Aaron Brown Wins Silver Bullet: Why Context is Needed in Reading Charts

Aaron Brown recently wrote a careful analysis of some popular charts that lacked the needed context. As often happens, his excellent work received some attention, but probably not as much as the original post. He deserves more recognition. That is the purpose of the Silver Bullet Award.

For several years I have highlighted work that represents strong, factual analysis and is not influenced by popularity or page views. One must be like the “Lone Ranger” so I called it the Silver Bullet. Trying to get more recognition for these first-rate posts, I am now highlighting them in a new and separate series (rather than inclusion in my regular weekly updates). I hope that readers and past winners will join me in highlighting this important work.

This Week’s Award – Aaron Brown

One of the most popular market topics is crash risk. The idea that stocks are fully valued and upside is limited seems to be a required part of any current commentary. More and more popular work claims that a crash may be imminent.

Here is the chart pack from a recent article on this theme.

Graphics have a tremendous power on readers, regardless of the actual relevance. Context is required. Enter Aaron Brown!

In a carefully nuanced response he looks at longer-term results. He also objects to the time for the ending of each chart. He shows the dramatic change of extending it a bit. To appreciate his work, you need to read the entire post – and I hope you will! Meanwhile, here is an example.

Brown summarizes, in part, as follows:

For those inclined to see patterns,  the takeaway is that it’s not really the slow-build-up-sudden-crash suggested by the original charts. Rather there are periods of general uptrends, which tend to have relatively low volatility around the smooth orange line, interspersed with level or down periods, with much more volatility both up and down.  I’ve never tested that rigorously, but it doesn’t strike me as a bad qualitative description.

He also does a careful analysis of comparative drawdowns – a key element in evaluating risk and reward. There is an excellent and helpful table.



This sharp contrast in charts illustrates some key problems for the individual investor who seeks solid information.

  1. Articles that emphasize a continuing trend seem less interesting and less “actionable.” Who cares about advice to stay the course?
  2. Articles that provide dramatic warnings capture attention.
  3. Charts that select short time periods and have big curved lines suggesting the future have inordinate power.

There is specific advice here: Do not over-estimate market risks from charts without context!

Prior Winners

I began the Silver Bullet award more than three years ago. It was an occasional part of my regular weekly post. My hope is to give greater visibility and recognition to the winners. If bloggers and media sources are honest about wanting to get beyond the noise, they will join me in recognizing those who have written special posts. I also invite nominations. I expect about 20 awards each year, but I would be delighted if the community found more great candidates.

Here is a list of past winners, which I am calling the “Silver Bullet Band.” No one will be surprised to learn that Barry Ritholtz and Josh Brown lead the multiple winners, but there are others. New Deal Democrat and Ben Carlson each have two wins.

Nominations and comments are most welcome!

Weighing the Week Ahead: Time to Raise Price Targets?

With President Trump taking vacation at the same time as Congress and a light data calendar, what will the pundits feast upon? Corporate earnings results and new stock market records mean that the price targets at the start of the year are now obsolete. For many, the question will be:

Is it time to raise price targets?

Last Week Recap

Last week featured earnings news and generally positive economic data.

The Story in One Chart

I always start my personal review of the week by looking at a chart of market price moves.

The key feature is the lack of volatility. Prices moved only about 0.6% from top to bottom.


The Silver Bullet

As I indicated recently I am moving the Silver Bullet award to a standalone feature, rather than an item in WTWA. Last week’s deserving winner was Ben Carlson (his second award). We also posted the list of all past winners. I have a great candidate for the coming week as well. I hope that readers and past winners will help me in giving special recognition to those who help to keep data honest. As always, nominations are welcome!

The News

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

The economic news last week was generally positive.

The Good

  • Brian Gilmartin reports the strength in forward earnings estimates:

    Tracking the year-over-year growth in the forward estimate;

    8/4/17: +9.75%

    7/7/17: +9.58%

    6/9/17: +9.35%

    5/5/17: +9.80%

    4/7/17: +8.30%

    The “forward 4-quarter EPS” has still not cracked 10% y/y growth, and it may not, since the earnings compare’s get tougher with the 3rd and 4th quarters since crude oil prices were less of a drag in the back half of 2016, but you also have Financial’s possibly to starting to enter a period where revenue and EPS growth could accelerate.

    The forward estimate trends remain positive. For SP 500, it’s one of the best leading indicators we have.


  • Pending home sales increased 1.5%
  • GDP estimates are higher. The Atlanta Fed’s GDP now forecast is showing strength. Will it hold up this quarter?

  • Long-leading indicators remain positive. New Deal Democrat has plenty of important data you probably do not see elsewhere.
  • Employment showed solid increases
    • ADP rose to 178K, slightly beating expectations for private employment. This is a good independent measure of private employment changes.
    • Initial jobless claims declined slightly to 240K. Jill Mislinski and Doug Short illustrate how dramatic this level really is.

  • Payroll employment showed a solid (if unspectacular) gain.
    • Unemployment declined
    • Hourly wages improved
    • More of the unemployed are longer term. Bob Dieli is an expert tracker of all things employment. He is concerned about the early shift in this ratio, and is monitoring the change.


The Bad

  • Construction spending declined 1.3% versus expectations of a gain of 0.5%.
  • Rail Traffic was slightly lower (Calculated Risk). Contrary interpretation of the data from GEI.
  • ISM non-manufacturing declined to 53.9 missing expectations of 56.9. By my rules, this change in the diffusion index, showing growth at a slower pace than the month before, is “bad.”
  • Personal income showed no growth versus an expected gain of 0.3%. Jill Mislinski and Doug Short make the adjustments for inflation and transfer payments. The result is a bit less distressing.

  • Auto sales missed expectations for nearly all companies. The aggregate pace is now below 17 million vehicles per year. Bloomberg explains that cars are lasting longer. Fair enough, but still not good for the economy.

The Ugly

I am disturbed by the Pew survey report (Via Statista and GEI) that most Republicans (58%) see colleges and universities has having a negative effect on “the way things are going in the country.” I confess my bias from many years of experience, but that experience also confers knowledge.

It was also an ugly month for CNBC, where ratings continue to decline. It was their worst month in 22 years, with Fox Business taking the lead.


The Week Ahead

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

The Calendar

It is a light economic calendar. Inflation data are still not very interesting. JOLTS provides information about labor market structure, but few use it for that purpose. There is not much FedSpeak.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

With President Trump joining Congress on vacation, one source of news (and volatility) might be absent. The light calendar leaves plenty of news time to fill. Expect the punditry to fill it, whether there is news or not!

Into the vacuum, I expect plenty of talk about stocks and markets setting new records. Analysts were raising their price targets on Apple (AAPL) for example, after the positive earnings news and outlook. Or was it just because old targets were hit? I expect that scenario to be repeated, both for individual stocks and the market overall. Pundits will be asking:

Is it time to raise our price targets?

Here are some viewpoints:

  • Everything is over-priced. My price targets will eventually be proven right.
  • I want to stay on the company’s good side. Access is essential. I’ll keep my “buy” rating and raise the target.
  • The market might be OK for a bit longer, but the twelve-year outlook is poor.
  • Everything looks really good – just like we see before a big decline.
  • The rally is based upon dumb money, the Fed, Trump, blind ETF investing.
  • Stocks are due for a big correction.
  • Targets should change with the fundamentals – especially earnings expectations.


We monitor the stocks in our portfolio as well as those on our watch lists. We review price targets frequently. We sell when a stock reaches or approaches our target. Apple is a good example. We sold it after holding it for many profitable years, including times when many analysts hated the company and said the low multiple was deserved. What has changed? Adding debt, much higher enterprise value multiples, and the analyst lovefest are factors. You must choose companies and hold on when others are skeptical. Be willing to sell when they join in. Apple is still a great company with wonderful products, but it is much more expensive.

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

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

The Indicator Snapshot


The Featured Sources:


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

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

Georg Vrba: Business cycle indicator and market timing tools.

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

Doug Short: Regular updating of an array of indicators. Great charts and analysis. Here is an update of the “Big Four” economic indicators highlighted by the NBER.


Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be this wonderful article from Morgan Housel, describing what you would hear in an honest business news report. Here is an excerpt for the flavor, but you will enjoy the entire post.

Three dozen political pundits yelled at each other on TV in front of an audience of 75 million. Meanwhile, a couple hundred million people were reasonable and productive in front of an audience of zero.

Just over 1,700 patents were filed at the U.S. Patent and Trade Office, with a few expected to change the world over the coming decades. “Pretty damn cool” said Sarah Donald, a PTO spokeswoman. “I wish more people paid attention to this kind of stuff.”

Facebook stock fell $0.23 to close at $169.16. Four-hundred seventy one news outlets covered the move. No one knows why.

Analysts expect more of the same tomorrow, with the trend continuing into next week.

I read this to Mrs. OldProf, who interrupted her laughing to interject, “That’s just what you always say.”

“But Morgan said it better,” I replied.

Stock Ideas

Despite the new market records, there are plenty of ideas.

Barron’s (subscription required) is still on the case with some oil service stocks.

Peter F. Way looks at Chevron versus Exxon Mobil, using his unique Market-maker pricing. The result? Meh. Check out the full post for some great charts and analysis.

He also compares defense stocks Lockheed and Raytheon. Check out his verdict, and take him up on his offer to reply to your questions.

Blue Harbinger’s screens have turned up five attractive stocks that will trip the trigger for many investors —- high yield and also contrarian. Check out the post for plenty of charts and detail.

Simply Safe Dividends highlights a less-famous dividend growth legend, V.F. Corp. (VFC). Fans of his approach should also check out Cincinnati Financial (CINF).

Market Outlook

I strongly recommend that investors read a variety of sources. This means a focus on those using objective data!

The Fear and Greed Trader covers many topics in his excellent weekly updates. Of special note is his discussion of sentiment:

The fear of new highs that has been explained here in previous missives played out this week with the latest report from AAII. The Dow 30 just crossed another 1,000 point threshold, most major U.S. equity averages are at or near all time highs, and bearish sentiment spiked from 24.3% up to 32.1%. That’s the highest weekly reading since mid May, and the largest weekly increase since March. Bullish sentiment stands at 36%, that makes 135 consecutive weeks below 50%.

Scott Grannis has one of his typical chart packs, describing the no boom, no bust economy.

The 1000-point thresholds are falling rapidly (Bespoke). When I was on CNBC for my early Dow 20K forecast they asked for my current opinion. I said that the next 8-10% would be pretty easy. We are there. More on my take in the Final Thoughts. Bespoke points out that retracements to prior levels have become less frequent, despite the narrower percentage.

Personal Finance


Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. This week I especially enjoyed his commentary on cuts in employer retirement support. As he frequently does, Gil raises a topic of importance both to advisors and to individual investors. I read it daily, and you will enjoy it as well.

Final Thoughts


Risk. Before even considering price targets, there is an important first step: Risk Assessment.

Risks should be tangible and measurable – not a fuzzy prediction of danger or disaster. The most important risk is usually a peak and decline in the business cycle (the technical definition of a recession). I watch this closely, and so should you.

Risks are present in both directions. Upside risk happens when you exit a market which proceeds to rally without you. Most people find the re-entry psychology to be impossible.

Reward. Changing your price target just because the old one was hit makes no sense. Targets should relate to the fundamental prospects for the stock, bond, or market. Here is a simple method.

  1. Consider the expected return from the investment, a forward-looking process
  2. Compare this return to the expected rate of inflation. Most people would love to see a 5% CD rate, but no so much if inflation were 8%.
  3. Compare the return to other investments of similar risk.
  4. Consider events which could add to profits or reduce inflation.

The simple process is of comparing risk and reward is the foundation for asset allocation. The information needed is available each week in the quant section.

If you are “scared witless” (TM euphemism OldProf) by the doom and gloom stories, you are not alone. Jason Zweig reports that in the past month individual investors pulled $17 billion from stock funds and invested $29 billion in bond funds.

[Some readers might enjoy my recent short paper, Getting Back in the Market. This has more specific suggestions about attractive stock sectors and good tactics. The Top Twelve Investor Pitfalls will help with your plan. Understanding Risk might also be of interest. All are free at your request from info at newarc dot com].

What worries me…

  • The upcoming debt limit issue. No signs of progress so far.
  • Incipient trade wars. Whether it is Canadian lumber or U.S. potatoes to Mexico, there are consequences to reducing trade with our key partners.

…and what doesn’t

  • The Fed. That includes both rate increases at a reasonable pace and the planned balance sheet reduction.
  • Alleged complacency among stock investors. Low volatility represents equally balanced opinions with a lack of dramatic, fresh information.

Stock Exchange: How Durable Is Your Franchise?

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

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

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


Our last Stock Exchange took a closer look at big moves in the retail sector, as well as the opportunities and challenges they create. If you missed it, a glance at your news will show that the key points remain relevant.

This Week – Is Your Company’s Franchise Value Changing?

According to Oxford Dictionaries, a franchise is defined as “An authorization granted by a government or company to an individual or group enabling them to carry out specified commercial activities.” Understanding a company’s franchise value can be critically important to traders, particularly when broad market conditions are changing. What might be a terrific franchise in some market environments can be a terrible franchise under different circumstances. More specifically, if your franchise is authorized to carry out only certain activities, but the market is changing so those activities are no longer in demand, then the value of your franchise isn’t what it used to be.

And here is what Warren Buffett has to say about franchise value:

“If you got the right kind of product, you may be paying for taste, you may be paying for a mental association that you have, or service availability. That’s franchise value, then the question is how durable and big is it? I’d say that franchise is basically like a moat around your economic castle.”

However, tastes, mental associations and service availability can all change over time (i.e. they’re not always “durable”). And it is in these periods of change that some of the best trading opportunities can be found.

Expert Picks from the Models

This week’s Stock Exchange is being edited by our frequent guest: Blue Harbinger (also known as Mark Hines). Blue Harbinger is a source for independent investment ideas focused on value and high-income opportunities (for example, check out the ideas in Blue Harbinger’s most recent Blue Harbinger Monthly). And this week’s diverse group of model picks are being tied together under the theme of “franchise value.” In particular, the franchise value of each of this week’s picks is being impacted significantly by current market conditions.

Road Runner: My most recent pick is Electronic Arts (EA). I look for stocks that are at the bottom of a rising trading channel and if you look at the chart below you can see why I like Electronic Arts. It’s been in a steady rising channel since May and has just pulled back in the channel to $116.92. I expect the price of EA to rise back to the top of the channel, but it will only hold that position for so long.

Blue Harbinger: I believe Electronic Arts dominant franchise in sports video games (e.g. Madden18, NBA Live 18, and FIFA 18) will give it a steady flow of healthy cash flows as it continues to release new highly-sought-after versions, year after year. However, I also realize EA is little expensive right now from a price-to-earnings standpoint, especially considering it’s still proving itself in the online and mobile gaming markets.


RR: I really don’t care about fundamentals like P/E ratios and cash flows, but I can appreciate that EA isn’t the pick for everyone right now.

BH: Just last week EA lowered sales guidance for 2018, but it’s still expected to grow. I think as long as the company continues to release new versions of its top selling games year-after-year, and assuming consumer preferences don’t change dramatically, the company will be fine over the long-term. I just believe given the recent price rally so far this year, combined with the high P/E ratio, now isn’t the best time for long-term investors to add shares.


RR: That’s great that you’re considering the long-term value of the franchise, and our readers might care about that too, but I simply look at the chart and like what I see! How about you, Holmes, what have you got?


Homes: This week I like Northern Trust (NTRS). This stock’s dip two weeks ago is the sort of set up I like to see when sniffing out a good deal. From the chart below you can see NTRS is below its 50-day moving average, and reasonably priced relative to its 200-day moving average. It’s also received support at the $87.50-level. The price moving above the 50-day average at $92.40 would be encouraging. With limited downside and plenty of upside potential, I hope I’ve brought the humans a solid pick.



BH: I believe Northern Trust is a decent buy at its current price for a couple reasons. First, rising interest rates help the business because of an improved net interest margin. And second, a rising stock market also helps the business because a large portion of its revenues depend on assets under administration/management. However, for full-disclosure purposes, I may be biased because I worked at Northern Trust for several years, and I have a positive view of the company.


Holmes: Your subjective views and biases are exactly what I have been designed to avoid. Humans can be illogical, my decisions are based on objective data. My style is dip-buying mean reversion, my average holding period is six weeks, I exit when my price target is achieved, and I control risks based on macro factors and stops.


BH: I also like Northern Trust because of its strong franchise value. It has a squeaky clean reputation that allows it to maintain its long list of ultra-high net worth wealth management clients. Northern Trust’s reputation is also enabling its continued focus on expanding business in the United Arab Emirates with its recent new branch office in Abu Dhabi.


Holmes: That’s all great, but I’ll stick to the hard data instead of the touchy-feely stuff.


Felix: Seagate Technologies (STX) looks extremely “out of favor” right now, and to me, that’s what makes it attractive. The continued pullback since late April is signaling a bottom. As a long-term investor, that’s a very important factor. Have a look at this chart of the past 12 months.


I’ll admit this does not read as a success story, though I still think it provides a useful entry point. I could easily see some recovery back up to the $37.50 mark, especially with my extended time frame.

BH: Felix do you even know what Seagate does? Seagate is basically a hard disk drive producer, and with the ongoing proliferation of cloud computing and data centers, Seagate’s desktop and notebook PC hard disk drives seem like a very unattractive investment. This is a franchise that was very powerful only a few years ago, but with the continuing slow death of the PC and hard disk drives in favor of mobile and cloud-based computing, Seagate looks anemic to me.

Felix: Okay, that’s interesting. However, I can tell you that I like the current price as an entry point and that I would be looking for a long-term holding. There are plenty of companies and stock prices that have made turnarounds, and I’d much rather buy something on sale than pay full price.

BH: I can appreciate your frugalness, and I agree that companies can and do make turnarounds. In fact, Seagate is trying to capitalize on the big growth in data centers. Specifically, Seagate is investing in high-capacity storage devices to support cloud-based infrastructures. However, I just don’t think it’s going to be enough to offset the declining PC market. Seagate isn’t going out of business overnight, but unless something dramatic happens, it has a very uphill battle ahead.

Felix: Fair enough, we shall see.

Oscar: This week I bought into the healthcare sector, via the healthcare sector ETF (XLV). I like the sector because it has been exhibiting strong momentum, and based on recent volatility I can see some upside.

BH: Healthcare has been interesting over the last 5 years starting with the US supreme court’s 2012 decision to uphold the Affordable Care Act, followed by more recent efforts to “repeal and replace” the law. We’ve even seen a lot more choppiness in the price of XLV very recently as Congress has tried and failed to change the law.

Oscar: I typically hold these position for about six weeks, and I usually exit by rotating into another sector.

BH: If we consider the healthcare sector according to our earlier definition of a franchise (i.e. as “an authorization granted by a government or company to an individual or group enabling them to carry out specified commercial activities”) then the recent volatility you have described makes perfect sense. There is a lot of uncertainty in the healthcare sector right now, and based on how the laws change (or do not change) there will be winners and losers in the sector. For example, if efforts by some members of Congress to slow the growth in Medicaid reimbursement are successful, this will hurt some companies in the sector more than others. However, the overall demographics-driven need for healthcare continues to rise, and healthcare is likely a fairly decent long-term bet.

Oscar: That’s an interesting story, but again, I typically hold these position for only about 6-weeks, and the objective data is currently attractive. Based on momentum, XLV looks like a winner.


Knowing the strengths (and weaknesses) of your franchise can help you understand the near-term moves and long-term direction of your trades, especially in the light of changing market conditions. However, it’s the model’s job to not be influenced by market narratives that can be subjectively interpreted. It’s the model’s job to follow its technical indicators carefully and to remain consistent.

Stock Exchange Character Guide

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!