar to tightening, but further comments from other Fed officials sought to ease those concerns.

However, despite the efforts of the Fed to calm the markets, the yield on the 10-year T-note jumped to 2.715% on July 5th from 2.164% at the end of May. This was one of the largest jumps in years. The selling of treasuries combined with the strength in the dollar is resulting in a shift into the equities markets, which has halted, at least temporarily, the correction that was occurring in stocks.

The Economy

Now here is the big news. The Fed has acknowledged that the "Economy is Growing," albeit at an anemic pace. However, job growth continues, with 195,000 net jobs being created in June, according to the Bureau of Labor Statistics (BLS). Furthermore, BLS revised the non-farm payrolls upward for both April and May. As the job situation has improved so has the Conference Board's Consumer Confidence Index, which jumped to 81.4 from 74.3 in May, the highest reading since February 2008.

The final revision to 1Q Gross Domestic Product (GDP) was lower, partially the result of government sequestration. GDP was lowered to an increase of only 1.8%, down from the previous reading of 2.4%. Personal consumption was also lowered to 2.6% from 3.4%.

Equities, A Deeper View

An unofficial correction of approximately 5% was recorded by most major averages and indices last month. As we go to press, those benchmarks have been recovering, and RUT has climbed to a new all-time high. There has also been significant improvement in the internal market indicators, such as the NYSE and Nasdaq advance-decline indices as well as the number of issues setting new 52-week highs.

Among the strongest performing groups in June were electric equipment and instruments (+10.7%), publishing and printing (+10.7%), computers and electronics (+8.9%), thrifts and mortgages (8.0%), and cable and satellite providers (+5.9%). The weakest groups included coal and consumable fuels (-23.3%), diversified supply services (-14.4%), oil and gas refin-ers (-13.1%), gold (-12.6%), and educational services (-11.4%).

Investor and trader sentiment remains relatively complacent, especially given the sharp intra-month decline and bounce. Despite an uptick in the CBOE S&P 500 Implied Volatility Index (VIX—16.86), which reached a year-to-date high of 21.91 on June 24th, the "fear gauge" has returned to nearly pre-correction levels.

What To Watch For

An increase in jobs and consumer confidence now needs to be confirmed by economic activity, which should be in the form of increased earnings.

Investors also need to keep their eyes on the political, social and economic events that are developing around the world. From the ouster of the first democratically elected president of Egypt to the economic concerns of euro zone and china, there is plenty of ammunition that could derail the US economic recovery.

We continue to maintain a defensive posture. The use of conservative and defensive strategies provides a lower risk exposure while still allowing for growth and performance.

2013: The First Half

The seven month rally for most averages and indices came to a halt last month, but the S&P 500 Index (SPX) only lost 1.5% in June while the Dow Jones Industrial Average (DJIA) gave back 1.4%. For the six month period SPX rose 12.6% and DJIA jumped 13.8%. The Nasdaq Composite Index (COMPQ) spiked 12.7% while the Nasdaq 100 Index (NDX) appreciated 9.4%. The small-cap Russell 2000 Index (RUT) surged 12.7%. Outperforming most other benchmarks was the Dow Jones Transportation Average (DJTA), which soared 16.3% so far this year (see chart).

During the first six months the strongest industry groups included computers and electronics (+99.8%), home entertainment software (+58.1%), special consumer services (+49.4%), healthcare fa-cilities (+42.0%), and office electronics (+33.0%). The weakest groups included gold (-35.5%), coal and consumable fuels (-30.1%), computer hardware (-19.0%), steel (-17.6%), diversified metals and mines (-16.5%).

Two groups we are watching are the automotive industry (see last month's letter), and the financial sector. These groups have been strong recently, an example that shows that the economy is growing. Automotive sales were very strong in June, and manufacturers are anticipating that sales will remain strong into the new model year.

Meanwhile the KBW Bank Index (BKX) rose 19.8% during the first half of 2013. The recovery of the real estate market combined with broad economic growth and the anticipation of higher interest rates is expected to keep the banking group strong.

For more information about our thoughts, market performance, and strategy, please contact us.

Michael J. Levas has been in the investment management business for over 25 years and is the founder, senior managing principal & chief investment officer at the Olympian Group of Investment Management Companies. Prior to Olympian, he was a VP and Portfolio Manager in the ... View Full Bio
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