Stock Exchange: A Fresh Look at Health Care and Biotech

Each week the Stock Exchange highlights the results from different technical trading methods. We also provide contrast, and often dissent, from a fundamental analyst. It is always interesting when we find a pick where multiple methods agree. This week the entire group gives the nod to health care stocks, and there is even some fundamental support.

Review

Our last Stock Exchange suggested that it might be time to buy the dip in IBM. The unusual agreement came because differing methods reached a similar conclusion. We see the same thing this week on health care, although the specific stock choices vary. Combined with the group endorsement of NVDA three weeks ago, we have an unusual streak. Maybe the Stock Exchange discussion should be held around a campfire instead of before the poker game!

Let’s turn to this week’s ideas.

This Week— A Fresh Look at Health Care?

Health care stocks started a decline when drug prices became a campaign issue. The weakness continued after the election. Uncertainty reigned. Would ObamaCare be repealed? Which health care stocks would survive the policy change? Recent political developments have not clarified the uncertainty, but some candidates are showing strength.

Let’s start with RoadRunner, who has an interesting, non-biotech pick.

Road Runner: I have discovered my favorite chart pattern in Align Technology (ALGN). Here is the rising channel and the current position at the bottom.

J: I keep asking you to earn your lizards by drawing the channel.

RR: Even though I cannot draw, I pecked out this chart:

J: Isn’t that a huge break of the channel in April? Shouldn’t we draw the channel to include that break? And this is another of your Wile E. Coyote stocks.

RR: I suppose you will once again invoke Chuck Carnevale and F.A.S.T. graphs.

J: How did you know? The fundamentals might catch up with your purchase in a few years. And here is a nice summary (Timothy Gornall at Seeking Alpha) of what the company does – bringing orthodontics to regular dentists.

RR: Have you made a profit from my channels?

J: Yes.

RR: Then do not complain. I am only holding this for a month. And get someone else to do the drawing! Beep Beep!

Oscar: I have a new sector favorite: Biotech. It’s not uncommon for me to buy the Biotech sector and hold it for a few weeks. This week looks like an especially good time to be in Biotech. The IBB chart has a few tantalizing details:

The first thing that strikes me here is how the 50 and 200 day moving averages are starting to wilt. We’ve been off recent highs for just about two months, but not so far off that the stock price has tanked. Rather, it’s hovering around the $290 mark. Would it be unreasonable to expect another increase up near $305?

J: You do not trade the biotech ETF, right?

O: Right. Ever since you started complaining about intra-day pricing of these sector ETFs, I have traded my own basket of stocks.

J: They are highly correlated with each other, and all very liquid. None of the members are “dragged along” in an ETF trade. Each of the members is equally weighted.

O: Just like the Cubs batting order. Every member counts.

J: Not the analogy that would occur to me. Any specific ideas?

O: Ian Happ is one I am watching, even though he is a rookie.

J: Actually, I was hoping that you would discuss a stock.

O: Oh. I can discuss one of my specific holdings, Incyte (INCY).

O: Here we see some of the dips that have been common in the sector, although it looks like the drops in this stock have been a bit exaggerated. That’s why I felt comfortable picking some positions on the upswing in this past week.

J: Biotech expert John McCamant declared Incyte to be the “King of ASCO.” This is the meeting of the American Society of Clinical Oncologists. The reports showed “compelling evidence of efficacy across multiple tumor types including, lung, bladder, kidney and head & neck cancers, with impressive safety that is leading

to long duration of responses (DoRs)”. The market had been nervous about these findings, but John has been steadfast on the fundamentals. I took his advice, buying the dip for our “aggressive” program. This is a typical example of a stock making the transition from a “story” to actual earnings. I have found this to be an attractive entry point for biotechs. The stock has lost some loyalists, while the sharp-pencil, accounting-style crowd is skeptical.

O: Right. I see that in sports all of the time. Just look at the NBA.

J: Instead, how about your updates on reader requests?

O: OK. Here is the current list.

 

 

 

 

 

Holmes: I always like a bargain, and Biogen (BIIB) is no exception. The month of May has been a rough one here, although there’s been a slight pop up from below $250 just this week. Let’s review:

Previous price declines to the $250 range have happened twice over the past 12 months, and each were followed by a significant spike up above the $290 range. That doesn’t suggest to me that a sharp spike is imminent – only that the market tends to value this stock well beyond the $250 range. I could see myself holding this position for a couple months.

J: Have you been following the news about drug pricing and the health care changes?

H: No. What news? As you know, I study price, volume and trends. We have a nice dip here, and it is worth buying.

J: For once, the fundamental analysis agrees with you.

Felix: I have nothing new this week.

J: I am not surprised. When we have a sideways market, you have few chances to spot momentum.

F: That is exactly right. You and Vince always tell us not to reach. We are just following orders.

J: We? I suppose you mean that Athena has nothing fresh either?

F: Right. She said to tell you that you will see her again when something is happening.

J: How about your weekly stock rankings? Still buy, hold, or sell, depending on the color?

F: Yes, and I welcome new questions. That is how the list is built.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conclusion

We can always learn from the model ideas. It is a great reminder that different approaches – each all profitable – see the same situation in very different ways. It also is a reminder that there is nothing wrong with waiting for the right moment. That said, when widely disparate methods highlight a sector or stock, it is probably worth a look!

 

 

Here is a summary of the cast of characters. Find your own favorite!

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

One month

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

One month or long term

Risk signals

Recession risk, financial stress, Macro

 

 

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 it out 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.

Getting Updates

We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

Weighing the Week Ahead: Will the Fed Change Course?

We have yet another quiet week for economic reports, and it is in front of a holiday. Don’t worry. Pundits will find something to fill the empty time and space!

It is possible that we will have another week of political stories, but I expect a shift. Many will find it time to digest the recent economic data with a focus on the Fed. I expect many to be asking:

Will the Fed alter its policy path?

 

Last Week

Last week the economic news was good, but the Wednesday decline dominated. As expected it was all about the political controversies.

Theme Recap

In my last WTWA I predicted that accusations about President Trump would hijack the financial news coverage, including comparisons to Watergate. In my “final thought” (where I put my own opinions) I concluded that the controversy did not represent a downside risk, but there would be concern about the prospects for tax policy. This was one of my most accurate guesses about the week ahead. Those who read it properly – what a big news story really means for their investments – should have found it helpful during the Wednesday selling.

Those who looked only at the story’s (accurate) headline, or interpreted it as political commentary, or think that everyone should ignore potential threats to their pocketbook — these people will not be successful investors. For many, the comments seemed to offer an emotional outlet rather than an investment discussion. The Fear & Greed Trader’s weekly summary captured the essence of the investor problem – the political side show versus fundamentals.

I cannot help readers who would rather discuss politics than investing. As I explained in last week’s introduction, I do not choose the media focus for the week. I merely try to help in coping with it. Here is one of the best analyses – an expert source, reaching my conclusions, but after learning more information.

Let me ask this: Would you have been helped more by an investing site that did not even consider the biggest story of the week ahead?

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the news-driven Wednesday decline, the recovery to a modest loss on the week, and the continuing near-record status.


Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “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!

Once again, the economic news last week was good, but the market reaction was negative. Of course, there were other considerations.

The Good

  • Industrial production was up 1%, beating expectations, and up 2.2% year-over-year. Steven Hansen (GEI) reports with a more nuanced viewpoint.
  • Philly Fed’s Index registered a blowout 38.8. Steven Hansen (GEI) notes the trends and reminds us of the best methods for interpreting this volatile series.


  • Revenue growth. Those complaining about the inaccuracy of earnings growth often turn to revenue. Brian Gilmartin has an important post showing information on this topic, by sector. Not only is growth increasing, so are expectations.
  • Home Owner’s Equity is Rising. Marginal Revolution sees balance sheets in “good shape.”
  • Leading indicators rose 0.3%, matching expectations, but reassuring to fans of this method.
  • Homebuilder confidence continues the upward trend. Calculated Risk has the story, including this chart:


The Bad

  • Brazilian stocks and related ETFs (esp EWZ) plunged on new corruption reports. Ian Bezek has an interesting analysis.
  • Building permits declined to 1229K from a prior annualized rate of 1270K. This was also a miss of expectations.
  • The yield curve is flattening a bit notes New Deal Democrat in his analysis of high-frequency indicators.
  • Housing starts decreased to an annual rate of 1.172 million. Calculated Risk notes that the change was mostly in multi-family, with single family starts up 7% YTD. Bill is maintaining his expectation that starts will increase 3-7% for the year.

 

The Ugly

North Korea is threatening to retire my “ugly” award. Complicating the problem is a general lack of knowledge on the part of Americans. A lack of information does not stop people from forming an opinion, of course. The Upshot reports that only 36% of Americans can find North Korea on a map. Those who can are more likely to favor diplomacy over military action. Take a try and then check today’s conclusion to compare your choice with that of others.


The Illinois budget situation and the need for public schools to increase borrowing is also pretty ugly.

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. This week’s award goes to David Bailey et.al. via CXO Advisory. One of the most pervasive traps for investors doing their own research is evaluating the record of forecasters and pundits. They often claim selective, cherry-picked credit. CXO Advisory for some years maintained a “guru grades” feature. The Bailey team has re-ranked the market forecasters after adjusting for specificity and time frame. In general, the scores are not very impressive, but your personal favorite might be an exception. Here is the summary:


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. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have a very light week for economic data.

The “A” List

  • New homes sales (T). Current strength continuing in April?
  • Michigan sentiment (F). The final figure for May is expected to remain at a peak.
  • Existing home sales (W). Not as important for first-order economic impact as new homes.
  • Initial jobless claims (Th). Continues with record low levels.

The “B” List

  • Durable goods (F). Volatile April data with weakness expected.
  • Q1 GDP second estimate. (F). Not much change expected, and attention has already turned to Q2.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

There is plenty of FedSpeak on the schedule. We also have President Trump’s travels and the continuing news flow about various controversies.

Next Week’s Theme

Once again, we have an economic news vacuum, and it is heading into a holiday. The A Teams will be eager to head for the beach. Almost anything could grab the news cycle, making it a risky guess for next week’s theme. I expect some reflection and digestion of recent economic data, with a focus on the Fed.

Pundits will enjoy a return to a favorite topic, asking:

Will the Fed Change Course?

As always, there are several viewpoints. Most observers seem to expect two more rate increases this year, beginning with next month.

  • The Fed missed its chance to raise rates a few years ago, and now is hopelessly behind the curve.
  • Economic data have been soft. A rate increase now is likely to create another recession.
  • Economic data have improved. The so-called “soft data” is catching up with other reports. A change in Fed policy is a close call.
  • The key for the Fed is whether to reduce the balance sheet or to raise rates.
  • The economy is stronger than most think. Three rate increases are still in play – as is balance sheet reduction.

As usual, I’ll have more in my Final Thought.

Quant Corner

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

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. 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

 


 

The Featured Sources:

 

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.

Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed.

Georg Vrba: The Business Cycle Indicator and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. His interpretation suggests the probability creeping higher, but still after nine months.

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies.

Doug Short: The World Markets Weekend Update (and much more). His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating.

 

How to Use WTWA (especially important for new readers)

In this series, I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. Most readers can just “listen in.” If you are unhappy with your current investment approach, we will be happy to talk with you. I start with a specific assessment of your personal situation. There is no rush. Each client is different, so I have eight different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

Are you preserving wealth, or like most of us, do you need to create more wealth?

Most of my readers are not clients. While I write as if I were speaking personally to one of them, my objective is to help everyone. I provide several free resources. Just write to info at newarc dot com for our current report package. We never share your email address with others, and send only what you seek. (Like you, we hate spam!)

Barry Ritholtz has a good post on the VIX and why it should not be viewed as a “fear index.”

The Federal Reserve Bank of St. Louis weighs in with its entry in the battling Fed forecasts for Q2 GDP. They are seeing 2.8%.

James Picerno warns against forecasting recessions based upon a single indicator. I hope that our regular readers were already on board with that concept, but the point is always new for some.

Best Advice for the Week Ahead

The right move often depends on your time horizon. Are you a trader or an investor?

Insight for Traders

We consider both our models and the top sources we follow.

Felix, Holmes, and Friends

We continue with a strongly bullish market forecast. Most of our models are fully invested. RoadRunner is fussy about entry criteria. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our five technical experts, and some rebuttal from a fundamental analyst. This week our dip-buying Holmes model discusses why he is trading IBM. I joined in, describing the buy/write position in our yield program. RoadRunner plays upward trending channels and Restoration Hardware (RH). See the post for charts and more details.

Top Trading Advice

What is lost when trading on a screen instead of in a pit? Many of my friends are veterans of the pit. They describe the signals they got from their surroundings. Here is an interesting comment on the difference in trading from screens.

Volatility traders finally got the long-anticipated spike. Dana Lyons writes that trader fear (measured by the term structure of volatility contracts) also spiked. A 20% jump in this ratio has nearly always led to meaningful, short-term market gains.


Brett Steenbarger, returning from a well-deserved vacation has some extremely important advice about managing your expectations:

Our job is to trade with the odds and accept the probabilities that the odds may not play out on any particular occasion.  Confidence in trading comes from the cultivation of a set of robust processes for identifying opportunity, expressing that opportunity as trades, and managing the risks associated with those trades.  

Check out the full post for some helpful examples.

Insight for Investors

Investors have a longer time horizon. The best moves frequently involve taking advantage of 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 Chuck Carnevale’s important article, The Active Vs. Passive Performance Debate Is Nonsensical. The discussion on this topic has been so one-sided that many might be tempted to conclude, “case closed.” As he always does, Chuck mixes analysis with some excellent examples. He raises questions about what it means to be active, and how it is measured. But that is just the start. Here are a couple of the key points:

And even more to the point is the undeniable reality that there are numerous investing strategies and many of them are not designed to beat the market. Instead, and for example, there are strategies designed to produce income, there are strategies designed to mitigate risk and there are strategies designed to meet specific investor objectives – and many more. Therefore, I consider the raging debate of active versus passive investing nonsensical. Attempting to define the broad universe of investing strategies as either active or passive is simply too restrictive and/or general to be of any real value.

And…

Furthermore, where is it written that as an investor I should have the singular goal of beating the overall stock market on a total return basis? What if I need more income than the S&P 500 index is capable of generating for me? Therefore, if I build a stock portfolio that produces significantly more dividend income than the S&P 500, have I somehow failed as an investor because my capital appreciation component may be lower? Personally, I think not.

Moreover, if I am judging my success or failure based on outperforming a benchmark such as the S&P 500 on a total return basis, this could prove problematic to my goals and objectives. The problem with total return investing is that I become subject to the vagaries of short-term price action. As an income investor, it is possible that I would be forced to harvest shares during a bad market in order to meet my income needs. Therefore, I would be invading my principal and doing it at a time when I might be better served to simply hold. But since I need current income, invading my principal is really not a viable option.

And much more.

 

Stock Ideas

 

Retail? Really? Anyone looking at this sector must never have heard of Amazon (AMZN)! Vito J. Racanelli takes a contrarian stance in this week’s Barron’s. I have listed the nine stocks selected as “survivors” but you should not jump in blindly. Take a careful look at the article and the reasoning.


Those interested in this idea should also read Marc Gerstein’s take on the topic. Providing a good lesson for those wanting to learn screening and backtest techniques, he begins with a hypothesis of what makes for a good retailer, selecting underlying characteristics for return on equity (ROE). Once again, you should read the analysis carefully before rushing to buy his survivors.


I found the contrast interesting, and I hope you will as well.

Peter F. Way’s analysis of Market Maker hedging suggests Goldman Sachs (GS) as “an odds-on buy for a near-term cap gain.”

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. To my surprise, Felix (our long-term investor proxy) likes MercadoLibre (MELI).

Lee Jackson highlights JPMorgan’s favorite biotech stocks.

Dividend Investing

David Fish highlights the 18 increases among dividend champions before June 30.

Ploutos analyzes data on dividend vs. non-dividend stocks.


Eddy Elfenbein discusses a dividend champ that is making a 52-week low.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is about US Household debt, now back at 2008 levels. The overall debt level is a worry for many, but the L.A. Times explains that Americans’ finances are better.

Seeking Alpha Senior Editor Gil Weinreich has returned from his travels. He is back to providing advisors and investors alike with intriguing ideas and links. I particularly enjoyed his discussion of whether the lack of financial literacy meant that more personal finance education is necessary. If you believe the answer is obvious, read and consider his argument.

Watch out for…

Mall REITs. Brad Thomas sees a continuing “elevated risk.” He looks at the group through the lens of a single day’s trading. Then he turns to the exposure to specific retailers. It is an interesting approach that encourages you to look more deeply into how a given name is trading compared to the group.

Final Thoughts

 

The Fed story may well command attention. I classify it as an important story, but not an urgent one. I have some strongly-held viewpoints:

  1. The exact timing of rate hikes is not important for long-term investors. The Fed has been following a policy of rate increases in line with economic data. While many do not believe this, the data are supportive. Tim Duy on recent strength.
  2. That said, the rate increases have second- and third-order effects. The perception of the pace of hikes impacts exchange rates. The weaker dollar affects major corporate earnings – in both directions. This makes the Fed news worth watching.
  3. Current data are stronger than widely thought, but much depends upon how one views the Q1 softness—meaningful or aberrant. Recent Fed speeches suggest a moderation in the rate-hike path. (Merrill via Calculated Risk).
  4. Rates will be increased more slowly, but the balance sheet will be reduced.

As was the case last week, there could be a lot of noise next week – both from politics and from Fed speculation. If you have taken profits or are looking for trades, the week ahead might be one of opportunity.

And here is the map of people’s guesses about the location of North Korea, represented by blue dots.

Stock Exchange: Time to Buy the Dip in IBM?

Each week we highlight the results from different technical trading methods. We also provide contrast from a fundamental analyst. It is always interesting when we find a pick where multiple methods agree. This week, two different approaches choose IBM.

Review

Our last Stock Exchange featured multiple stock ideas from our group. That is normal with widely varying methods. The group consensus on NVDA two weeks ago was a rare situation.

The lack of consensus is not a negative market sign; it is business as usual. Attractive trades normally vary according to your approach.

Let’s turn to this week’s ideas.

This Week— Time to Buy the Dip in IBM?

IBM has attracted a lot of recent interest. The recent earnings report was a “beat” but a miss on revenue. Analyst downgrades followed. A couple of weeks later, there was news that Warren Buffett, a major stockholder, had sold about 20% of his position. This took the stock down further. Many complain that the company earnings do not come from organic growth, but result only from “financial engineering”. Others question the business model.

This provides an interesting backdrop for Holmes, who is buying the dip.

Holmes: IBM’s two-and-a-half-month slide has brought it down to a very attractive price. We’re currently trading around pre-November levels, a remarkable bargain. Let’s check the chart:

Jeff: In today’s introduction I explained the background of the recent losses. Revenue. Financial engineering. Mr. Buffett sold 20% of his stake?

H: Who is Mr. Buffett? I just go by the charts. If he is an expert, doesn’t it make more sense to think about the 80% that he kept? I think a rebound to the 50-day moving average is quite possible.

J: Perhaps. It happens that I also hold IBM in one of our other programs – the one where we enhance yield by selling near-term calls.

H: So, you agree that the dip is worth buying?

J: Not exactly. I see the stock as safe and also paying a good dividend. My income program emphasizes safety rather than exciting growth.

H: You are hoping that the stock does nothing, then?

J: That would hit our income target (8-9% after fees), but a small upside works even better. Here is the summary chart from Chuck Carnevale’s F.A.S. T Graph program. It suggests that IBM is a solid choice, but not exciting. That is perfect for our income program.

J: No one else in the group has an opinion on IBM this week. Let’s see what they have found.

Felix: Mercadolibre (MELI) is a new position for me. It’s been on a bit of a tear since mid-April, and a steep decline just gave me a viable entry point.

F: The growth here over 6 months is steady but boring. Just how I like it! The relatively low price is appealing to buy a sizeable position and sit on it for another six months.

J: This is not what I think of as a “relatively low price.” This company is supposed to be the Latin American “Amazon.”

F: No wonder investors are so excited. I suppose you are going to show me another one of those F.A.S.T. Graph charts.

J: Yes indeed!

J: Even if the projected earnings come through, the stock is overpriced. And did you see what happened today in Brazil?

F: MELI is based in Argentina.

J: I know, but it does help to highlight the risks. What about your regular weekly ratings? Have you had reader questions?

F: Yes. Here they are.

J: Your ranking remains buy, hold, sell, depending on the color?

F: Yes, and I welcome new questions. That is how the list is built.

J: Thanks. Let us see what Road Runner has for us.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Road Runner: At a glance, RH (formerly known as Restoration Hardware) may not look like my kind of pick. My approach is to buy stocks at the bottom of a rising channel.

J: I know! I keep asking you to include the channel on your charts. This week we asked Vince (our modeling guru) to provide the chart. Maybe you can do it yourself in future weeks.

RR: Vince’s chart is perfect. I plan to hold the position for several weeks. Ideally the price will increase to the top of the channel. Whatever happens, I will sell and move on. If I had hair instead of feathers, I could say “rinse, lather, repeat.” And if I had fingers, I could draw the chart myself!

J: As a reality check, let us once again see the view from Chuck.

RR: That chart does not illustrate the channel at all!

J: No. It illustrates another of your Wile E. Coyote moments. You had better not overstay your welcome in this one. Retail stocks are widely hated right now.

Oscar: I do not have any sector shifts to report.

J: OK. Holding your positions is fine, if that is the result of your ratings. Do you still hold the restaurant group? Does it include Jack-in-the-Box (JACK)?

O: Yes. I am still holding that group, and it includes JACK.

J: Many ETFs also hold JACK. Here is the list.

O: The holding in these funds is too low to move the needle. My typical holding in a single stock is 5-6%. Each is chosen to trade tightly with the others in a sector.

J: That also means more individual stock risk.

O: True, but you cannot get the payoff without a bit more risk. I still have plenty of diversification.

J: Do you have your regular sector rating list, or have you been too focused on whether the Cubs and White Sox should make a trade?

O: Yes. Here is the sector rating list for my fans.

J: I do not see a report from that diva goddess, Athena. Where is she?

O: Still on vacation. She said that she would return when something showed some short-term momentum.

J: Did she report any sales?

O: No. She is still fully invested, but with no new choices. She quoted your instructions about “not reaching” when nothing fit.

J: Am I supposed to pay her for this?

O: We all think so. You often say that we should take what the market is giving us. That is a mixed picture right now.

 

Conclusion

Today’s post is interesting on several fronts. First, there is the absence of attention to the Washington sideshow. That dog is not barking in our model results. This is a strong endorsement of trading that seizes opportunity and avoids emotion.

Second, the models are reacting as we would expect. The trading models see opportunity on the dips. The short-term momentum models (despite my scoffing) are more cautious. This is just as we would expect.

If you do not see attractive trades in the current market, that is just fine. There are opportunities, but make sure they fit your own system. Just take what the market is giving!

 

Here is a summary of the cast of characters. Find your own favorite!

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

One month

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

One month or long term

Risk signals

Recession risk, financial stress, Macro

 

 

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 it out 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.

Getting Updates

We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

 

Weighing the Week Ahead: Should Investors Fear Another Watergate?

We have a very quiet week for economic reports. The housing data are quite important, but it will be a Tuesday story without legs. The White House drama will be compelling for the media. Whether investors like the idea or not, we should expect another week of news that is mostly political. My mission at WTWA has two parts:

  1. Recognize the reality – like it or not.
  2. Find the investment implications – however modest.

In a light week for data, it will be easy for the punditry to jump on the Comey firing story. Expect everyone to be asking:

Is this like Watergate? Should investors be afraid?

 

Last Week

Last week the economic news was good, but mostly ignored.

Theme Recap

In my last WTWA I predicted that a bored punditry, lacking fresh data, would be looking at tea leaves to find a message from the markets. That proved to be my worse forecast of the year! After a day of analyzing Mr. Buffett and the Sohn Conference, President Trump grabbed the spotlight. I hope people benefitted from the discussion, even though it never became the focus for the week.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the weak Friday trading, the narrow range, and the closeness of the all-time high.


Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “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!

Once again, the economic news last week was good, but there was little market reaction. Of course, there were other considerations.

The Good

  • The EIA’s energy outlook suggests stable prices. People seem to regard different prices as “good.” These levels are fine for consumers. The distress in the oil patch has been mitigated. (EIA).
  • Hotel Occupancy increased again matching a record pace. This chart from Calculated Risk provides a nice comparison.



  • Corporate earnings have been strong on all fronts: improvement over last year, beating expectations on earnings, and beating expectations on revenues. FactSet details this important story for investors, illustrated by the chart below. Brian Gilmartin makes a key point, highlighting the modest revisions in earnings expectations:

    The question we should ask for readers is what sectors (using the above data listed in 2nd set of bullet points) are seeing the smallest negative revisions as we approach Q2 ’17?

    Real Estate: +3.6% today vs. +3.5% on April 1 ’17.

    Financials: +9.5% today vs. +10.5% on April 1 ’17.

    Industrial’s: +1.1% today vs. +1.3% on April 1 ’17.

    Technology: +9.6% today vs. +11.5% on April 1 ’17.

    Health Care: +2.2% vs. +3.3% on April 1 ’17

    Readers should remember, that Technology, Financials and Health Care – those 3 sectors alone – comprise about 50% of the SP 500 by market cap.

 


  • Port traffic strength continues at a better rate than the economy. Steven Hansen (GEI) takes his expected deep dive into the data.
  • Initial unemployment claims dropped to 236K. Calculated Risk provides this interesting, long-term chart. It is consistent with the tighter labor market conditions in last week’s JOLTS report.


 

The Bad

  • Retail sales disappointed. Core sales increased 0.4%, less than expectations. This was somewhat mitigated by revisions to prior months. The data are not adjusted for inflation, notes Steven Hansen (GEI), so the picture is a bit worse.

Retail same store sales also disappointed. The entire sector is challenged. (MarketWatch). J.C. Penney hit a record low and big-name department stores were also hit.

 

The Ugly

Some stories do not die, perhaps illustrating why they qualify for the “ugly” category. This week a major ransomware meltdown occurred. Wired asks whether it might be the long-awaited “big one.”


North Korean nuclear and missile development is another regular concern in this section. As I write, there is news of another missile launch, but few details.

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week, but I welcome nominations. The investment world is full of misleading information and bogus conclusions.

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. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have a normal week for economic data, but with few important reports.

The “A” List

  • Housing starts and building permits (T). Continuing strength expected in the April data.
  • Leading indicators (Th). Popular economic summary remains in solid growth range.
  • Initial jobless claims (Th). Continues with record low levels.

The “B” List

  • Industrial production (T). Will the rebound continue?
  • Philly Fed (Th). Moves markets, perhaps because it is the earliest read on a new month.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

FedSpeak is down a little after last week’s heavy schedule. I don’t care much about the Empire State index. There are still some earnings reports, including Wal-Mart.

Next Week’s Theme

As I noted last week, when there is not much important news, it creates a vacuum. It does not change the need to fill on-air minutes or column space. If nature abhors a vacuum, the punditry hates it even more! I was right about that, but wrong about what the news would be!

The Comey firing, the suggestion of recordings of Oval Office conversations, and the Kissinger picture have fueled plenty of speculation. Everyone is asking:

Is this like Watergate?

Financial media might also ask:

Do events increase risk for investors? What does it mean?

Expect to be bombarded with speculation, beginning with the Sunday shows.

Some will emphasize Watergate parallels, while others will cite differences. I have a list of such sources, but the arguments are mostly political.

The investment implications are much more difficult to follow. The early theme is that the controversy will derail the Trump agenda. Since recent market gains assume Trump tax cuts, etc. the stock rally is threatened.

This is certainly a big story, but it is not yet a market story.

The Comey firing is “more of a political story than a markets story…Implications directly for the market are pretty muted,” Chris Zaccarelli, chief investment officer for Cornerstone Financial Partners, told MarketWatch. (William Watts).

As usual, I’ll have more in my Final Thought.

Quant Corner

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

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. 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

 


 

The Featured Sources:

 

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.

Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed.

Georg Vrba: The Business Cycle Indicator and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. His interpretation suggests the probability creeping higher, but still after nine months.

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies.

Doug Short: The World Markets Weekend Update (and much more). His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating.

Eddy Elfenbein has his inimitable take on the VIX – clear, common sense, and accurate:

I have a slightly heterodox view on the VIX. You’ll often hear the VIX discussed on the financial news as if it’s the market’s heart rate. It’s not.

In fact, the VIX is largely tied to what the market is doing. When the market is up, volatility drops. When the market falls, volatility rises.

Ploutos has another analysis of Selling in May. Returns are lower, but still positive – as I think readers know. He also comments on the possible reasons for how this persists in the face of arbitrage.

Peter F. Way provides a careful explanation and a good example of how to use market maker hedging data to find solid stock values. Even if you do not accept the market makers as the “smart money,” this is interesting information about the perceptions of big players. Here is an interesting example:


And an application to the overall market.


Read the entire post carefully for an overview of the methodology. This is an aggressive, market-timing approach.

How to Use WTWA (especially important for new readers)

In this series, I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. Most readers can just “listen in.” If you are unhappy with your current investment approach, we will be happy to talk with you. I start with a specific assessment of your personal situation. There is no rush. Each client is different, so I have eight different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

Are you preserving wealth, or like most of us, do you need to create more wealth?

Most of my readers are not clients. While I write as if I were speaking personally to one of them, my objective is to help everyone. I provide several free resources. Just write to info at newarc dot com for our current report package. We never share your email address with others, and send only what you seek. (Like you, we hate spam!)

 

Best Advice for the Week Ahead

The right move often depends on your time horizon. Are you a trader or an investor?

Insight for Traders

We consider both our models and the top sources we follow.

Felix, Holmes, and Friends

We continue with a strongly bullish market forecast. Most of our models are fully invested. RoadRunner is fussy about entry criteria. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our five technical experts, and some rebuttal from a fundamental analyst. If you followed my recommendation last week, you had a chance to evaluate the unusual agreement among our models (Four Thumbs Up for Nvidia!) and with guest expert Cody Willard. I hope that some readers (after doing their own research) could join in the post-earnings gains.

This week was much different – no consensus at all among our experts in their discussion of some big-name stocks. We try to have fun, but there are always fresh ideas. RoadRunner plays upward trending channels and likes Take-Two Interactive Software (TTWO).

Top Trading Advice

 

Brett Steenbarger is required reading for traders, posting many great ideas almost daily. He has two posts this week that are required reading:

What should you do if you have lost your edge? Brett has great practical advice, explaining how to be open to fresh ideas and how to leverage your strengths.

He also explains why traders should always be updating their methods – and provides a fresh idea.

The other post is of special interest for me and my colleagues: Will Quant Blow Up? He distinguishes between successful approaches and pseudo-quants. His experience lets him identify the imposters easily. There is a solution:

The answer to the limitations of pseudo-quant strategies is not to abandon mathematics altogether, but rather to employ rigor in the application of mathematics.  Just as medicine has evolved from a discipline dominated by village doctors to more of an evidence-based science, finance is doing the same.

As a bonus, he also cites MAFFIA. There is plenty of information for identifying the pseudo-quants, and a respectful refutation of the Jason Zweig article that sparked the discussion.

 

Insight for Investors

Investors have a longer time horizon. The best moves frequently involve taking advantage of 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 the collection of ideas from this year’s Buffett fest. The topics cover a wide range, including both methods and specific stock ideas. Plan to take some time and enjoy these.

Stock Ideas

 

Bad luck for Blue Harbinger, writing a great post within a few days of Warren Buffett’s big week. Mark’s analysis of Frontier Communications (FTR) is excellent. It covers the fundamental analysis and the stock history, but that is just a start. Should you consider the stock, the bonds, or the options? These are important questions which investors rarely consider. It is a first-rate article.

Barron’s recommends buying Europe and emerging markets, providing a list of ETFs. I’m not so sure, but it is worth a look. (I get exposure to these markets through stocks trading in the U.S. and following accounting rules).

Dana Lyons also takes a look.


The Sohn Conference raises money for charity by featuring big-name hedge fund managers to present their ideas. The audience pays five grand for a ticket (nearly all of it going to charity) and trades from their smartphones during the presentation. The speakers talk their books. Barron’s has a nice discussion of how it works and the volatile stock movements during a presentation.

With that background, readers might wish to consider some of the ideas. (Diana Britton, Wealth Management) has a video and slideshow.

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. To my surprise, Felix (our long-term investor proxy) likes Valeant. (VRX).

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is about retiring early. It raises several interesting questions – not just financial calculations.

 

Watch out for…

Whole Foods (WFM). Stone Fox Capital and Barron’s both raise questions.

Stone Fox also raises warnings about ConocoPhillips (COP).

TV pitches for questionable IPO’s. Dan Bobkoff and Rachael Levy (BI) highlight a Seinfeld actor pitching this one under the latest SEC rules. For the record, every stock idea I have ever seen on TV or heard on the radio has been a disaster. These pitches raise my blood pressure, since good, working people are the targets.

Final Thoughts

 

The Watergate analogy makes a good story, but the similarities are superficial – so far. I do not see a great downside risk, but the hoped-for growth from tax cuts has a lower probability.

The key differences from Watergate include the state of the economy (especially pressure on prices), turmoil over the Vietnam war, and the VP controversy regarding Spiro Agnew.

Investors must get past the political theater and ask how much this matters to the economy and their investments. So far, not much. There are many sources, but let us highlight something old and something new.

Warren Buffett notes that his investments do not depend upon who is President. He does not call them. He does not send messages.

Josh Brown cites the “fake Trump trade,” a theme familiar to WTWA readers, and also opines that the market would rally if Trump resigned.

Morgan Housel emphasizes the story that investors would be watching, were it not for the sideshow – housing.

He shows this chart and then writes as follows:


We’re still near a level associated with previous bottoms. The only other times since World War II that housing investment has been as low as it is now was during or near recessions. And that’s not because we’ve declined to these low levels, but because the rebound since 2009 has been so meager.

Which is promising. It’s a humble suggestion that we’re not as close to the top of this nine-year expansion as you might think.

I see daily evidence in my own contacts; other wealth managers make similar reports. People are sitting on cash, out of the market, chasing yield, or turning to real estate and gold. Many expect a violent end to the current slow and long-term economic expansion – just as they did three or four years ago. It is a time when investors can expect a reward for careful analysis instead of blind fear. The Fear and Greed Trader calls it a market in search of a catalyst. Maybe so, but catalysts are not always easy to predict.

Stock Exchange: Experts Disagree on Big-Name Stocks

Last week we highlighted a rare consensus among our models and our guest expert. The result was a very successful pick. Readers have often asked why there is so much disagreement among our models. The essential reason is simple. Each has a different method, and they rarely align.

This week there is no consensus, but several good ideas and plenty of spirited debate.

Review

Our last Stock Exchange, Four Thumbs Up for Nvidia, featured guest expert Cody Willard who joined three of the gang in recommending Nvidia (NVDA). It was the most popular article in our series. We hope that some readers (after doing their own checking) joined in the gain. Some may wonder whether we took profits. Not yet. All the models are still holding, as is Cody. (The offer for a free month of Trading with Cody has been extended).

Let’s turn to this week’s ideas.

This Week— Experts Disagree on Some Big Names.

Few stocks are more controversial than Valeant Pharmaceuticals (VRX). Felix is undeterred.

Felix: My newest holding, (VRX) is already paying off. Sure, the chart here doesn’t look like much. At the same time, this position has grown 20% in the week since we first bought in. That small blip in mid-May goes a long way.

Adding this position as part of my long-term portfolio has some sizeable advantages. The odd combination of volatility and a relatively flat trend line create an opportunity for me to monitor growth over months, and pick an exit point at my leisure.

J: I can hardly see the “blip in May.” How about a shorter time frame on the chart?

F: That might be better, but you can see it–on a percentage basis.

J: Do you understand the controversy behind this stock? It is a “poster child” for unfair drug pricing. It was the subject of a famous impromptu CNBC debate between Bill Ackman and Carl Icahn. More recently, Ackman has bailed out on this investment. Are you smarter than they are?

F: Who are these people?

J: They are a couple of the biggest fund managers. People invest billions with them.

F: Do you mean that humans are less effective at evaluating results than us models?

J: I am merely noting that the big-name experts do not like this one.

F: What do you see with your “Chuck Carnevale” analysis? You swear by his methods.

J: It is amazing. The stock has gone through a huge swing.

F: Does that mean you like my pick?

J: If the earnings can be believed – and that is the key question – it might be a solid choice.

F: That is weak praise.

J: It is the best I can do right now. At least you are not recommending it at a point of wild over-valuation.

 

 

 

 

 

Road Runner: Take-Two Interactive (TTWO) is my pick of the week. This chart would cause a lot of trepidation for most investors. Not only is the stock trading at all-time highs, but it’s reached this point after nearly a full year of consecutive growth.

My logic here is straightforward: the stock is hotter now than it has been for most of 2017. I’m holding out here for maybe a month, hoping the latest big move lasts just a bit longer.

J: Your method is to buy stocks at the bottom of an upward-sloping channel. I don’t see it here.

RR: You need to look more closely.

J: I have asked you to draw the channel on the chart.

RR: As I have explained before, I cannot draw!

J: Fair enough. We’ll try to improve that feature.

RR: Beep, beep.

J: Meanwhile, the fundamentals do not support this choice. It looks like another of your Wile E. Coyote moments.

RR: I have done this before. There is a simple key: Do not overstay your welcome.

 

Oscar: I’m back on Bloomin’ Brands (BLMN), along with the rest of the Restaurants sector. Regular readers might remember I picked this one in mid-March. Let’s review what’s happened between then and now.

After a big jump in price in early March, I bought into BLMN and other restaurants. My usual timeframe is between two and four weeks, so I could enjoy a remarkable increase in price before exiting the position around mid-April. The latest swing to the downside convinced me to give the sector another look.

J: Does this have anything to do with golf? The Tournament Players Championship? You probably have fond memories of Greg Norman.

O: I definitely was a fan.

J: Did you know that he was not a big endorser of Outback Steakhouse? His company sold wine to them.

O: Hmm. Well, it is still a good example of an interesting restaurant stock.

J: At least it is not horribly overpriced like so many of your ideas. It even has a dividend. What about your responses to reader questions? Is Oscar also paying attention?

 

 

F and O: Yes, and we welcome more reader requests. Our fans should know that Jeff gives us an incentive payment when we get more followers.

 

 

 

 

 

 

 

 

 

 

Holmes: This week, I see value in Omnicom Group (OMC). As you can see by the 50-day moving average, the price has been steadily dropping all year. In and of itself, I wouldn’t necessarily call that an opportunity for investment. Let’s double check the chart here, and I’ll explain my angle.

I view the sharp decline in OMC from mid-April onwards as an overcorrection. Judging on the past week of performance, the market seems to agree with me – it’s just a question of degree. I feel comfortable jumping in at current levels and reevaluating in another two or three weeks.

J: This is another example where the fundamentals mildly disagree. It is not a compelling “buy” but neither is it horrible. There is a reasonable dividend.

H: I may not be around that long! One way or another, this is just a trade for me.

J: I don’t see Athena around this week. Where is she?

H: She said something about “nothing, new – taking another week off.”

J: She is acting more like a diva than a goddess!

 

 

Conclusion

Today’s post contrasts sharply with last week’s. It is rare for so many methods to agree. Meanwhile, each of our experts has a strong system.

There are many ways to succeed in trading and investing – and many ways to fail. Consistent, proven methods can be quite different. Using a suite of models helps to identify a range of opportunities.

For new readers, here is a scorecard describing the basic approach of each participant, and also background information.

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

One month

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

One month or long term

Risk signals

Recession risk, financial stress, Macro

 

 

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 it out 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.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

 

Identifying “Hard” Data

During recent weeks, much of the punditry has suggested a sharp difference between “hard” and “soft” data.  The former seems to show sluggish economic growth while the latter paints a more optimistic picture.  The general distinction seems to be that surveys are “soft” and other data are “hard.”   Results are rather arbitrarily placed in one group or the other.

Test Your Hard Data IQ?

Since reliance on surveys seems to be the acid test, let’s try a little quiz.  Which of the following reports use surveys, and which do not?

  • Payroll jobs
  • ISM manufacturing index
  • Wholesale inventories
  • Retail sales
  • Unemployment rate
  • Labor participation rate
  • PPI
  • ISM non-manufacturing index
  • Consumer confidence or sentiment
  • Business optimism
  • Durable goods orders
  • New home sales
  • CPI
  • Building permits
  • Personal income and spending
  • The decennial census of U.S. population
  • Existing home sales
  • JOLTS report
  • Business inventories
  • Housing starts
  • Regional Fed indexes – Chicago, Empire State, Philly Fed, Dallas, etc.

Before going on, please make sure that you have indicated “survey” or “non-survey” for each of the reports above.

Criticism of Survey Data

Most of the survey critics dismiss such data as “soft” and undependable.  This is often an assertion that surveys always involve speculation about future behavior.  Without exception, the survey critics do not include anyone who has actually designed or administered a survey.  A real expert would know that most of the complaints are treated on day one of the methods class.

Please consider this obvious example.  Suppose we ask someone, a month before an election, for whom they intend to vote.  Now suppose we ask in an exit poll.  The respondent might still give an inaccurate answer in the latter, but logic suggests it will be more accurate than the first.  Logic is confirmed by results.

Try this example.  We ask a purchasing manager if he/she is ordering more this month than last.  Or if prices paid were higher?  It does not involve speculation – just an honest report of facts.  Suppose we ask a Chinese purchasing manager the same question.  Are we just as confident of the answer?

Many questions are carefully worded to make it easy to give an honest answer.  It is a technique taught in the classes.  Most of the critics have never looked at the actual underlying surveys or considered the issues.

Quiz Answer

All the reports listed above involve the use of surveys.  All of them.

Many pundits pick and choose data to support their viewpoints.  The “hard versus soft” meme is the latest such effort.  Here is a test.  The choice of classification has been very loose and arbitrary.  Despite this, it has been taken seriously by nearly everyone.

We have seen many new fans of the Atlanta GDP Now tracking.  It showed weak growth in the first quarter.  During the second quarter the early returns are 3.5% to 4%.  Many sources will react by finding a new favorite indicator.

Investment Conclusion

The economy has a better footing than most sources allege.

Your decisions will be better if you rely upon sources that are intellectually honest in the consistent use of data.

Weighing the Week Ahead: What is the Message of the Market?

We have a quiet week for data. The ObamaCare drama is finished for now. The Fed meeting is over. Earnings season is past the peak. Don’t worry! The punditry will find something new. Analysts will look deeply into the charts and ask:

What is the message of the market?

 

Last Week

Last week the economic news was good, but mostly ignored.

Theme Recap

In my last full WTWA (two weeks ago) I predicted efforts to find some new worries. The old set seemed to be running out. There was a fair amount of discussion on this theme, although nothing really dominated. In some ways, it set up the topic for the week ahead. The reception to the abbreviated WTWA last week was great. Thanks to those who read and commented (especially at Seeking Alpha). This makes the articles more valuable for everyone, including me! I’ll continue this plan on other occasions when I have a weekend off.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the strong Friday trading, leading to a new all-time high.


Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

 

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “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!

Once again, the economic news last week was good. The market got a little boost.

The Good

  • Railroad traffic increased again up 8.4% year-over year (Calculated Risk).
  • Corporate earnings have been strong on all fronts: improvement over last year, beating expectations on earnings, and beating expectations on revenues. FactSet details this important story for investors, illustrated by the chart below. Brian Gilmartin emphasizes how this has affected forward estimates and the expectations for stocks.


  • Company comments have been solid. Avondale does a first-rate job of identifying and reporting trends in conference calls. Look for yourself, but it seems to support the modest growth that we see in economic indicators and earnings. There is special strength in industrial sectors.
  • High-frequency indicators are positive. New Deal Democrat’s excellent weekly post monitors data you would otherwise miss. It is a valuable addition to the major reports.
  • Tax revenues are surging. Jed Graham (IBD) has the story.


  • ISM non-manufacturing registered 57.5, a gain of 2.3 over March. Calculated Risk has the details as well as this chart.


  • Employment reports were strong. This week is a good test. There are so many aspects to these reports that you can always find something to complain about. This week, while not perfect, included more jobs, more private jobs (Calculated Risk on the ADP results), lower unemployment, and solid labor force participation. Rather than my usual exposition of the highlights – all good this time – I will include the deep analysis from Dr. Robert Dieli, who writes a great report on employment each month. (I do not have a current promotion agreement with him, but reach out and he will probably give you a trial report or two. You will be impressed). Here are the recent complaints. You will notice that permabears on the economy (no matter how long they have been wrong) ignore these points and move on to some other idea. There is probably a “silver bullet” award lurking for anyone who wanted to look into this.
    • Remember all the complaints about the labor force?


  • How about the claim that jobs were only for part-timers?


  • And the lack of full-time jobs?


And this is “hard data.”

The Bad

  • China’s Peoples’ Bank may be doing some spinning about bad loans. Benn Steil and Emma Smith (CFR) have the story, including this chart:

  • The ISM manufacturing index missed expectations, registering 54.8. This still indicates GDP growth of 3.6% for the month and 4.1% for the year. I suspect that the need to update their correlations, but it is probably stronger than the official and oft-revised GDP measure. Here are the details.

 

The Ugly

Problems in the ETF world. Investors have been flocking to ETFs that supposedly meet specific objectives and have very low costs. This week there were stories about three different problems:

  1. A rush of new investors, straining the capacity of the fund. This happened to the gold juniors (GDXJ). When the managers were forced to add new names, redemptions sent the price much lower.


  1. A four times leveraged fund that tracks poorly for anything longer than a day or two. Nice work by Phil Huber.
  2. And the ugliest of them all – how a closed-end fund can seem to be providing yield while merely giving your own money back. Want a 26% return? Eric Newman with a HT to Josh Brown.

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. This week’s award goes to CXO Advisory, a subscription service which maintains a number of great resources for investors. The methodology is always first-rate, and often surprising. This week they take on the “sell in May” meme that we are all hearing. The basic conclusion is that the May – November period is weaker in growth than the rest of the year, but still adds to your returns. Here is the key chart:


See also a similar post from David Keller, who takes a multi-cycle trading perspective.

We should all encourage those who fight slogans with data.

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. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have a normal week for economic data, but with few important reports.

The “A” List

  • Michigan sentiment (F). May preliminary A good read on employment and economic well-being.
  • Retail sales (F). A big rebound is expected for the April data.
  • Initial jobless claims (Th). Is the series edging up from record low levels?

The “B” List

  • JOLTS (T). The analysis of job openings is important for labor market structure and tightness.
  • PPI (Th). Eventually this will matter, but not until there are a few hot months.
  • CPI (F). See PPI above.
  • Wholesale inventories (T). Highly spinnable March data.
  • Business inventories (F). People see what they want – anticipated demand or unsold goods.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

With last week’s meeting over, the Fed speakers are out in force, including a sponsored conference on Thursday. Earnings reports continue. While the market is calm about the French election, we will know for sure about the time you are reading this.

Next Week’s Theme

Whenever the week is a bit light on A-level news, it creates a vacuum. It does not change the need to fill on-air minutes or column space. If nature abhors a vacuum, the punditry hates it even more! If they do not see something truly significant, they merely look more deeply to find a topic. Surprising news next week — something important like another on-board airline incident? – would work. Barring that, look for an extra-deep analysis of every market, with the question:

What is the market message?

There is plenty of grist for this mill:

  1. What does the “fear gauge” tell us? Some warn because the VIX is so low that it is not representing the level of fear they see. Others suggest that a low VIX implies trouble ahead. (Value Walk).
  2. Are economic indicators failing? “Soft” data misleading?
  3. What is the message from bonds?
  4. Are some more important than others?
  5. Do chart patterns show weakness? JP Morgan sees “red flags.”
  6. If so, in what time frames? Fear and Greed Trader sees a likely breakout.
  7. Some indicators imply future strength. (Todd Sullivan).

 

As usual, I’ll have more in my Final Thought.

Quant Corner

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

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. 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

 


 

The Featured Sources:

 

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.

Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed.

Georg Vrba: The Business Cycle Indicator and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. His interpretation suggests the probability creeping higher, but still after nine months.

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies.

Doug Short: The World Markets Weekend Update (and much more). His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating. The latest update now includes the employment data.


Menzie Chinn at Econbrowser also reviews these key indicators, suggesting no recession.


 

Policy Issues

Readers know that I recommend being politically agnostic when it comes to your investments. That said, investing wisely depends upon knowing the likely impacts of various policies. I came from an intellectual tradition of “speaking truth to power” whether it was popular or not.

This new section will provide some food for thought – basic policy analysis on important topics. I will include only a brief overview. Those interested should dig into the source material, planning to spend a little time.

For our first topic, let us consider trade issues. My friend and former colleague Marty Finkler is putting his retirement time to good use. I encourage following his new blog. You really need to read the entire post, but this chart of the G7 share of world GDP will surprise most:


 

How to Use WTWA (especially important for new readers)

In this series, I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. Most readers can just “listen in.” If you are unhappy with your current investment approach, we will be happy to talk with you. I start with a specific assessment of your personal situation. There is no rush. Each client is different, so I have eight different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

Are you preserving wealth, or like most of us, do you need to create more wealth?

Most of my readers are not clients. While I write as if I were speaking personally to one of them, my objective is to help everyone. I provide several free resources. Just write to info at newarc dot com for our current report package. We never share your email address with others, and send only what you seek. (Like you, we hate spam!)

 

Best Advice for the Week Ahead

The right move often depends on your time horizon. Are you a trader or an investor?

Insight for Traders

We consider both our models and the top sources we follow.

Felix, Holmes, and Friends

We continue with a strongly bullish market forecast. Most of our models are fully invested. RoadRunner is fussy about entry criteria. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our five technical experts, and some rebuttal from a fundamental analyst (usually me, but this week Cody Willard took that role). We try to have fun, but there are always fresh ideas. Last week the group demonstrated how your choice of time frame affected your interpretation from the chart. Cody joined in with expert commentary (see more from him at Trading with Cody and mention WTWA in asking for a free trial) about the long-term fundamentals of a near-consensus pick in our group – Nvidia (NVDA). If you have never checked out this series, please look at this one — a great insight into why there is no “right” strategy.

Top Trading Advice

 

Brett Steenbarger is required reading for traders, posting many great ideas almost daily. My favorite this week is his discussion of trading stops. He explains why weaker traders get it wrong and complain, while experts are taking profits and limiting losses. A great topic!

He also explains why traders should always be updating their methods – and provides a fresh idea.

Gatis Roze takes up a theme I have often mentioned: keeping a trading journal. He looks back over five years, but I think a shorter time frame is still a good idea. He breaks the trades into four interesting categories:

  1. Good losers
  2. Bad losers
  3. Winners
  4. Tenbaggers

You might guess the logic, but read the whole post for a nice explanation and some examples.

Adam H. Grimes discusses stock screens with an emphasis on traders. It is in podcast form, but regular traders may well enjoy this. I note that the stock screen trading concept is essentially what our models do.

 

Insight for Investors

Investors have a longer time horizon. The best moves frequently involve taking advantage of 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 Chuck Carnevale’s post, The Most Important Stock Investment Lesson I Ever Learned. The title should make everyone sit up and take notice. It also ties in nicely with this week’s theme, which Chuck challenges. He focuses on a Seth Klarman principle via Vishal Khandelwal:

“Don’t seek Mr. Market’s advice.

Some investors – really speculators – mistakenly look to Mr. Market for investment guidance.

They observe him setting a lower price for a security and, unmindful of his irrationality, rush to sell their holdings, ignoring their own assessment of underlying value. Other times they see him raising prices and, trusting his lead, buy in at the higher figure as if he knew more than they.

The reality is that Mr. Market knows nothing, being the product of the collective action of thousands of buyers and sellers who themselves are not always motivated by investment fundamentals.

Emotional investors and speculators inevitably lose money; investors who take advantage of Mr. Market’s periodic irrationality, by contrast, have a good chance of enjoying long-term success.”

So much for trying to get a message from the market. Chuck goes on to explain the fundamental factors that should be part of your analysis.

Key Concepts

We can always learn from the greatest. This Peter Lynch interview includes a wonderful story about a pick gone wrong. He also explains why work pays off for the value investor — turning over more stones. This fits nicely with some of our featured posts below.

Be sure to read the news from the Berkshire annual meeting. Seeking Alpha has a live blog.

Stock Ideas

 

Barron’s has a feature on Amazon and a nice column on tech stocks.

Marc Gerstein executes a clever stock screen discover non-financial candidates that might do well in a rising rate environment. He discovers that there were few candidates until a year ago. Very interesting. His list is worth further study.

Blue Harbinger starts with 100 high-yield stocks that declined last week. He narrows down the field to ten that you might consider.

William Stamm recommends a look at Omega Healthcare Investors (OHI). This name popped up in several of the articles I read this week, and we hold it for some clients.

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. This week several models agreed – for a change! Take a look at the post for analysis of Nvidia (NVDA) in multiple time frames and strategies.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorites are the two posts on how much you really need in cash and assets.

I have emphasized the regular personal finance feature at Abnormal Returns, but the offerings have become much more diverse. I follow them all, often finding items of personal interest as well as ideas for WTWA. If you have not recently checked out the site, it is time for another look. You can also get special benefits by becoming a member.

Seeking Alpha Editor Gil Weinreich’s series for investment advisors is useful for individual investors as well. The well-chosen topics span important questions and provide helpful links. This week he featured an intriguing psychological study about risk and reward. Imagine that you were offered a payment to walk to the end of a 10-meter diving board…..But I don’t want to spoil a good story.

Watch out for…

 

Grocery stocks. The competition is heating up. Craig Giammona (Bloomberg) analyzes five forces. A German invasion?

Final Thoughts

 

What should we think about today’s “market messages”? I want to emphasize some key misconceptions.

  • A Fed tightening cycle does not represent an immediate threat to stocks. Prof. Tim Duy, a leading Fed expert who is quite objective on markets, notes that stock price increases are quite common in this part of the Fed cycle. Put another way, the message from stocks and bonds might be correct in both cases.


  • The quiet trading range does not indicate “complacency” or a topping process. The highly-respected BCA Research sees a setup for an upside breakout. http://www.valuewalk.com/2017/05/stock-market-break/. I don’t know how to handicap this, but I do see a great disparity in coverage in these technical stories.
  • Commodity prices, especially oil, are a poor indicator of demand and economic strength. Those believing the opposite simply ignore the supply side of the analysis. Credit Suisse explains.
  • The VIX is a popular discussion theme, but not very helpful. The evidence for it as a leading indicator is weak. Few seem to know that the current levels of implied volatility (expectations of those in the options market) significantly exceed the recent past. Despite the low levels compared to times past, the readings are higher than we might expect from the data. Beware of making inferences from an indicator you do not completely understand.
  • Objective valuation measures show solid potential for higher market prices. “Davidson” (via Todd Sullivan) offers multiple persuasive charts leading to this conclusion:

    Markets have a long history of rising with rising lending spreads. The current T-Bill/10yr Treasury rate spread, a proxy for lending spreads is currently 1.55% and rising after a brief pull-back from Jan 2017 level of 2.00%. Markets peak when this rate spread falls to 0.2%. An excessively priced SP500 relative to the SP500 Value Investor Index with the rate spread falling to 0.2%-0.0% range is a signal that a market top and significant  correction is at hand. There is no sign of this occurring anytime soon.

    I expect economic expansion to continue for 3yrs-5yrs. Economic indicators tend to signal 24mos to 8mos ahead of market tops. I encourage investors to add to equity positions.

     

Market “messages” are many. Or perhaps none. Those believing in the wisdom of the market always seem to be chasing old prices and effects. The Chuck Carnevales, Ben Grahams, and Warren Buffetts of the world begin with a concept of value and view market prices as a deviation.

Even if you seek a message, the signals point in different directions. Pundits love discussing the market message. There is always something to say and no way to prove them wrong!

 

 

 

 

Stock Exchange – Four Thumbs Up for Nvidia!

Readers have often asked why there is so much disagreement among our models. The essential reason is simple. Each has a different method, and they rarely align.

This week provides a rare opportunity to illustrate this, while also showing the process for each model.

That would already make it one of our most interesting posts in the series, but we also have another great guest expert. Cody Willard, a famous TV anchor and commentator, writer for many top-line sites, former hedge fund manager, and entrepreneur provides our guest commentary. You can follow my friend Cody at tradingwithcody.com. If you mention that you were referred from the Stock Exchange, you can get a valuable free month to look at his ideas. I have followed him for many years, partly because his style challenges my own. It is provocative, interesting, and loaded with ideas that you do not find if sticking strictly to a value approach. His themes highlight a vision of the future.

Review

Our last Stock Exchange took up the difficult question of back-testing and how you can use it. There were more comments on the Seeking Alpha publication of the post, and they were very good. If you missed the original article, please take a look, including the comments.

Let’s turn to this week’s ideas.

This Week— Four Different Takes on Nvidia (NVDA)

It is not quite as rare as an eclipse, but it is certainly unusual to get consensus among our models on a single choice. In addition, we have agreement from Cody. Here are the differing perspectives:

Felix: As the long-term investor, I look for a strong uptrend. This must have persistence over time – more than just a short-term momentum play. Here is what I see.

Athena: I love relative strength, but my time frame is much shorter than Felix’s. I also have less tolerance for losses. Here is what I see.

The stock easily meets my criteria.

RoadRunner: The short-term uptrend is just a start for me. I need both an upward channel and an attractive entry point within the channel. Here is what I see.

Jeff: The agreement from three of you is fascinating. This is a stock that value investors would not care for. I typically use a ten-year history from F.A.S.T. Graphs to capture an entire business cycle. Here is what that shows.

The over-valuation looks scary! Sometimes a different time frame will provide a more useful picture. Let’s shorten it up a bit.

It still seems a bit high, but the strong growth in earnings and typical P/E make it more reasonable.

Cody: I am a long-time holder of NVDA, so I am not surprised that your models have joined in. Neither the technical nor the fundamental charts can tell the real story. This is a platform play on both self-driving cars and deep learning. These are the fastest-growing and most revolutionary applications. Both are chip-intensive. If either of these markets hits, NVDA will have a market cap of in the hundreds of billions.

The intermediate-term weakness reflects the company’s decision to commit to long-term opportunities. The pull back in the short-term has cleared out some of the very short-term momentum players, so it is an interesting entry point. A near-term catalyst could be next week’s earnings report. I see downside risk of about 5%, and the potential to break the upside of the channel.

Athena: Thanks for the encouragement, Cody. Jeff is always so fussy about those value charts.

RR: Beep beep!!

Felix: I want to ask Cody about one of my longer-term holdings, Wynn Resorts (WYNN). It has been one of my holdings since the end of March. So far, so good. While the month started off slow, a significant pop in the last two weeks has already made this a worthwhile investment. As always, I’m looking for a long-term holding here. I don’t plan to cash out immediately, like Holmes or Road Runner might do.

Cody: I really don’t like Wynn. There are many ways to trade and invest profitably. There is no need to profit from something that is an addiction for so many. My second objection is that investors are at the mercy of regulators, especially the Chinese. If they crack down on gambling in Macau, Wynn will suffer.

F: The chart has looked good, but I am wondering whether to hold ’em or ‘fold em.

C: Did you learn that from Oscar?

Oscar: Felix makes his own poker decisions, and he is more likely to listen to Chopin than Willie Nelson. My sector choices include some interesting ideas. My top ranking is with consumer cyclicals. This includes retail, like the Gap (GPS).

What does Cody think about my choice here – a profitable one so far?

C: Every bricks-and-mortar retailer is feeling the Amazon effect. I don’t care for any of them on a long-term basis.

O: What about for a few weeks?

C: That is anyone’s guess, but beware of overstaying your welcome. BTW, Jeff told me that both you and Felix have regular stock and sector ratings. Any updates?

F and O: Yes, and we welcome more reader requests. Jeff gives us an incentive payment when we get more followers.

Holmes: Just a minute! Can I get a bark in edgewise? I have some interesting new choices. Look at W.W. Grainger (GWW). This could be a real steal for us dip-buyers.

C: I can see why the rest of your group does not like this chart!

Jeff: Thanks for joining in with some great comments and ideas, Cody. Readers should try Trading with Cody (using our referral) to learn more of your ideas. I hope you will return soon.

C: It was fun. You have some colorful characters here, and I like the range of styles.

Conclusion

This post added something new to our series: Multiple ideas about the same stock. This is a rare opportunity, since the model approaches are so different. Agreement is unusual. The time frame is so important regardless of your analytic approach.

Great trading ideas are not always great investments — and vice versa!

Cody Willard’s ideas added a valuable perspective. We frequently contrast fundamentals based upon value with the message from the charts.

Cody is a visionary. He looks ahead to discover emerging trends. These ideas do not always show up in the charts, and certainly not in the earnings history. It is a valuable perspective.

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 it out 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.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

Weighing the Week Ahead: Can Employment Continue as the Engine of the Economy?

Market data has remained mixed.  The weak Q1 GDP is not consistent with some of the most important measures.  This week I expect pundits to be asking:

Will the jobs report signal continued strength?

Personal Note

In response to reader interest I am trying to do an abbreviated WTWA when I am away.  I will include the update of indicators and a few ideas about what I am watching.  Some noted that this would also provide a forum for some of our “regulars” to congregate.

Theme Recap

In my last WTWA I predicted a week of rebuilding the wall of worry.  Some problems have been avoided, even if not completely solved.  There are always new ones, and we did get some of that discussion last week.

The Story in One Chart

I always start my personal review of the week by looking at a chart of market performance for the week.  Once again, there was little change for the week.

Whatever the news, the net market effect was (once again) very small.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “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 Good

The best news is the strength of the earnings rebound. This is true both for year-over-year results and forward expectations. (Brian Gilmartin).

While the government shutdown deadline was merely extended for a week, I am encouraged by the handling of this issue.  The market hated this uncertainty on the past.

The Bad

The soft GDP numbers and uptick in initial jobless claims (not the time reflected in Friday’s payroll report) were the worst news.

The Ugly

Still Korea.

What to Watch For

Everyone wants to evaluate the Trump agenda, especially reflecting on the first 100 days.  I do not expect movement on any of the big issues without some participation by Democrats.

The key economic reports are ISM, the ADP private employment, and the official employment report.  It is a big week for data.

While there is no change expected from the FOMC meeting (and no press conference), everyone will be watching for hints on the pace of rate hikes.

 

Quant Corner

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

Risk Analysis

Whether you are a trader or an investor, you need to understand risk.  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

 

 

The Featured Sources:

 

Bob Dieli:  The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades).  His subscribers get  Monthly reports including both an economic overview of the economy and employment.

Holmes:  Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis.  While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation.  Try out his new public Twitter Feed.

Georg Vrba: The Business Cycle Indicator and much more.  Check out his site for an array of interesting methods.  Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal.  His interpretation suggests the probability creeping higher, but still after nine months.

Brian Gilmartin:  Analysis of expected earnings for the overall market as well as coverage of many individual companies.

Doug Short: The World Markets Weekend Update (and much more).  His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating.  The latest update now includes the employment data.

 

Final Thoughts

 

Here is an update on my “Trump Matrix.”  Last week’s timber tariff decision shows why it is important to track what the administration can easily accomplish versus what requires cooperation with other governments or Congress.

Stock Exchange: How to Use Backtests Effectively

 

Everyone interested in managing their own money ought to keep an old idiom in mind: if it seems too good to be true, it probably is. Unfortunately, greed is a powerful motivator. It’s tempting to see a new model with an incredible backtest and think this could be the answer.

Experienced investors know that there’s often a drastic change between a model’s backtest and its first live run. You can usually find that point by checking for where the 45-degree angle increase in value drops off into sideways movement (and generally underperforms the market).

This week, we’ll take a deeper dive into how you can minimize these problems using professional techniques.

Review

Our last Stock Exchange revisited a common theme: making stock picks according to a set time frame. Our models suggested finance and software stocks in the short-term, and energy for the long-term.

Let’s turn to this week’s ideas.

This Week— *crickets*

We usually arrive to find the gang happily enjoying their weekly poker night. Instead, all we’ve got are Felix and Oscar’s weekly rankings with a “gone fishin’” note on the counter. Strange behavior.

We decided to give Vince Castelli a call to investigate. Vince is our modeling guru, a brilliant scientist who spent the bulk of his career as a civilian employee for the U.S. Navy. During his time there, he’s had hands-on experience with modeling techniques vital to national security – not something you can find in the classroom. He knows these models better than anyone; after all, he designed them.

Jeff: Vince! What is this about giving everyone the week off?

V: I didn’t give them the week off. There were new no new fresh signals.

J: Is there something wrong with the gang? They encompass five different methods. How can there be no fresh ideas?

V: A key feature of all models is recognizing the best times to trade. When volatility increases trades become less predictable.

J: What do you mean? The VIX is lower this week. Volatility is down.

V: That measure is for amateurs. Trading volatility includes both upside and downside. That bogus fear gauge emphasizes only the downside. Predictions are affected by extreme movements in either direction.

J: Since we do not have current picks to feature, maybe we could discuss how you developed these models.  There was an excellent recent article from Ben Carlson about what you cannot learn from a backtest. It reminded me of the TV ads suggesting that anyone can discover a system and trade their way to a fortune.

V:  If only it were that easy.

J:  Ben’s description made me think of some suburbanites wandering into the woods with massive chain saws.  The power of the tools far exceeds their skill in using them.

V: I see it all of the time.

J:  I would like to take up a few of Ben’s points and get your reaction.  How about this:  How many bad backtests came before the good ones?

V:  This is a great question.  Most people do not know the right questions to ask the model developer.  That one is crucial.

J:  How would you answer?

V:  Our method preserves multiple out-of-sample periods.   We develop models on our development data, saving pristine time periods for the test.  We verify that the strength of results continues.  You cannot just look at backtest results; you must know the developer’s method.

J:  Here is another good point — Data availability at the time.   Isn’t it easy to “peek ahead” or to exclude data from failing company?

V:  It certainly is.  You need to have data that includes the failed and merged companies.  The average person at home will not pay up to get this.  It introduces a deceptive, positive bias.

J: Ben also raises an interesting point about friction.  He writes:

It’s almost impossible in a backtest to completely account for costs and frictions such as taxes, commissions, market impact from trading, market liquidity, etc. Sure, you can estimate these frictions, but you never truly understand how these things will affect your bottom line until you actually have to execute buy and sell orders.

V:  This is the first point where I really disagree with him.  Why is it almost impossible?  You should definitely include commissions and a slippage factor.  If your trades are a small percentage of the market volume, the impact from trading is negligible.  Taxes vary by the type of account and the investor.

J:  Interesting point!  “Almost impossible” is strong language.  For someone who knows the ropes, this kind of test might represent real edge.

V:  That is what I do with each of my creations!

J:  Some of Ben’s other points relate to psychological factors.  The trader bailing out of the system in the face of losses.  Or concern about real money.

V:  That is strictly a matter of confidence in the system.  If it has been developed properly, you should not do a lot of fretting.

J: Thanks for joining us, Vince. I’m sure your comments will help readers make more sense of our series.

V: Any time!

Conclusion

One important point was not mentioned in Ben’s article – simplicity.  The temptation for the untrained modeler is to introduce as many variables as possible, hoping to find correlations that others have missed.  What they find is misleading. Computers are powerful enough to discover apparent links between variables when there is actually no relationship. A great model uses as few variables as possible.  The backtest may not seem as good, but the real-time trading will be much better.

Quantitative modeling is an extraordinarily complicated field. In some ways, the way to find success here is similar to finding success in the investment world as a whole. Find the right experts, learn their methods, and try to make sense of the data for yourself. Backtesting can be effective or dangerous – it depends on the skill of the developer.

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 it out 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 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.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.”  Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!