Goldman Speaks! Should You Listen?

Here is a common story to test your financial news reading skill. The headline describes a conclusion from “Goldman.” Here is the example, beginning with the title:

Goldman says highest valuations since 1900 leave investors in for a world of hurt

The article lead emphasized the warning, as did the first paragraph.

Investors beware, there is pain ahead, says Goldman Sachs. The only question is whether it will happen fast or slow.

The Wall Street bank is warning that after years of stretched valuations, a day of reckoning is near.

“We are nearing the longest bull market for balanced equity/bond portfolios in over a century, boosted by a ‘Goldilocks’ backdrop of strong growth without inflation. A 60/40 portfolio has not had a drawdown of more than 10% since the great financial crisis,” wrote Christian Mueller-Glissmann, a London-based equity strategist, in a note.

At the same time, the average valuation percentile across stocks, bonds, and credit is highest since 1900, he said.

The average investor sees a story like this from a Dow Jones source and pays attention. While some will move on, others will nudge the fear gauge higher, and reduce their equity holdings.

There are several problems:

  • Goldman is an organization, not a person.
  • Authorized and “official” releases are expected to be limited both by topic and by circulation.
  • In the modern, aggressive media environment, the search for confirming stories never ends. Many of the leading media outlets depend on providing confirmation bias to a loyal audience.
  • The source is not described as a managing director (over 2100 people, so pretty exclusive) or a partner (even more exclusive).

Try this contrast —–

Suppose the story had cited an intelligent and promising young Goldman employee, one of tens of thousands. Would it be as interesting or persuasive?

The Real Goldman Story

David Kostin, Chief Equity Strategist for Goldman is the authorized source of official conclusions. He has appeared in both broadcast and print media in the past week, explaining his bullish outlook. In one typical example he explains that an earnings-driven rally can drive “rational exuberance” over the next three years.


I do not intend to support one viewpoint or another. I am not recommending either Goldman source. This is about how to read financial news.

  • Beware of stories that attribute the viewpoint of a single person to an entire organization.
  • Double check the credentials and background of quoted sources.
  • Make sure the headline matches the supporting material.

If your approach to financial news emphasizes just the headlines, you are better off reading something else!

Weighing the Week Ahead: Plenty of Cross-Winds for Santa

The economic calendar is normal, but there are plenty of cross-currents from other major events. Bitcoin futures, the FOMC meeting, more debate on the tax legislation, the Alabama special Senate election, and an avalanche of 2018 forecasts.

[Image is one of many clever art, craft, and creative ideas at Chica and Jo].

It is the time of year when the punditry looks for the nearly-annual Santa Claus rally. This year, that jolly old elf may need a GPS system to navigate the cross-currents. I expect many to be asking:

Is a Santa Claus rally possible?




Last Week Recap

In the last edition of WTWA I took note of the strengthening economic outlook and predicted that attention would turn to the effects of the tax cut legislation. That shot hit the mark, but Mrs. OldProf was not impressed. She said the shot did not require Steph Curry! (And I thought she was skipping the basketball section of PTI).

The pundits pondered, and the market reacted. Little was determined, and there are plenty of tax implications to wonder about in the week ahead.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. has a nice interactive version of futures trading with news. Check out the site to have some fun.

Compared to recent days, it seemed like there was a lot of volatility. The range was actually only 1.5%. Some week we will see some real volatility. The market weathered questions about problems in the tax bill and the debt limit.

Personal Note

Readers often ask how I prepare for WTWA. I read many sources. Even when I share many links, most of the material does not make the cut. Part of my approach is to save and organize material as I read it. For this, I like to use Pocket and a system of tags. This week I got a message from Pocket summarizing my reading saved on this particular source. Readers might find it interesting, and might want to try Pocket. I also use Feedly to monitor all my sources along with OneNote and Evernote.

Policy Wonks

Are you really interested in tax reform? Are you willing to put aside self-interest and prejudice, emphasizing broad principles? If so, I highly recommend the analysis by my friend, retired econ prof, and former colleague, Marty Finkler. Dr. Finkler provides a thoughtful, objective framework. Many of my readers will appreciate this approach. You will find it difficult to disagree with the key principles! Hint: Think broad base, low rates, simplification, and little distortion of private activity. What is not to like?

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news continues to be strong. New Deal Democrat notes a slight improvement in his wide array of indicators.

The Good

  • Commercial property leading index remains strong. (Calculated Risk).
  • Progress in the Brexit talks (Fortune). This helps the European financial sector and global growth. It is important.
  • Households are wealthier. Scott Grannis regularly follows household net worth. Here is the current look.

  • Government shutdown averted. (Politico via Wealth Advisor). Plenty of issues remain, but this is a clear sign of progress.
  • Rail traffic registered another small improvement. (Steven Hansen at GEI)
  • Home prices increased 7% y-o-y. (Calculated Risk).
  • Employment
    • ADP reported net private employment growth of 190K. This strong number also beat expectations.
    • Initial Claims fell more than expected. Bespoke has the story and an informative chart.

  • Payroll employment increased and beat expectations with a net gain of 228K jobs. The WSJ has a nice collection of comments from leading economists.
  • Unemployment remains low and labor force participation is improving. The WSJ has a nine-chart package. The look at prime-age workers is representative of the overall story, as is the look at the median duration of unemployment.


The Bad

  • Factory orders registered a slight decline. Steven Hansen (GEI) reports the data from his expected wide range of perspectives.
  • ISM services pulled back from the multi-year high, declining from last month and missing expectations. Bespoke puts the story in context.

  • Tax policy changes may reduce housing supply (Calculated Risk). On the other side of the ledger is the reduction in mortgage foreclosures to 0.68% from 0.99% a year ago.
  • Michigan sentiment declined from the prior high. Jill Mislinski has the best chart on this subject, pulling together multiple factors in a single look.

The Ugly

Bitcoin trading hazards. Many are doing quite well. Unless you are careful, you can be tripped up by several hazards:

The Coinbase founder advises “responsible investing.”

I recommend that anyone interested in trading Bitcoin (it is not an investment) watch this brief, informative, and helpful video from Josh Brown. You will learn how to execute trades and what to watch for.

Seeking Alpha also has excellent coverage of this topic, reflecting many approaches and ideas. If you are not reading SA, you are missing out.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

We have a normal calendar, but with plenty of extra news. The data features retail sales and the much-misunderstood JOLTS report. Inflation is creeping higher, but not yet an important consideration. (See Carola Binder).

We also have Bitcoin futures, the Alabama Senate election, possible changes to the tax legislation, and the December FOMC meeting. And this is not an exhaustive list! has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

This time of year would normally lead to some quiet markets and often, a Santa Claus rally. The cross-currents raise doubts.

Here is the litany of possible year-end surprises:

  • Tax cut effects. This is especially important, since there is active trading based upon the current version. There is selling of winners as well as tax-loss losers. Why? Concern about FIFO rule changes and carried interest. There is also great concern about the corporate AMT which was apparently retained by accident. John Rekenthaler has a good assessment of the current situation and risks. Brian Gilmartin has a good analysis of the potential earnings effects – a key metric for investors.
  • The Fed. Widely expect to hike rates on Wednesday. What will be the future signals?
  • Bitcoin futures trading. There is a wide divergence of opinion about the likely effects.
  • The Alabama election. This is especially important since the GOP Senate majority is so thin.

And of course, the start of the year-end market forecasts, already begun in Barron’s with their cover story. I will discuss this topic in more detail next week.

As usual, I’ll have more in the Final Thought, where I always emphasize my own conclusions.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot


Recession odds remain low and many economic indicators are improving.

The Featured Sources:


Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools.

Doug Short: Regular updating of an array of indicators. Great charts and analysis. Let’s take another look at the regular update (via Jill Mislinski) of the Big Four indicators most influential in recession dating. The recent strength in these indicators is clear from the chart.

Guest Sources

Urban Carmel (The Fat Pitch) discusses the overall macro strength and especially the prospects in housing.

Fannie Mae sees an “Awakening of Millennial Homeownership Demand.” Their clever approach uses moves in age cohorts rather than static ranges.

Insight for Traders

Our discussion of trading ideas has moved to the weekly Stock Exchange post. The coverage is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. This week’s post illustrates how technical approaches can spot trades you would not find through fundamental analysis. As always, we include trading tips from experts like Dr. Brett Steenbarger and Larry Swedroe, who both describe ideas relevant for our own trading models. Model performance updates are published, and of course, there are updated ratings lists for Felix and Oscar, this week featuring the DJIA. Blue Harbinger has taken the lead role on this post, using information from me and from the models. He is doing a great job.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Guggenheim Partners analysis of forecasting the next recession:

First, it is important.

The business cycle is one of the most important drivers of investment performance. As the nearby chart shows, recessions lead to outsized moves across asset markets. It is therefore critical for investors to have a well-informed view on the business cycle so portfolio allocations can be adjusted accordingly. At this stage, with the current U.S. expansion showing signs of aging, our focus is on projecting the timing of the next downturn.

Second, there are some patterns in pre-recession times.

The last several expansions have shown similar patterns leading up to a recession. The charts on the following pages help to tell this story by identifying six indicators that would have exhibited consistent cyclical behavior, and that can be tracked relatively well in real time. We compare these indicators during the last five cycles that are similar in length to the current one, overlaying the current cycle. Taken together, they suggest that the expansion still has room to run for approximately 24 months.

Finally, there are several key indicators in a model-based recession probability. One must be wary of results determined strictly by a back test.

The last several expansions have shown similar patterns leading up to a recession. The charts on the following pages help to tell this story by identifying six indicators that would have exhibited consistent cyclical behavior, and that can be tracked relatively well in real time. We compare these indicators during the last five cycles that are similar in length to the current one, overlaying the current cycle. Taken together, they suggest that the expansion still has room to run for approximately 24 months.

It is nice to see a prestigious firm joining into a campaign I have championed for over seven years. There are excellent warnings before recessions (and the major market declines linked to them). Our favorite methods have worked in real time, not just in back tests. Most people do not understand how to recognize an overfit model.

[If you are concerned about major declines, you might be interested in my paper on risk. Just write for our free information on these topics. While they describe what I am doing, the do-it-yourself investor can apply the same principles. Both the concepts on recessions and how we used it to forecast Dow 20K are available for free from main at newarc dot com].


Stock Ideas


Internet stocks maintain the uptrend (Andrew Thrasher) despite the rotation out of tech.

Morningstar’s ultimate stock pickers – conviction buys, and sales. Here are the current top holdings.

Playing Bitcoin via stocks instead of direct purchases.

What stocks might take the lead in the DJIA. (24/7 WallSt) Hint: Think beyond current winners!

Finding dividend aristocrats among retail stocks. This is a nice analysis of the merits of some likely Amazon survivors. (Dividend Sensei)

Top picks from Merrill Lynch, with a view toward the long-term investor.

How about some biotech? Some even qualify on “value screens.”

Junk Bonds

Maybe not as risky as we thought? (Charlie Bilello).

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. While his series’ theme emphasizes financial advisors, the topics are usually of more general interest. His own commentary adds insight and ties together key current articles. It is a valuable daily read. My favorite this week is his discussion of the values and pitfalls of market forecasts. This is a first-rate analysis, which I will take up in greater detail. Meanwhile, check out his links – one of which I have cited below.


Sector rotation

Eddy Elfenbein has his normal, level-headed approach to current developments. He has a good take on the rotation from tech stocks to cyclicals. His new buy list, a widely-anticipated annual event, will be published in two weeks.

Watch out for

Mall REITs. Brad Schwer (Morningstar) discusses the reduced the “moat rating” for malls.

Excessive focus on the expense ratio in ETFs. The holdings themselves are much more important. (Todd Rosenbluth).

High-commission products. Investment News reports on what happened to the values of non-traded REITs after the DoL forced commissions lower.


Final Thoughts

I have my own conclusions about the cross-currents.

  • On tax cuts, I expect another compromise. It will preserve the basic business breaks. It is premature to make big sector bets based upon the original House and Senate versions. The first, knee-jerk moves looked like algorithmic trading, spreading into ETFs. There was a lot of “collateral damage.”
  • On Bitcoin, I have no idea about the effect of futures trading. This is a trade, not an investment. If you plan to trade it, make sure your position size is appropriate. Think about what you can risk, rather than what you hope to gain!
  • On the Fed, I expect no effect. An increase is widely anticipated. While Chair Yellen’s conference may include some thoughts, these will be spun by anyone who prefers a switch to the new chair. Despite the policy change, this should have little effect.
  • If we believe the polling, Judge Moore will win the Alabama election. Even if he loses, the GOP will get the tax bill through, perhaps via some additional modest changes.

My expectation is that we will see a year-end rally, but the story is much more complicated this year. Repositioning your portfolio requires attention to sector strengths and potential, not just the overall market.

In short, the many cross-currents are not likely to disrupt Santa’s course.

What worries me:

  • Continuing budget issues when government agencies need new computers and better protection against hacking.
  • Josh Brown disagrees with my take on the Mueller investigation. I am not yet convinced, but look for yourself.

And what doesn’t:

  • Automation and employment. Poor analyses focus on existing jobs with little attention to what will probably grow.
  • The debt ceiling deadline was on the “not worrying” list last week. While there is still a deadline, it has once again been moved.

Stock Exchange: Going Beyond Fundamentals, 3 Attractive Ideas

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and,
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!


Our previous Stock Exchange asked if it was time to get contrarian. If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: Going Beyond Fundamentals, 3 Attractive Ideas

This week we review three attractive trading strategies that go beyond fundamentals, and then our cast of trading characters offers three specific trading opportunities that are currently attractive.

Our first attractive trading strategy is “time series momentum,” also called “trend momentum.” Larry Swedroe does a good job of describing this strategy (investing in winners, and avoiding losers) and explaining “Why Trend Following Works” in this article. Swedroe also mentions multiple times that trend momentum not only offers attractive expected returns, but it also has a lower correlation with other strategies, thereby making it a powerful risk-adjusted addition to multiple trading strategies. As we’ll see more later, several of our trading models (e.g. Felix, Oscar and Athena) utilize trend momentum strategies.

Our second attractive trading idea is a multi-strategy “team-based” approach. According to Dr. Brett Steenbarger, successful traders find multiple ways to make money. With regard to successful traders, Steenbarger writes:

“They aren’t limited to one strategy or pattern to trade. That allows them to succeed when markets become slower or when trends are not dominant… A great way to not succeed is to be isolated and locked into a single style of trading.”

This multi-strategy approach is also relevant to the non-correlated benefits of trend momentum as mentioned earlier. Further, we find that blending multiple trading strategies helps us to lower risks while also keeping returns strong (we share our trading model performance later in this report).

Our third attractive trading strategy involves behavioral economics. According to the 2017 Nobel Prize winner for economics, Richard Thaler, behavioral economics will eventually disappear as a distinct part of economics, instead becoming essentially ubiquitous with the term. And according to AQR (the creator of much of the academic trend momentum work cited by Larry Swedroe, earlier in this report):

“a large body of research has shown that price trends exist in part due to long-standing behavioral biases exhibited by investors, such as anchoring and herding, as well as the trading activity of non-profit-seeking participants, such as central banks and corporate hedging programs.”

We’ve been having success taking advantage of said behavioral biases using our momentum models (e.g. Felix and Athena), as described in the following trading model performance table.

Trading Model Performance:

Per reader feedback, we’ve recently started including a table summarizing the performance results for our trading models. The table (below) shows actual client results after commissions and fees (I watch this every day, and now readers can see it as well). We’ll share additional information, including test data, with those interested in investing. For our weekly updates, we use only real-time results.

For reference, the results in the table above include all of the positions (10 for Road Runner and Athena, 16 for Holmes, and 20 for Felix), not just the specific stock examples we discuss in the Stock Exchange every week (and sorry Oscar, you have too many individual stocks and trades to be part of this approach). We’ve included six months of data since that is the shortest real-time record we have. All of the models are expected to perform well over longer time periods. Holmes, for example, has returned over 20% in the last eighteen months.

Also very importantly, our models (especially our “Blended” approach) tend to have a low correlation with the overall stock market, which can be extremely valuable for diversification and risk management purposes (this is essentially the multi-strategy team-based approach Dr. Steenbarger described, and the low correlation benefits that Larry Swedroe described.

Expert Picks From The Models:

This week’s Stock Exchange is being edited by Blue Harbinger (aka Mark Hines). Blue Harbinger is a source for independent investment ideas. The three stocks selected by our “trading team” this week are based on multiple strategies (e.g. trend momentum and dip-buying). We also share lists ranking securities from Felix and Oscar.

Road Runner: This week I like Southwestern Energy Company (SWN). Have you heard of it?

Blue Harbinger: Yes, it’s an energy company; oil and natural gas exploration and production. It’s relatively small ($2.8 billion market cap), and based out of Spring, Texas. Why do you like this stock, Road Runner?

RR: As you know, I like to buy stocks that are at the bottom of a rising channel. And based on the following chart, you can see why I like Southwestern Energy Company.

BH: Interesting pick. Are aware this company has generated a large net loss (i.e. negative net income) in 2015 and 2016, and it has a lot of debt relative to its assets. Higher energy prices could help this company, but the price of oil has fallen since we wrote about it two weeks ago: Will Oil Hit $70 Soon? Here is a look at  Chuck Carnivale’s FastGraph for more fundamental information.

Road Runner: I am a trading model, not a person, so I am not “afraid” of the data points you mentioned. Besides, my typical holding period is about 4-weeks. I’ll be in and out of this stock before the company’s fundamental story plays out.

BH: Suit yourself, Road Runner. Personally, I like to dive deeply into the fundamentals before I invest in any company, but I suppose you’re trying to move beyond the fundamentals. I’ll check back with you on this one in about 4-weeks. Anyway, how about you, Holmes—what have you got this week?

Holmes: This week I bought Proofpoint (PFPT). This stock’s dip over the last month is the sort of setup I like to see. From the chart below, you can see it is well below its 50-day and 200-day moving averages. However, it has attractive upside over the next six weeks.

BH: Proofpoint provides cloud-based solutions to prtect people from attacs on their email, social media and mobile aps. It sounds like there could be a large total addressable market for this company given the explosive growth in cloud-based applications. And even though this company is not yet profitable, its revenue has been growing very rapidly. Here is a look at the FastGraph.

Holmes: It’s nice that your FastGraph showns the company will experience strong growth in 2018 and 2019, but I’m typically in and out of my trades in about six weeks.

BH: Based on your dip-buying strategy, I suppose your trying to move beyond the fundamentals, but this long-term growth story is interesting to me. I’m going to take a closer look at this one. Thanks for bringing it to my attention. How about you, Athena—any ideas for us this week?

Athena: I like Vertex Pharmaceuticals (VRTX).

BH: Interesting. Vertex is engaged in discovering, developing, manufacturing and commercializing medicines for serious diseases. For example, Vertex is focused on developing and commercializing therapies for the treatment of cystic fibrosis (CF). Why do you like this stock, Athena?

Athena: As you know, I am a momentum trader, and my typical holding period is about 17-weeks. Based on the following chart, Vertex has a lot of upside price potential.

BH: Honestly, I don’t know enough about this company to have a strong opinion. I don’t know if I’m impressed or disturbed that you and the other models can pick stocks so quickly, and then own them for only a few weeks at a time. Vertex, for example, has barely been profitable so far this year, and the market has very high hopes for the company based on its valuation multiples. Here is a look at the FastGraph.

Athena: Thanks for that information, but I’m a trader, not an investor, and Vertex looks attractive right now.

BH: Well, at the very least I can say I am impressed with your performance in recent months, as shown in the earlier performance table. How about you, Felix—what have you got this week?

Felix: This week I am sharing my ranking of the top stocks in the Dow 30. I’m showing my top 20 in the following list. Also, as you know, I am a momentum trader, but I typically hold my positions for about 66 weeks—which is much longer than the other models. I exit when my price target is hit, and I use stops and macro considerations to control risks.

BH: Thanks for that list, Felix. I see a lot of the usual suspect (i.e. stocks that have been performing well this year) which makes sense considering you’re a momentum trader. DowDuPont (DWDP) is an interesting one. I think it’s still not on the radar of many investors as much as it should be following its creation through the relatively recent merger of Dow and DuPont. I suspect their actually are some synergies there that the market isn’t yet fully recognizing, plus I like Basic Materials (Chemicals) companies at this point in the cycle. Thanks for sharing. And what about you Oscar—any picks this week?

Oscar: This week I’m sharing my top ranked ETFs among “high volume” ETFs. The following table includes my top 20.

BH: Thanks Oscar. I see gold miners (DUST) and oil (USO) are still at the top of your list (the were last week too). Its also encouraging to see you have the S&P 500 (SPY) ranked highly too because it suggests to me you think this market can still go higher, at least over the next six weeks, which is your typical holding period.


As we often mention in this Stock Exchange series, trading and investing are very different. However with both (and particularly with trading) it’s important to move beyond just the typical fundamental analysis, and to also include other factors (such as momentum) via a blended approach in order to take advantage of market opportunities such as those created by behavioral biases. Our blended model approach has been performing well, but more data and analysis is always important.

Background On The Stock Exchange:

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Stock Exchange Character Guide:

Character Universe Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum 17 weeks Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value Long term Risk signals Recession risk, financial stress, Macro

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.