Weighing the Week Ahead: Time for Some Clarity?

We have a light week for data, but plenty of other big news. Earnings season continues. There will be plenty of FedSpeak, and most importantly the results of the U.S. elections. I everyone to be asking:

Will the election results provide clarity for financial markets?

Personal Note

 

I enjoyed my Wisconsin weekend away with Mrs. OldProf, who is completely sick of election stories. Especially after seeing a few ads in a battleground state! She will probably will not read this week’s edition, focusing instead on her Packer-laden fantasy football entry and tomorrow’s game.

I know that some readers will not like my conclusions this week. Please read them as investment advice, not voting advice.

Thanks also to readers for the interest and early comments for my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. Readers of WTWA can get a copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Last Week

Last week’s economic news was all good, despite the modest negative reaction in stocks. The election story is the culprit.

Theme Recap

In my last WTWA (two weeks ago), I predicted a focus on the trading range, and whether it would soon be broken. Breaking election news attracted most of the attention with earnings playing a secondary role. Since then, we have experienced a 40-year flood, so to speak. The nine consecutive days of market declines are the most for 36 years. And still counting. Whether the range has been broken remains open to question, but I was wrong about the key theme.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Some sources said the market was in the “grip of the worst decline since the financial crisis.” Doug notes that the nine days of decline amounted only to 3.09%. By comparison, the nine-day streak from 36 years ago represented 9.37%. Even single-day declines can be more than this, including the -3.59% on June 24th of this year. Doug’s analysis helps to put the recent trading in perspective.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

 

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

  • Personal income and spending were up 0.3% and 0.5% respectively. These results were better than the prior month, and in line with expectations.
  • ISM manufacturing index registered 51.9 beating the prior month and most expectations. This is roughly consistent with recent GDP readings.
  • GDP for Q3 increased 2.9%, the highest rate in two years. James Hamilton notes that this is still slightly below the long-term trend, but good enough to reduce the recession odds of his model to 12.3%.

Some skeptics have claimed that the good report is “full of beans” in the words of Dr. Ed Yardeni. While the one-time effect of soybean imports was important, he cites several other factors that suggest future strength.

  • Earnings strength continues. Despite the importance of this story, it has not gotten much attention. The earnings recession is over, as I concluded from our first-rate sources a few weeks ago. FactSet has some key points in their update:
    • 71% of S&P 500 companies have reported earnings above the mean estimate and 54% of S&P 500 companies have reported sales above the mean estimate.
    • For Q3 2016, the blended earnings growth rate for the S&P 500 is 2.7%. If the index reports growth in earnings for the quarter, it will mark the first time the index has seen year-over-year growth in earnings since Q1 2015 (0.5%).
  • Corporate narrative agrees. Avondale Asset Management tracks hundreds of earnings calls. Their helpful summary includes quotations from the calls, organized into topics. Here is the encouraging list of topic headings for the U.S. macro section. There is supporting evidence for each of the points below.

 

The environment has stayed slow and steady

The economy is fully healed even if it’s not setting new records

Conditions are still pretty difficult for industrial companies, but turning up

Still, there’s a pervasive sense of uncertainty

CEOs are waiting to see what happens in the election

Companies are setting strategic plans that assume weakness

The consumer has been slowing

But energy and currency are moving from a headwind to a tailwind

Inventories are much leaner than they have been

And pricing pressures are building

 

  • Employment
    • Non-farm payrolls increased by 161,000 and the prior month was revised upward by 35,000.
    • ADP private employment growth was 147K, 23,000 less than expected, but the prior month was revised up by 48,000.
    • Unemployment decreased slightly to 4.9%.
    • Hourly earnings increased 2.8% on a year-over-year basis –
    • One slight negative was initial jobless claims edging higher by 7000, but still historically low at 265K.

 

The Bad

  • ISM non manufacturing registered at 54.8, down from 57.1 in September and missing expectations. Calculated Risk has the story, highlighting a comment in the report about the effect of uncertainty from the Presidential election.

The Ugly

The last days of a very personal and negative election campaign. Scott Grannis called for a “mulligan.” (For non-golfers, a complete do-over). I would probably just slice another drive into the rough! If you want to change outcomes, you must be willing to reform the process and go to work on your swing. In such a long election season, campaign managers finally resort to techniques that are proven to influence the undecided and the faithful. You and I might be turned off, but we are not the target market.

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 winner is Bill McBride of Calculated Risk. Debunking recession calls is not popular. It is not the way to get page views. Please read Bill’s entire post to see the full story about the endless parade of recession calls. Here are some of the key points:

Note: I’ve made one recession call since starting this blog.  One of my predictions for 2007 was a recession would start as a result of the housing bust (made it by one month – the recession started in December 2007).  That prediction was out of the consensus for 2007 and, at the time, ECRI was saying a “recession is no longer a serious concern”.  Ouch.

For the last 6+ years [now 7+ years], there have been an endless parade of incorrect recession calls. The most reported was probably the multiple recession calls from ECRI in 2011 and 2012.

In May of [2015], ECRI finally acknowledged their incorrect call, and here is their admission : The Greater Moderation

In line with the old adage, “never say never,” [ECRI’s] September 2011 U.S. recession forecast did turn out to be a false alarm.

I disagreed with that call in 2011; I wasn’t even on recession watch!

And here is another call [last December] via CNBC: US economy recession odds ’65 percent’: Investor

Raoul Pal, the publisher of The Global Macro Investor, reiterated his bearishness … “The economic situation is deteriorating fast.” … [The ISM report] “is showing that the U.S. economy is almost at stall speed now,” Pal said. “It gives us a 65 percent chance of a recession in the U.S..

The manufacturing sector has been weak, and contracted in the US in November due to a combination of weakness in the oil sector, the strong dollar and some global weakness.  But this doesn’t mean the US will enter a recession.

The last time the index contracted was in 2012 (no recession), and has shown contraction a number of times outside of a recession.

Bill cites this chart:

Bob Dieli also made both of those calls in real time, as he has been doing for a few decades. His work goes mostly to private clients. It helps all of us to monitor objective sources like this. They benefit only from being right.

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 light week for economic data, but some important earnings reports for retail stocks. I watch everything on the calendar, so you do not need to! Check out WTWA to focus on what is important – and ignore the noise.

The “A” List

  • JOLTs report (M). Few understand, but the main use is labor market structure.
  • Michigan Sentiment (F). Has been weaker than the Conference Board version. An important indicator.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Wholesale inventories (W). Volatile and challenging to interpret. Rebound expected.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

More important than the economic data will be continuing earnings news. We also have almost daily Fedspeak and plenty of international events and speeches. And most important of all – the election.

Next Week’s Theme

 

With increasing uncertainty about the election outcome and resulting policies, markets pushed the trading range lower over the last two weeks. Eddy Elfenbein describes this as an extended period of small lower moves. Each of the daily declines has been less than 0.7%. During the same period, the economy has been showing signs of acceleration. Eddy provides a helpful chart:

Earnings have also been solid in the face of the longest market losing streak in 36 years.

I expect discussion of the election and the implications of the results to be the key market question:

Will we finally get some clarity?

The possible election results are not binary. There is a wide range of possible outcomes, listed below from bearish to bullish. Please note that I am not opining about who I want to win or how you should vote. I am reporting how the market will probably react under differing circumstances, with some references for you to start your own research.

  • No clear result. We might think it’s over when it’s over, but that might not be the case. (Robert Schroeder, MarketWatch)
    • Some states might require recounts, either automatic by state law or after a challenge.
    • A third-party candidate might win the electoral votes of one state in a close split between the major parties. That is the explicit objective of candidate Evan McMullin.
    • Trump and /or supporters might challenge the outcome, possibly with some legal basis. Most people will remember the Bush/Gore controversy and the infamous “hanging chads.”
    • The Supreme Court decided that dispute, splitting along partisan lines. Right now, that would be a 4-4 vote, placing emphasis on how states and lower courts decided.
  • A Trump victory. Estimates are that the market would decline by 5-7%, mostly because of increased uncertainty. Many market participants believe that Trump economic and regulatory policies would be market-friendly. (CNBC)
  • A Democratic sweep with a majority in both houses of Congress. The perception, possibly not accurate, is that this would allow a much more aggressive legislative agenda. This is probably not accurate because of the filibuster potential in the Senate. Cloture currently requires 60 (out of 100) votes. This serves to block nearly everything that does not have solid overall support. Making it more complicated is the idea of the “nuclear option” where the cloture requirement would be reduced. (Barbara Kollmeyer, MarketWatch)
  • Divided control — a Clinton Presidential victory with Republicans maintaining control of one or both houses of Congress. Markets have generally liked a deadlocked government. (Allianz)

Which of these will happen? Join in the comments with your thoughts about the election implications. As always, I’ll have a few ideas of my own in the conclusion.

Quant Corner

We follow some regular great sources and the best insights from each 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.

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

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

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. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

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.

 

How to Use WTWA (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 six 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?

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

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 and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested. They now have a regular Thursday night discussion, which they call the “Stock Exchange.” This week the gang came up with some contrarian, pre-election ideas. You can see the best technical analysis – and you can ask questions!

Top Trading Advice

 

Brett Steenbarger cites that noted trading guru, Bruce Lee, to illustrate our need to be flexible in trading.

In another post he emphasizes the need to ask the right questions. As he often does, this is a good technique for other life missions, not just trading. He uses an excellent specific example of VIX trading.

Options expert Bill Luby sheds some light on VIX trading, a widely misunderstood topic. He explains the difference between “median reversion” and using five-year moving averages. I doubt that most have event considered this significance.

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 Ben Carlson’s post, Don’t Be Afraid of All-Time Highs in the Stock Market. This is a concern that you see often, because many people equate a high level of the index with “expensive.” It is also true that declines begin from a peak. Forgotten in this is that most peaks lead to new peaks! Here is a key table:

And a key quotation:

Here’s also another way to think about this — since nearly 7% of all days since 1950 have been an all-time high that means that more than 93% of the time the stock market is in a drawdown state from a previous peak. So 9 times out of 10 you are going to be beating yourself up for not selling at the previous high. This is what makes the markets so interesting and excruciating all at the same time. Most of the time you’re in a state of regret.

Stock Ideas

 

Many people are mystified by the PEG ratio. Chuck Carnevale does a deep dive on the derivation and provides examples to show when and how it should be applied. If you invest in growth stocks, this is a must-read article with many ideas.

Brian Gilmartin draws upon the changes in earnings estimates to highlight attractive sectors for Q416. This is extremely helpful work, and worth a close read. Hint: Technology and Financials.

Is health care a sector to avoid or to embrace? Eddy Elfenbein comments on the decline in the group since July, 2015.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, with four or five specific ideas that we are also buying. This week Holmes likes Biomarin (NKE). Check out the post, Stock Exchange: Contrarian Pre-Election Trade Ideas in Chips, Biotech, Trucking, and Energy, for my own reaction, and more information about the Holmes method.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

How about housing? Barry Ritholtz has a great post highlighting the big best on housing by one of those who called the decline and has now switched sides, fund manager Donald Mullen. The entire post is worth reading, but here is the key argument:

Given how wary some people are of homeownership, why should we be thinking about demand strengthening? Here are a few possibilities:

  • Millennials seem to be moving out of their parents’ basements, and forming households;
  • Mortgage rates are starting to rise, and the potential for further rate increases could lead potential buyers to getting off the fence;
  • Low equity constrains inventory; that drives up rental demand as well as prices;
  • The economy continues to recover and even expand;
  • Unemployment has been about 5 percent for about a year, and wage increases are finally beginning.

All of these add up to an increase in the number of households, including renters — many of whom go on to become buyers.

This is also what we see from the Calculated Risk reporting on home prices, consistently higher but with room to run.

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, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the story about how even math teachers cannot understand 403-b annuities. Tara Siegel Bernard explains in the NYT. I have a lot of experience with people who come to me, seeking to escape something that sounded great at the time. The products are fine for some people, but because of high commissions are sold to many more. Anyone considering an annuity needs some advice ahead of time.

Another good piece is the Barron’s Next article on excessive concentration in stock of your own company. I have seen millionaires lose everything that way.

Seeking Alpha Editor Gil Weinreich’s market is the community of financial advisors, but it also attracts spirited comments from investors. I especially enjoyed this post featuring retired RIA Jim Sloan. The topic is one I rarely cover in WTWA – spending. I focus on clients’ investment plans; these must match their spending needs. Sometimes it is better to find a few economies than to take excessive risk.

Morgan Housel pulls together some themes that are among my favorites. It is a good explanation of why even the smartest individual investors go wrong. Hint: You are good enough to explain why it is not working and toward complex solutions.

Watch out for…

Facebook? Marc Gerstein provides an interesting and balanced analysis, driven by his quantitative methods.

Final Thoughts

 

The election outcomes that the market sees as most distressing are extremely unlikely. The best sources I follow suggest a Clinton victory, a toss-up in the Senate, and the GOP retaining the House. These are not partisan pollsters, but those who benefit only from accurate interpretation of data. Here are the key sources and a starting link. The message changes with new information, as we would expect. Barring any fresh news, the outcome has a high probability.

Larry J. Sabato of the University of Virginia Center for Politics.

Nate Silver, a numbers guru with respect from the Political Science community.

Sam Wang and the Princeton Election Consortium. Their method of median-based probability estimation is interesting and plausible.

The resulting gridlock will be perceived as positive. That will be true only if our leaders learn to compromise. There are decisions ahead that require action.

The first market reaction will be positive, if only because the worst cases were avoided and the uncertainty ended. Hedge fund managers who have lagged the market and are hoping to catch up via big short positions will need to cover. Based upon trader commentary and performance reports, this is a large group.

The second reaction will be sector and stock specific, and it will take time. Most of the financial punditry does not realize the limitations on Presidential power. I expect changes in drug pricing policies, for example, but not a sweep against an entire sector. The targets will be the most egregious excesses.

I understand that many people will disagree with these conclusions, despite my care in identifying sources. They will have theories about bad polls, hidden voters, and the like. I recommend reading this post. It is fine to keep cheering for your candidates until the last vote is tallied, but you do not have to lose money as well.

Stock Exchange: Contrarian Pre-Election Trade Ideas in Chips, Biotech, Trucking, and Energy

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.” Their methods are excellent, as you will learn if you join us for a few weeks. 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. Each week features a different expert.

I have placed more background at the end of the article. Comments, dissent, and specific stock questions are welcome!

This Week—Be Fussy with Felix

This week’s featured expert is Felix. Vince (our modeling guru) designed Felix to be an opportunistic, long-term trader with a time horizon of more than a year. This does not mean “buy-and-hold.” Felix is very fussy about new positions and aggressively drops those that are not working. Felix does not do much trading, so he can be a bit boring. To make up for that, Felix is our leader in answering reader questions. With nothing better to do, each week he generates a rating for every stock in the universe.

Here are the ideas for this week, beginning with Felix, our featured expert.

Felix

I look for long-term themes, and I have a great one this week. I am enjoying the long drive of tech. Let’s pick Micron Technology (MU) as an example. The chart looks like my heart monitor when Oscar comes home and makes himself a salami sandwich after I just cleaned up the kitchen. Sky-rocketing!! The ups and downs well make up the overall value of this one.

[J] This is yet another pick from you guys that is totally unsupported by earnings! Look at Chuck Carnevale’s basic chart for the stock.

[F] The earnings may be light this year—

[J] Try almost non-existent.

[F] But the market is forward-looking. You can see that expected earnings for 2017 are much better. That is just the start.

[J] 2017?

[F] Only professors focus on past earnings. Think ahead!

[Felix] I’ve had a question this week from A Dash of Insight:

Energy- have heard from others this sector is “emerging” i.e., getting stronger.  As such, how about XLE and OIH?
Seems to me that growth in this sector will depend on higher oil prices which I do not see coming unless OPEC makes and enforces an agreement to limit production (not likely, IMO).

[Felix] I have looked at XLE and OIH and they rate as middling on my scale. Energy has been low for so long that, yes, it is getting stronger. It is just at a very minimal level right now. OPEC is now finally making some changes (after years of sitting back). The effects might be a bit slower than we’d like, but there are a lot of changes now and in my opinion the future.

[J] Energy stocks are out of the danger range right now. Potential added production seems to provide a cap in the low 50’s for oil prices, but demand remains solid. These are probably reasonable long-term plays.

[F] I’m glad that you agree with me about something. Readers — please keep your questions coming. I get paid for each answer. Jeff makes Jack Benny look like a spendthrift and I need the money.

Oscar

I’ll be the first to admit I’m not a fan of tennis. All that jumping back and forth makes the game hard to follow – gives me a headache, really. At first glance, that might be what you see when you check the chart for Swift Transportation Co (SWFT), a member of my current favorite sector. I use my own sector baskets rather than ETFs, and trucking has a very high rating. Look to the individual stocks for some good ideas. SWFT is on a solid four-month upswing. I would be perfectly comfortable holding onto this one for another month or so.

[J] Why not ETFs?

[O] Intra-day pricing does not seem to reflect the underlying positions. I have a great basket with individually weighted members. I do not compete with the HFT models.

[J] That makes sense, but I expected you to have something inspired by the World Series.

[O] Have you ever seen the old Chicago stockyards? This business reflects the heartland, and the celebration is extending all over town. I am taking the day off tomorrow to attend the parade.

[J] You mean that you are skipping your regular day at Hawthorne? No sure things?

[O] I’ll call in if you need me.

Holmes

I am the rebound specialist. If you like to buy dips and sell rips, I’m your dog. I am also logical, deductive and careful. I cap my risk with stops setting up for good gains but small losses. This week I bought Biomarin Pharmaceutical (BMRN) closed today at 80.90. This stock is displaying a classic pattern of distribution and consolidation and it looks like it’s ready to move towards it 50d MA (86.60). If it gets there, I’d look for it to march even higher towards its 200d MA (91.50). I’ll keep this on a tight leash with 76.00 stop. These strategies don’t always work but the long-run risk/reward record is excellent.

[J] Didn’t you hear anything about the election? If Clinton wins, health care and biotech will get crushed.

[H] What election?

[J] What? No one in my team of models is discussing the Presidential election?

[H] The stock prices tell you everything you need to know about upcoming events, including this election. If a Clinton victory is expected and is negative for health care, that is already reflected in the stock price. My trade works if this sentiment is overdone, and it works big if Mr. Trump wins.

[J] I agree that the health care selloff is overdone, but we might not see improved pricing until February.

Athena

Usually I like to pick stocks that already have more momentum, but this is too good to pass up. HollyFrontier (HFC) looks to be bottoming out here, and I expect to ride this one out for a decent run. The clue here is a long solid base, providing attractive support. Most of my current positions are from April, and they are all doing well.

[J] The near-term earnings look very unattractive.

[A] As I try to teach you each week Jeff, you need to look farther into the future.

 

Background on the Stock Exchange

What is this about? Since launching this series I have had good questions on three general themes. Here are the questions and some brief answers.

  1. The model characters are fun, but please tell me more about what they do.

    I include the general personality of the model at the end of each article. I will begin featuring one approach each week with more detail, and soon provide a reference page for readers.

  2. Why don’t you show a track record on performance?

    I understand that those trying to sell a newsletter or chat room often provide some sort of time-stamped real-time record. You will find that most of these people are not subject to compliance rules. The “track records” tell you nothing, since they do not have enough trades to get into the “long run.” Confidence in a model comes from knowing how it is developed and tested. I would rather ask a few questions to a developer than see a few months of real-time picks. It is easy to spot the amateurs.

  3. Why should I care about these model picks?

    You probably read many articles with stock ideas. Some are a single idea based upon technical analysis from a source you do not know about. At the Stock Exchange, you get four different recommendations from technical “experts” as well as some fundamental commentary as a rebuttal. I am not trying to sell anything. We are developing an institutional product. The results are good enough that I am willing to share and discuss with readers. Some of my clients are invested in these models, so I am not going to provide every trade in real time. It is supposed to be interesting and fun! Look at the ideas and do your own research.

 

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).

Cast of Characters

Felix is fussy, precise, and very cautious. He looks for what is working, but it also must have upside potential. He is an investor who thinks long term. Felix will not usually announce new picks, but he will answer questions, saying what he thinks about specific stocks. He will also comment on favorite themes and sectors.

Oscar is naturally optimistic and a bit excitable. He likes to go with winners, and focuses on a one-month time frame. He trades either sector ETFs, or a basket of stocks (equally weighted) that reflect a sector. Oscar will mention a favorite sector each week, and will also answer questions about sectors.

Holmes is a trader, but a cautious one. Holmes emphasizes asset protection through profit taking, stops, and trailing stops. He is careful in selecting new positions, and generally looks at an intermediate time frame. While he does not know the definition of “mean reversion” he loves rebounds! There is no set holding period, but two or three months is not unusual. Holmes will tell us one stock recommended that week. For those who sign up for his email list (no charge, privacy respected, holmes at newarc dot com) he will report exits with a one-day delay.

Athena trades more frequently than the others, but still limits risk. Her inspiration helps to find good ideas. Her excellent quant skills find attractive risk/reward opportunities. Her wisdom leads her to exit trades that are not working. Athena will provide a new idea each week.

Jeff usually has some comments about stock or market fundamentals. Unlike the other witty participants, he sounds like an old prof.

The conversation is light-hearted, but the stock analysis is serious. We own positions in each of the stocks mentioned.

And finally, you can learn about the eternal debate between technical analysts and those using fundamentals.

Weighing the Week Ahead: When Will the Trading Range Be Broken?

We have normal week for economic data, including the first estimate for Q3 GDP. There are also important earnings reports. Election stories have become even more intense. Meanwhile, the market has been pretty quiet. I expect financial media to be asking:

When will the trading range be broken?

Personal Notes

I will be traveling next week and probably will not write WTWA.

I have completed my new paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. Readers of WTWA can get a copy by sending an email to info at newarc dot com. We will not share your email address with anyone.

Last Week

Last week’s news was pretty good, despite the modest reaction in stocks.

Theme Recap

In my last WTWA, I predicted more attention to the “stealth market rotation.” This idea got a little attention on Monday from the Pundit-in-Chief, but that was all. The rotation was less pronounced and the competing stories were good ones.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a slightly positive week, but the real story is the continuation of a very narrow trading range.

Doug has a special knack for pulling together all of the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something really good. 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

  • Building permits rose and beat expectations. But housing starts declined (see below). New Deal Democrat analyzes this contrast and the effect on his leading indicators.
  • Philly Fed also beat expectations.
  • Existing home sales rose 3.2%. Calculated Risk is the go-to source on housing, and Bill continues his analysis of the effects of the small inventory. This concept is essential to understanding housing trends.

  • Industrial production registered a (small) increase of 0.1%. Steven Hansen notes that the year-over-year figure is still in contraction.
  • Hotel occupancy still on pace to be the second best year in history. (Calculated Risk)
  • Earnings season shows continuing strength. FactSet reports that 78% of S&P 500 companies are beating earnings estimates and 65% beating on sales. Take a look at the entire analysis. Here are two interesting takeaways.

The Bad

  • Rail traffic continues to decline, even when coal and grain are excluded from the data. Steven Hansen does a thorough analysis of the trends.
  • Jobless claims edged 13K higher, moving away from recent lows.
  • Housing starts declined and missed estimates. The annual rate was 1.047 million. Calculated Risk discusses and notes that his prediction at the start of the year, growth of 4-8% still looks about right.

 

The Ugly

Increased hacking. Yesterday’s widespread outage attacked a domain name service, according to MarketWatch. Engadget says, Blame the Internet of Things and provides the map below. The hacking began with home devices which often have weak security protocols. With that entry, the distributed denial of service attack took down a list of major sites, including “Twitter, Spotify, Reddit, The New York Times, Pinterest, and PayPal.”

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 Ryan Detrick of LPL Research. I am showing the power of his work via the two key charts, but reading the entire post will help you to spot these things on your own.

 

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, along with many important earnings reports. I watch everything on the calendar, so you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.

The “A” List

  • New home sales (T). Continuing strength needed.
  • Consumer confidence (T). The Conference Board version spiked last month. Few expect the gains to hold?
  • GDP for Q3 (F). Even though this is backward looking, it will get plenty of media attention in front of the election.
  • Michigan Sentiment (F). Has been weaker than the Conference Board version. An important indicator.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Pending home sales (Th). Not as important as new homes for immediate economic effect, but a good market indicator.
  • Durable goods (Th). Volatile September data, but important for the overall assessment of the economy.
  • Existing home sales (Th). Without the impact of new homes, but still a good read on the overall housing market.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

More important than the economic data will be continuing earnings news. We also have almost daily Fedspeak and plenty of international events and speeches. And of course…the candidates.

Next Week’s Theme

Despite the many events that normally increase volatility, the stock market has traded in a narrow range. There is an increasing sense that “something’s got to give.” The exact cause and timing remain unclear, but the obvious choice is Election Day.

I expect an active discussion about a looming market question:

When will the trading range be broken?

Here is a chart of the market over the last year:

If you look at mid-July through today, you can see that the trading range has been quite narrow.

Now let’s turn to the sequence of topics I have written about in the last two months. These remind us of what we were thinking and worrying about each week.

  • Possible rate increase after Jackson Hole 8/28
  • Chance of an Autumn Correction 9/3
  • Should we fear the Fed? 9/11
  • Is the bond correction at hand? 9/18
  • Election effects on the market 9/25
  • Time to get past the gloom? 10/2
  • Earnings recession over? 10/9
  • Market rotation at hand? 10/16

Despite this list of challenges, stocks have held up pretty well.

Many are expecting the trading range to be broken soon. But in which direction?

Election predictions range from a surprise, Brexit-style victory for Mr. Trump to a Democratic sweep. The markets seem to favor a Clinton victory, but a continuation of divided government, mostly because of reduced uncertainty.

At the beginning of the year I wrote that the investment effects of this election were smaller than most would expect. The President has much less power to change policy than most people think – especially in the face of a Senate filibuster. Either candidate would need to forge alliances with the other party to make major changes. OppenheimerFunds has some interesting comments about surprises from past elections, and advice for investors this time.

Data indicate that many are not following this advice. A BlackRock survey (via Financial Advisor IQ) found that 53% of investors have raised their allocation to cash because of the “persistent volatility.” The Presidential election gets credit as a major cause.

The perceived volatility is completely wrong – certainly for the last few months, and also for several years. If you missed my post on testing your Confirmation Bias Quotient, you might want to take a look. Something is causing many investors to perceive volatility that is not really there.

Bloomberg reports that investor cash levels have not been seen since 9/11.

Join in the comments with your ideas on when the trading range will be broken, and in which direction. As always, I’ll have a few ideas of my own in the conclusion.

Quant Corner

We follow some regular great sources and also the best insights from each 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.

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

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has a number of interesting approaches to asset allocation.

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. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

“Davidson” (via Todd Sullivan): An excellent, understandable description of the interest rate cycle and its close association with recessions. The description of the factors we can expect to see before a recession will come — someday. Here is a key quote and chart:

Recessions, for the most part, in my opinion, are predictable. The rate spread between T-Bills and the 10yr Treasury is 1.20% today or 120bps (basis points). Based on history, lending continues, a relatively high level of pessimism continues and so does economic expansion. The rate spread is only one of several economic measures we have available that indicates economic expansion is likely to continue for several years.

 

How to Use WTWA (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 six 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?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

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 also the best advice from sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested. They now have a regular Thursday night discussion, which they call the “Stock Exchange.” This is the place to get some ideas from the best technical analysis – and you can ask questions!

Top Trading Advice

 

Brett Steenbarger provides a checklist to help you determine if you are “operating in peak performance.” As he often does, Dr. Brett has raised a point that few people think about. This is one that could make a big difference – and not just for traders.

The Trading Goddess considers pot stocks for an election trade.

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 “Davidson” (via Todd Sullivan) and the analysis of current market fears. It is a post packed with good ideas, one of which is in the quant corner as well.

The past 12mos has seen many a ‘high profile’ investor forecast that a recession is imminent. This is the consensus view. Some claim it is driven by economic weakness from one area or another. There are still claims that employment is weak when it is at record highs. Others claim that retail sales and personal income (wage growth) are nearly unchanged for more than a decade. Not so! They are much better. Then, there are those who claim that recoveries only last a certain number of years before they expire. Not so! Finally, there are some who claim no recovery has occurred and that the SP500 is only higher because interest rates are so low, i.e. high stock prices are only supported by the Federal Reserve keeping interest rates at historical lows. Definitely, not so! The range of commentary covers a broad spectrum, but remains pessimistic just the same.

Please take a few minutes to read this valuable post.

Income Ideas

 

Many investors are looking for income stocks. Rightly worried about the valuation and downside risk of utilities, they seek alternatives. Some have joined us in buying sound, conservative stocks and writing near-term calls against the position. This can generate an excellent yield and is safer than owning the stocks alone. It is a lot safer than a basket of utilities.

REITs present another alternative. The trick is to find those that have some ability to hold up in the face of interest rate hikes. Brad Thomas has been writing on this topic, presenting several good ideas. This week it is Apple Hospitality (APLE). I have been adding some REITs to the yield portion of our client portfolios. Like Brad, we include analysis from Chuck Carnevale’s F.A.S.T. graphs as part of our research.

David Fish has an interesting article on dividend increases anticipated before the end of the year. There is also a link to his updated list of dividend champions.

Stock Ideas

Lee Jackson writes about three “red-hot chip stocks.” These interesting ideas are based upon a research report from highly-regarded chip analyst Will Stein (SunTrust Robinson Humphrey).

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, with four or five specific ideas that we are also buying. This week Holmes likes Nike (NKE). Check out the post for my own reaction, and more information about the Holmes method.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Dillard’s, Inc. (DDS): Has The Pendulum Swung Too Far? Asks Mitchell Mauer. I especially like to recommend articles that are backed by good analysis. Here you can see both pros and cons. It follows a method that is quite useful in selecting stocks.

Is the selling in Gilead Sciences overdone? Stone Fox Capital notes the falling analyst recommendations despite strong earnings. Should the stock really be trading at a multiple of 6. The net payout (stock buybacks plus dividends) is now almost 18%.

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, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the “lucky versus good” analysis from Jonathan Clements. He writes:

The problem: We typically judge our financial choices by a single, crude yardstick—whether they make or lose us money. But that measure of success or failure can result in faulty feedback that validates bad behavior. Consider three examples……

Check out the whole post for the examples and an excellent lesson.

Millennial Investors

Barron’s introduces a new site aimed at “a new generation of investors.” There is a combination of advice and some stock ideas. I enjoyed the article about why Apple Pay is more secure than a credit card. They also introduce “The Next 50 Index” with stocks geared toward Millennials.

And from another source – this provides some inspiration about our changing habits.

Final Thoughts

There are several points to keep in mind:

  • The market has been resilient in the face of challenges. Look again at the chart. The worrying seasonal predictions have all been wrong – as January goes, sell in May, September as the worst month. We now approach the period of greatest seasonal strength.
  • The earnings recession seems to be at an end. Forward earnings are trending higher.
  • There is no sign of an economic recession – just more of the same slow growth.
  • Consumer confidence is still strong.
  • Energy prices are back in a range where the threat to producers has been reduced and the consumer prices remain modest.

What is needed to spark a change? The biggest item is increased investment by business. Surveys continue to show caution among these leaders, even when their own business is doing well. When there are specific events to worry about, it is easy (and seems wise) to defer decisions.

Acclaimed system developer, author, and hedge fund manager Ralph Vince summarized the situation with a bold call in a post at Daily Speculations:

Regardless of who wins this election, this market is going to rip to the upside — and I can be quite certain of that without even looking at the numbers, just the very tentative nature of nearly everyone around it. I’ve smelled this dish cooking before, and so have a lot of folks on this site.

How is that for a contrarian position?

Stock Exchange: Featuring Holmes and NKE — Energy and SCHW worth a look

Each week Felix and Oscar host a poker game. We listen in on current trading ideas in the few minutes before the game starts. They like to call this their “Stock Exchange.” I am the only human present, and the only one using fundamental analysis. Their methods are excellent, as you will learn if you join us for a few weeks. Since the time frames and risk profiles differ, so do the stock ideas.

Background on the Stock Exchange

What is this about? Since launching this series I have had good questions on three general themes. Here are the questions and some brief answers.

  1. The model characters are fun, but please tell me more about what they do.

    I include the general personality of the model at the end of each article. I will begin featuring one approach each week with more detail, and soon provide a reference page for readers.

  2. Why don’t you show a track record on performance?

    I understand that those trying to sell a newsletter or chat room often provide some sort of time-stamped real-time record. You will find that most of these people are not subject to compliance rules. The “track records” tell you nothing, since they do not have enough trades to get into the “long run.” Confidence in a model comes from knowing how it is developed and tested. I would rather ask a few questions to a developer than see a few months of real-time picks. It is pretty easy to spot the amateurs.

    This is a brief answer, and I promise to follow up with a longer post. Meanwhile, here is our model developer, my partner Vince Castelli, in his Popular Science feature from 2002. It is one of the few projects he worked on that are now in the public record. He has applied his scientific knowledge to finance for decades.

     

  3. Why should I care about these model picks?

    You probably read many articles with stock ideas. Some are a single idea based upon technical analysis from a source you do not really know about. At the Stock Exchange you get four different recommendations from technical “experts” as well as some fundamental commentary as a rebuttal. I am not trying to sell anything. We are developing an institutional product. The results are good enough that I am willing to share and discuss with readers. Some of my clients are invested in these models, so I am not going to provide every trade in real time. It is supposed to be interesting and fun! Look at the ideas and do your own research.

 

This Week’s Ideas—Focus on Holmes

This week’s featured expert is Holmes. Vince designed Holmes to be a trader, but one that would be safe enough for average investors. It is not a crazy, day-trading program. Holmes looks for stocks that have sold off, formed a base, and have promising rebound potential. The criteria are strictly technical, so the stocks may not be appealing for long-term investors. Holmes is very cautious in making new picks and aggressively dumps losers. Like most traders, Holmes also includes profit-taking and trailing stops. The average holding period is a few weeks. There may be as many as sixteen positions at one time – all from our universe of 700 liquid stocks.

Holmes reduces risk in three ways:

  1. Going completely to cash when market conditions are poor;
  2. Reducing the number of positions when indicated;
  3. Using stops and trailing stops on individual holdings.

I analyze the risk of each of our strategies. While it is partly subjective, I rate Holmes as lower risk than buy-and-hold for the overall market.

Here are the ideas for this week, beginning with Holmes.

Holmes

I am the rebounding specialist. I love great stocks that investors/traders have bailed on. My Bounce Play of the Week is NIKE, (NKE), This mega sports apparel and sneaker maker just keeps running a marathon while investors treat it like a sprinter. Coming off its highs of 67 in early 2016, this stock has been consolidating, digesting, and hanging out at the bottom of its channel. I see a good chance to power back up a few percent or more. I also love the risk/reward aspects of this trade. I would use 48 as hard stop, so I’m risking 3.8 to make 10 or more points. Like Nike says: “Just Do It.”

This is definitely a “bounce” play.  It is close to the lower edge of the channel.  I’ll be happy with a few percent.

J: Valuation is reasonable, but it is not exciting based upon the fundamentals.

H: The chart shows the rebound potential. Most of my ideas are quick winners. I’ll cut bait and move on if this does not work.

Felix

I still like energy and have added a new position last week. Some current holdings are dipping dramatically and some are rising out of those dips, but the long-term strength appeals to me. You can see the sector strength in VanEck’s CRAK.

J: Oil prices are still in a trading range. I think that it is the sweet spot for the economy. I agree with the long-term potential.

F: Oil appears to be making a slow bullish move going into Winter in the Northern Hemisphere.  There have already been a number of long range weather forecasters who are calling for a severe Winter in the US this year.

J: Since when do you pay any attention to weather forecasts?

F: My selections are always based upon the charts, but I also am interested in the message of the market.

And to my many fans: Please keep your questions coming. I could use the overtime pay! Ask about a specific stock, or perhaps an ETF. I am interested in sectors, but need a representative ETF to help.

Oscar

This week I like Oil & Gas exploration, illustrated below by XEC. Sure, the stock’s been hanging around yearly highs for a while now. But would you have bet against World Heavyweight Champ Joe Louis? I see at least a couple months of progress hanging around here.

This is a wonderful textbook example of momentum!  It looks like a real long-term winner in the making.

J: That seems crazy. The PE multiple is over 300. Where did you get such an idea?

O: My turf accountant also has stock picks.

J: You take stock advice from your bookie??

O: He is better than one of those robo-advisors. He says that 2017 earnings will be a lot better.

J: Sixty-eight cents this year, but 3.34 in 2017. I still think it is expensive.

O: As usual, I’ll either cash or go for a small loss.

 

Athena

Following some steep losses in January and June, Charles Schwab (SCHW) has spent the last few months on a rebound. The forward average suggests it’s leveling off, but I think there’s room to catch a few points just before the peak here.

What a great recovery from a major pullback.  Very strong!  This could have a long run.

J: This is trading around the long-term P/E ratio and earnings are rising. In that sense it is fairly valued. Here is Chuck Carnevale’s FastGraph, which shows why I still think it is expensive.

A: You and Chuck are just too cautious. If you want a big reward, you have to take some chances.

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 are allowed to choose me, although my feelings will not be hurt very much if you prefer one of the models).

Cast of Characters

Felix is fussy, precise, and very cautious. He looks for what is working, but it also must have upside potential. He is an investor who thinks long term. Felix will not usually announce new picks, but he will answer questions, saying what he thinks about specific stocks. He will also comment on favorite themes and sectors.

Oscar is naturally optimistic and a bit excitable. He definitely likes to go with winners, and focuses on a one-month time frame. He trades either sector ETFs, or a basket of stocks (equally weighted) that reflect a sector. Oscar will mention a favorite sector each week, and will also answer questions about sectors.

Holmes is a trader, but a cautious one. Holmes emphasizes asset protection through profit taking, stops, and trailing stops. He is careful in selecting new positions, and generally looks at an intermediate time frame. While he does not know the definition of “mean reversion” he loves rebounds! There is no set holding period, but two or three months is not unusual. Holmes will tell us one stock recommended that week. For those who sign up for his email list (no charge, privacy respected, holmes at newarc dot com) he will report exits with a one-day delay.

Athena trades more frequently than the others, but still limits risk. Her inspiration helps to find good ideas. Her excellent quant skills find attractive risk/reward opportunities. Her wisdom leads her to exit trades that are not working. Athena will provide a new idea each week.

Jeff usually has some comments about stock or market fundamentals. Unlike the other witty participants, he sounds like an old prof.

The conversation is light-hearted, but the stock analysis is serious. We own positions in each of the stocks mentioned.

What is Your Confirmation Bias Quotient?

Most thoughtful investors know and understand the concept of confirmation bias. Very briefly put, we selectively perceive and choose evidence that supports our existing beliefs. It is a powerful natural process. Everyone is susceptible.

 

Morgan Housel has a good challenge: “What’s something you strongly believe that’s likely wrong?” He has a wonderful description of the key problem:

 

And while most of us are OK being told we don’t know everything, being told we have a lazy thought process is hard to interpret as anything but an insult.

So we have the ultimate cognitive dissonance: Fully aware that we’re wrong about something but unable to admit being wrong about anything.

 

Unfortunately for the decision maker, fixing the process is the key to better results. There are various discussions about how to avoid confirmation bias, but they are pretty general and not well-linked to investment decisions. Even worse, many investment discussions descend into an argument about who is biased, instead of an intelligent discussion of the facts.

 

Since it is not easy to detect your own biases, I have devised a Confirmation Bias Quotient to help. I have scaled the test so that high is good.

 

  1. Anecdotes. If you pay a lot of attention to specific stories and examples, give yourself -3. Illustrations can add color to conclusions, but when used as the basic level of analysis if is too easy to find supporting narratives.
  2. Specific examples. Similar to #1 but probably even more common. How do you interpret information during earnings season? If you pay a lot of attention to news reports on specific companies, give yourself -3. (It does not matter whether the stories are positive or negative; -3 either way).
  3. Symbols. If you find yourself drawn to colorful or graphic symbols of events – new paradigm, stall speed, stagnation, or anything similar pointing in any political direction – give yourself -2. If you completely reject analysis of data, take an additional -2.
  4. Demonstrably biased data. Examples are things like ShadowStats, where there has been compelling and responsible refutation, without response, on several occasions. Or like the idea that over 90 million people in the U.S. are without work. There is a legitimate debate about some data, but a general rejection of this type indicates a preference for conclusions before evidence. Take -2 if you find these arguments credible.
  5. Emphasizing unimportant data. Choosing to use data rather than stories is a good step. The problem is that there are so many indicators, and most of them have little significance. If you are looking at the Markit PMI (for Europe, China, or the U.S.), or regional diffusion indexes like Empire or Dallas, give yourself -1. There are so many of these that you can find anything you want, and none of them are established as really important.
  6. Embracing biased interpretations. This happens so frequently that I can only give examples. Suppose that a source complains about seasonal adjustments one month, but not another. Or emphasizes sentiment measures only when pointing in the preferred direction. Or emphasizes some specific factor (birth/death adjustment, core measure versus headline) only when it fits their message. It is pretty easy to spot such sources if you look for them. If you find yourself in this camp, take another -1.
  7. Relying upon biased or weak sources. Mr. Buffett said that you should not ask your barber if you need a haircut. Why ask a bond guy about stocks? Or an emerging market manager about bonds? Or a hedge fund manager, who is not really there to help you, about anything? If you do not have a high level of skepticism about sources, take another -1.

 

If you are really mired in bias, you could have a score of negative 15 at this point. Let us turn to the positive factors. Each is worth a possible +5 points, for a total of +20.

 

  1. A willingness to separate your evaluation of the economy and investments from your personal political beliefs.
  2. Finding the most important economic indicators and sticking with them, even when they convey a message that feels wrong to you.
  3. Discovering sources that have demonstrated expertise and track records in the relevant subject.
  4. Being willing to read carefully the analysis of experts with differing viewpoints.

 

The Test is one of Process, not Conclusions

 

A crucial point: You may well reach a consistent bearish or bullish conclusion without significant confirmation bias. The test is about your information, method, and process — not about conclusions. Different experts can look at the same data and reach different conclusions. In my weekly WTWA column I carefully follow all four of the positive factors listed, and strive to maintain a high CB quotient. It happens that my conclusions have been correctly bullish. Some erroneously believe that this reflects bias. Not so. If the evidence changes, so will my conclusions. Why shift from a winning method for “cosmetic” reasons?

 

Scoring the Test

 

If your score is negative, your biases are costing you money. My estimate is that 70% of investors would have a negative score on this test.

If you have even a small positive score you are actively seeking objectivity – probably in the top 20% of all investors.

If your score is above +10, you are doing a very good job of seeking evidence. Your investment results probably reflect this!

 

Weighing the Week Ahead: Has the Market Rotation Begun?

We have normal week for economic data, and a big week for earnings reports. The last Presidential debate will grab headlines. We have been monitoring these factors for weeks, but something new is showing up in the data. Let’s call it a “stealth rotation” from bonds to stocks and from bond substitutes to less favored stocks. If the punditry carefully watches the data, they will be asking:

Has a market rotation begun?

 

Last Week

Last week’s news was pretty good, despite the negative reaction in stocks.

Theme Recap

In my last WTWA, I predicted special attention to the early earnings reports and questions about whether the earnings recession was ending. That was a reasonable guess, although most of the commentary seemed to focus on a couple of big earnings misses. There was also plenty of competition from some surprising China data, the ongoing Fed debate, and of course, the election news.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a negative week. You can see the opening gap on Thursday after the Chinese trade data, and also Friday’s failed rally.

Doug has a special knack for pulling together all of the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something really good. 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

  • JOLTS continues to show a solid labor market. Chair Yellen uses it as a signal for a tight labor market. The healthy “quit rate” shows that many people are comfortable in voluntarily leaving jobs. Some reports focused strictly on the number of job openings, which is a poor use of the data.

  • Initial jobless claims also show labor market strength.

  • Retail sales provided the week’s best economic news, rising 0.6%, the best increase in three months. (Bloomberg)
  • Corporate earnings nicely beat expectations. FactSet has some interesting early data – 76% of the reporting companies have beaten earnings expectations and 62% have beaten on sales.

 

The Bad

  • Import container counts are again lower. Steven Hansen (GEI) smooths out the effects of the Hanjin Shipping bankruptcy and finds a troubling trend. Does it portend weak holiday spending? The chart below is the year-over-year change in the three month moving average.

  • Chinese exports and imports both declined more than expected.
  • Q3 GDP estimates edge lower as more data is reported. Calculated Risk summarizes the move from various sources. Here is one example:

  • Michigan consumer sentiment slips to 87.9 in the October preliminary report. Jill Mislinski updates the story and the terrific Doug Short chart combining multiple elements of the story in a single look.

The Ugly

The political sideshow. There were polls to determine the “winner” of the debate. Not so long ago debates were seen as a way for the trailing candidate to show equality of stature – same stage, same rules, etc. Many challengers have used this effectively. It is also a way to demonstrate that a “Presidential” image. If an expert from years ago, without any context, read the transcript of this “town hall forum” debate s/he would not believe it. Campaigns are ever-more focused on the undecided or uncommitted voters, especially in the key states. Suppose for a moment that these voters may not have been the ones sitting at the front of the class. What do we expect the campaigns to do? The sound bite negative ads are one approach, but this is reaching a whole new level – and not a high one.

The most important thing you can do as an investor is to vote your conscience while still using sound, unemotional judgement concerning your personal finances.

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. Nominations welcome. I also note that Dr. Ed Yardeni joined us in applauding the Justin Lahart article on CAPE. Dr. Ed provides his own thoughts about market valuation and the advantages of forward earnings.

I am not a fan of valuation measures based on trailing earnings, especially if they trail over the past 10 years. I believe that the stock market is forward looking and discounts analysts’ consensus expectations for earnings over the year ahead. More specifically, I use S&P 500 12-month forward consensus expected operating earnings, which is a time-weighted average of analysts’ expectations for the current year and the coming one.

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 fairly big week for economic data, as well as earnings reports. I watch everything on the calendar, so you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.

The “A” List

  • Housing starts and building permits (W). Important forward looking data on a crucial sector.
  • Industrial production (M). Volatile September data. Any sign of a rebound from last month’s loss?
  • Fed Beige Book (W). Prepared for the next FOMC meeting, this provides color from each Fed district, going beyond the data.
  • Leading indicators (Th). Widely followed, despite some controversy. Rebound expected from last month’s negative reading.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Existing home sales (Th). Without the impact of new homes, but still a good read on the overall housing market.
  • CPI (T). Inflation is still not very important, and it will not be until there are a few higher months.
  • Philly Fed (Th). Has earned some respect as one of the few regional indicators that can move markets. The first October data.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

More important than the economic data will be continuing earnings news.

Next Week’s Theme

The Presidential campaign and the final debate continue to dominate the news. The regular economic data this week include important leading indicators about housing. These will not get the attention deserved. Corporate earnings reports will also get some attention, but the emphasis seems to be on spectacular “misses.” Did you even realize that the earnings season is positive so far? Unless you look at the FactSet data, you would not know.

Through this haze there have been a few glimmers of a new trend. If you are alert, you will see more attention to the question:

Has a market rotation begun?

There is some evidence.

  • The ten-year note has moved noticeably higher while the yield curve has steepened.
  • Utilities are losing ground while banks are gaining. Brian Gilmartin astutely asks, whether banks are assuming that role.
  • Economic skepticism remains intense – but perhaps the result of the election. Chris Matthews (Fortune) notes that concern about the economy has grown even as data show improvement.

    …a voter’s political beliefs and the overall political environment instead drives how they feel about their economic circumstances.

    There’s no better way to interpret the latest results from the latest Marketplace-Edison Research Poll, which showed that 30% percent of Americans are very fearful they will lose their job in the next six months, up 10% from last year.

And also….

A particularly telling figure in this year’s survey: While 37% of those surveyed said their personal economic situation has improved over the past year—versus 21.5% who said it got worse—just 30.3% said the overall economy improved. What’s more, 36.9% said it got worse.

If more people’s financial situation improved than deteriorated, why do more people think it’s the opposite for the economy in general?

As always, I’ll have a few ideas of my own in the conclusion.

Quant Corner

We follow some regular great sources and also the best insights from each 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.

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

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has a number of interesting approaches to asset allocation.

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. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score. This week Georg also updates his unemployment-based indicator, still not signaling a recession as you can see from the chart below.

GEI reports that the ECRI’s growth index remains solid, despite a marginal fall last week. Meanwhile, the ECRI continues its prediction of “stagflation lite” and Fed criticism.

This is a good time to review the St. Louis Financial Stress Index – vastly superior to anecdotes and headlines.

 

How to Use WTWA (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 six 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?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

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 also the best advice from sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested. They now have a regular Thursday night discussion, which they call the “Stock Exchange.” This is the place to get some ideas from the best technical analysis – and you can ask questions!

Top Trading Advice

Brett Steenbarger reminds us that we should always consider what we would be doing if not trading. Is it a good choice? He also highlights an interesting trading contest for women. It leads both to prizes and to job opportunities. While performance is measured, the criteria do not encouraging taking wild shots. You can still apply, but do so right away if interested since the contest has started.

Do you have an edge in your trading? Do you have a tested, trusted system? Adam H. Grimes describes this important first step for traders as well as what they should do next.

If you don’t meet Adam’s tests, you should definitely re-read Dr. Brett’s post!

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 Neal Frankle’s analysis of a client question about real estate versus stocks. In a generic sense, it is a common question faced by nearly everyone. Neal realizes that everyone’s situation differs. Using the couple’s investment goals and time frame, he compares three alternative choices. From this analysis one of the choices is easily eliminated. It is an excellent demonstration of sound contextual analysis. To appreciate the result, you should read the whole post. Here is an intriguing chart:

 

Stock Ideas

Chuck Carnevale’s most recent idea is CVS Health Corporation (CVS). His analysis shows that the stock has moved from overvalued territory to fair value – and with plenty of upside.

Our newest trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, with four or five specific ideas that we are also buying. This week Holmes likes Dexcom (DXCM). Check out the post for my own reaction. And his choice from last week, Air Products and Chemicals (APD), has now been endorsed by Athena. Check out the post to see the other picks, ask questions, and choose your favorite model.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Tom Armistead takes a deep dive into the numbers in his study of IBM. Read his post to see why artificial intelligence is a crucial factor.

Lee Jackson recommends four dividend stocks from the defense sector. And also five contrarian picks with good yield.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the Forbes report on a survey of young adults. It is a good read for young people and for investors wanting to understand current trends.

 

Gil Weinreich continues his excellent series for investment advisers, and of great interest to investors as well. He frequently features ideas about best practices for the advisor community. This week he introduced a new contributor, Neal Frankle. It is this week’s “best investment advice.” (And thanks to Gil for mentioning me along with others in his fine group).

Market Outlook

Mark Hulbert notes the seasonal strength typical of year’s end. Could there be a “monster rally?”

 

Final Thoughts

 

There is a continuing gap between perception and reality when it comes to economic progress and risks. This has translated into extremely defensive investment decisions, emphasizing anything that seems to provide yield. The incessant political accusations have made this worse.

The resulting environment encourages stories – even by unbiased journalists – seizing upon the dramatic. I am seeing the “R word” thrown around much more often, and by people without any special experience or track record.

The developing market rotation is still some weeks away from popular recognition, but there are signs it is getting closer. This Bloomberg interview with Tom Lee is well worth watching. Lee’s market read and forecasts have been excellent for years. He has remained bullish, and for the right reasons. I am encouraged when I see him commenting on the themes that I am also seeing.

One catalyst will be absolute losses in bond mutual funds. Investors are about to learn something important and possibly painful: Bonds and bond substitutes do not come with guarantees.

Weighing the Week Ahead: Is this the End of the “Earnings Recession?”

We face a modest week for economic data. While equity markets remain open, bonds will not trade on Monday (Columbus Day). Yom Kippur begins Tuesday at sundown and extends through the next day. The punditry, fueled by recent revelations as well as Sunday’s debate, will pounce on the election news. With the official start of earnings season on Tuesday and important reports by the end of the week, perhaps we can hope to see a serious market discussion before the week ends. I expect the punditry (eventually) to be asking,

Is the earnings recession over?

Last Week

Last week’s news was very good, although there was little reaction in stocks.

Theme Recap

In my last WTWA, I predicted a shift from the gloomy outlook might be improving as some of the current worries were reduced. That was a good guess for an overall theme. There were quite a few “looking ahead” pieces both on TV and in print. The other news – the election, Brexit, and flash crash news was featured on some days, but it is difficult to plan for that.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a flat week, and stayed within a range of about 1%. CNBC breathlessly noted the “triple digit moves” on several occasions. This is a great illustration of making something out of nothing.

Doug has a special knack for pulling together all of the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

Personal Note

The market is at a crucial point. It is not a time for sitting on the fence. Next weekend Mrs. OldProf (hometown Green Bay) and I are headed to visit her family in Wisconsin, so maybe I should say not a time for being a “deer in the headlights.” I am planning to write next week, but I can’t be sure. Meanwhile, we have a family fight brewing for tomorrow night, with the Presidential debate at the same time as a football game.

Because of the importance, I put extra effort into this week’s WTWA edition, and I hope it is helpful. People are sometimes bashful about reaching out to us with questions. Please feel free to get in touch via main at newarc dot com.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something really good. 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

  • Auto sales beat expectations, up 4.7% to an annualized rate of 17.8M. Calculated Risk puts this into perspective.

  • High-frequency indicators remain strong. New Deal Democrat does an excellent weekly update, which I follow regularly. His latest report shows the strength in both long-leading and short-term indicators. The concurrent indicators are mixed. Reading this post helps to understand why many using less data are more confused about the market.
  • A shortage of truck drivers? A $5000 bonus is available. Another among the many small, unremarked indicators which I follow. (Tyler Cowen)
  • Home prices up 6.2% over last year according to the CoreLogic index. (GEI)
  • Employment reports were generally positive.

  • Jobless claims dropped to 249K.
  • Labor participation increased, while the unemployment rate also increased from 4.9% to 5%.
  • The work week moved higher.
  • Best of all, hourly earnings increased 0.2% over August and 2.6% year-over-year.
  • The median duration of unemployment is down to 10.3 weeks. (WSJ)

  • ISM Non-Manufacturing made a big jump to 57.1, almost 6 points higher than last month and four points higher than expectations.

The Bad

  • Construction spending fell 0.7%.
  • ADP Private Employment gained only 154K, down from 175K in the prior month and missing expectations. This was worse than the “official” private employment estimate.
  • Commercial real estate index stumbles. Calculated Risk tracks this and provides a good update.

 

The Ugly

My original plan was the poll showing that over 40% of potential voters could not name the Vice-Presidential candidates. With the Presidential campaign in a descending spiral and a violent hurricane, my original idea seems lame. There is plenty of ugly news. We can all hope for a better week ahead.

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 Justin Lahart of the Wall Street Journal for his article, Shiller’s Powerful Market Indicator Is Sending a False Signal About Stocks This Time. The article has an excellent discussion of alternative methodologies, including an alternative profit measure that matched the results quite well until 2008. The Shiller CAPE is widely cited as a justification for not owning stocks, but both Prof. Shiller and his co-developer Prof. Harvey do not use it that way themselves. Here is the key conclusion, drawing upon the work of Prof Damodaran the leading expert on corporate valuation:

For New York University finance professor Aswath Damodaran, this is the real sticking point. He set up a spreadsheet to see if there was a way that using the CAPE could boost returns. When the CAPE was high, it put more money into Treasurys and cash, and when it was low it put more into stocks.

He fiddled with it, allowing for different overvaluation and undervaluation thresholds, changing target allocations. And over the past 50-odd years, he couldn’t find a single way he could make CAPE beat a simple buy-and-hold strategy. In the end, he doesn’t think it represents an improvement over using conventional PEs to value stocks.

“This is one of the most oversold, overhyped metrics I’ve ever seen,” says Mr. Damodaran.

Mr. Shiller agrees that the CAPE can’t be used as a market-timing tool, per se. Rather, he thinks that investors should tilt their portfolios away from individual stocks that have high CAPEs. But he says he isn’t ready to modify his CAPE for judging the overall market.

Attacking the most popular excuse for missing the rally is not a popular position. If only more journalists would step up with this kind of investigation.

 

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 modest week for economic data, with some holiday effects included. While I watch everything on the calendar, you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.

The “A” List

  • FOMC minutes (W). Unlikely to provide fresh news, but will still be watched closely.
  • Michigan sentiment (F). Good read on current employment and spending.
  • Retail sales (F). Rebound in store?
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • PPI (F). Not much is expected. This will not be important until we have a few “hot” months.
  • Business inventories (F). August data, but relevant for GDP calculations.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

Other news includes the Presidential debate on Sunday night and the start of earnings season. And of course, near-daily servings of FedSpeak.

Next Week’s Theme

The revelations surrounding the Presidential election campaign are going to dominate the news cycle. Sunday night’s debate will probably fan the flames. With bonds not trading on Monday, stocks will not have that cue. It is possible that these stories will persist, but there is a more important matter: Corporate earnings.

This earnings season could well be a turning point after a long “earnings recession” and a sluggish economy. Stocks have been resilient in the face of bad headlines and seasonal headwinds. Could stronger earnings be the spark for an upside breakout? I expect the pundits to be wondering:

Is this the end of the earnings recession?

There are three basic positions.

  1. Negative. Jim Bianco notes the declining estimates for the quarter and sees parallels to 1987. To be fair, he represents many taking this position. Here is his evidence of the plunging estimates.

  1. Eddy Elfenbein takes a neutral position, noting the trend toward lower earnings. He notes that the picture is much better if you exclude energy.
  2. Brian Gilmartin and FactSet see a possible inflection point. Brian has been the first on this story. Here is his latest analysis. While he is always a good read, it is especially important during earnings season. He provides a lot of analysis on specific stocks. FactSet explains that earnings estimate fall before the season begins, but the final returns beat estimates. Their expectation is that the final reports will break the streak of lower earnings.

The Bianco report seems strange. Surely he knows about the lowered bar and beating expectations. His squiggle chart starts in irrelevant territory and excludes the tail that is obvious in every other quarter. It is difficult for most people to see, exhibiting what I call a high coefficient of obfuscation (TM OldProf). Let us see what really happens. Like 1987? Really?

As always, I’ll have a few ideas of my own in the conclusion.

Quant Corner

We follow some regular great sources and also the best insights from each 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.

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

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has a number of interesting approaches to asset allocation.

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. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score. This week Georg also updates his unemployment-based indicator, still not signaling a recession as you can see from the chart below.

Citi does not see a recession either. (HT The Daily Shot)

How to Use WTWA (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 six 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?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

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 also the best advice from sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested. They now have a regular Thursday night discussion, which they call the “Stock Exchange.” This is the place to get some ideas from the best technical analysis – and you can ask questions!

Top Trading Advice

Brett Steenbarger (as I guessed a few weeks ago) is doing another book and will be taking a sabbatical for the month. He provides us two more great posts — an update on his trading model and an interesting measure of “pure sentiment.”

Adam H. Grimes also provokes thought with a post about losing. Few understand that it is part of winning.

 

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 JP Morgan’s wonderful quarterly chart book. Budget fifteen or twenty minutes to page through this carefully. My guess is that you will lose track of time as you enjoy the objective presentation of data. While it is difficult to find favorites, here are two that can have the biggest payoff for investors.

First, do not expect stocks to fall as rates move higher! As long as the starting yield is low, increased rates are associated with better earnings, a better economy, and higher stock prices.

And second, interest rates at the long end are not all about the Fed. Inflation is the key for the ten-year note. The Fed controls the short end. Look at the evidence.

Stock Ideas

When you read Chuck Carnevale’s articles, prepare for a stock idea combined with a great lesson. I am amazed at how well he does this, week after week. Following up on his analysis of Consolidated Edison (ED), he uses the same techniques on Johnson & Johnson (JNJ). Even if you are not one of the many investors who own these stocks, you will learn a great deal from Chuck’s process.

Our newest trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, with four or five specific ideas that we are also buying. This week Holmes likes Air Products and Chemicals (APD). Check out the post to see the other picks, ask questions, and choose your favorite model.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Tech assumes the sector leadership. Jim Picerno has the story.

Energy seems to have stabilized in the range I identified a couple of months ago. Some believe the OPEC deal has provided a floor. This is important as a place for picking up a few beaten-down names as well as the implications for the overall market. I am doing more research on this topic.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is Jonathan Clements’ (MarketWatch) warning about seven key mistakes. Read them all, but here is a sample:

1. Stocks are risky.

Reality: Sure, they’re risky. But the implication — that other investments are less risky — simply isn’t correct. Bonds and cash investments may not offer the rollercoaster ride that you get with stocks. But they leave you vulnerable to inflation, which is arguably an even bigger threat.

Gil Weinreich had another superb post in his series that explores the intersection between clients and advisors. He includes a description of the qualities that an advisor needs:

The ability to listen, question and analyze; professional knowledge and core beliefs; knowledge of what one doesn’t know, or what is unknowable; a positive attitude; peer relationships that would allow the advisor to test the value of his ideas or seek needed advisor; a propensity to share knowledge with others; discipline; sense of responsibility; and sensitivity to others’ pain.

This may seem simple and obvious, but it is very strong and helpful. Many investors ask the wrong questions and many advisors just try to maximize fees with high-profit products.

Morgan Housel has a similar message, explaining why good advice is important.

Watch out for…

Utility stocks. Bespoke shows how rapidly these can fall as interest rates rise.

Dana Lyons agrees. Check out his post to see why this sector is at a crucial point.

And FMD Capital on the “fear trade” falling apart.

Final Thoughts

 

To many investors it may seem like nothing is happening. If you follow our indicators you will see significant changes. Stocks are both safer and more promising and there are signs of sector rotation. What do you think will happen when those invested in bond funds learn that the values do not always rise?

If the “earnings recession” ends, that will accelerate the current change in tone. We all know that seasonality improves as the year nears its end, but no one has a good explanation. Here is my hypothesis:

Market participants start thinking in terms of a multiple of the next year’s earnings!

I know it seems silly, but just watch those commenting or writing. You will see it. They will begin to describe stocks of interest in terms of multiples of 2017 earnings. They will not mention Dr. Shiller’s method of looking at historical earnings. They certainly will not discuss Tobin’s Q. (Imagine: Well, Joe, we analyzed the replacement value for Amazon and found it to be vastly overvalued. We could replace their buildings, their fleet, and their workforce for 15% of their market cap). Or Google, or Facebook, or IBM, or Accenture, or any non-manufacturing company. I have never seen Tobin’s Q cited in the context of valuing a specific stock.

My own method is a constant revision of estimates using a slightly modified CAPE approach to get my own expected multiple. Since I am always looking twelve months ahead, the calendar changes are not important. This is why tracking forward earnings is so important. In particular, we have an opportunity to look for stocks with improving outlooks matching the improving economy.

We are “front-running” the pack in a completely legal fashion.

Stock Exchange: BBD, TAN, FSLR, APD, and AAP All Deserve Consideration

Technical stock analysts are a rich source of new stock ideas. Those charts always suggesting something. Our trading models each specialize in a different time frame and level of risk. Each week Felix and Oscar host a poker game. We listen in on current trading ideas in the few minutes beforehand. They like to call this their “Stock Exchange.” I am the only human present, and the only one using fundamental analysis.

Their methods are excellent, as you will learn if you follow us for a few weeks. The entire group had a winning call on energy three weeks ago, without any from the fundamentals.

Do the markets predict future events? Or should you use fundamentals to predict the markets?

That is the ongoing debate at the Stock Exchange.

This Week’s Ideas

Our technical experts have varying ideas this week. As usual, I am skeptical, but let us give each of them a chance.

Felix

I look for long-term themes, and I have a great one this week. I see a great chart for Banco Bradesco (BBD). The YTD is strong and steady. Brazil is as tumultuous as ever, except this time they might be improving their banking system.

[Jeff] How do you know about bank reform? Have you been fraternizing with those foreign models again?

[Felix] Would you believe it is just a conclusion from the chart?

[Jeff] Also, the CEO is under indictment for tax fraud.

[Felix] The chart tells you that the company and the market have moved past that issue. Take a look.

 

[Felix] I also had more questions for this week’s post! I thank my fans, and I am happy to answer.

Richjoy403 of SeekingAlpha asks:

 

I’ve wrestled myself to a draw regarding my 4.5 year position in RDS.B (i.e., I can make about equally strong bull and bear arguments). I’m asking how your models and yourself view it?

 

As usual, I answered through Jeff Miller, who could not resist adding his own comment.

 

RDS.B in the top half of our 700 stock universe. I think there are better energy plays right now. I’ll write something more on that when I have finished some research.

 

Another question from Seeking Alpha’s dls680:

 

Jeff – Love your work! Since you asked for questions about specific stocks or sectors I’d like to throw a question out to you (and Felix, since you describe him as an investor who thinks long term) about Wells Fargo.

WFC is technically breaking down while at the same time the bank sector looks like it might be entering an uptrend. I know you’ve liked the Bank sector right along, so what would you say to a long term holder about continuing to hold WFC for the long term?

 

Jeff Miller and I responded:

 

Felix does not like WFC at all. We own it as part of our enhanced yield program, which means dividends and writing calls against the position. For long-term investing I prefer regional banks like STI.

Thanks for the kind words and for joining in our discussion.

 

[Felix] Please keep your questions coming. I could use the overtime pay.

Oscar

It’s been a tough month for Odell Beckham Jr. In a stark contrast to last year’s superstar performance, he’s slumped his way through the first 4 weeks of the NFL season without a single touchdown. However, sharp eyed analysts see Sunday night’s matchup against the Green Bay Packers as a chance to get back on track.

What we’re really talking about here, of course, is mean reversion. When you have a promising player who is underperforming, you don’t expect them to flame out entirely. You’re looking for the big comeback game!

[Jeff] Do you have some stock advice here?

[Oscar] Of course! I was just explaining how you should look at stocks. Take a look at the Guggenheim Solar ETF (TAN). It’s been a rough year to be sure, but I can’t possibly imagine this sector limping along at $20 indefinitely.

First Solar (FSLR) is one of the key holdings in TAN as well as in our custom sector basket. It is a great example. We’re starting to see rebounds here after a possibly overdone correction in early August. I’m expecting to see significant gains over the next 4 week period.

[Jeff] Your pick this week is also attracting some fundamental analysts, including this one on Seeking Alpha, who calls FSLR a “unique value and growth play.”

[Oscar] What does he think about the Cubs?

[Jeff] You are incorrigible! Let’s see what Holmes has for us this week.

Holmes

Oscar is looking for a rebound in his pick, but I am the rebounding specialist. Air Products and Chemicals (APD) came of its recent high of 145.72, and went straight down 7 straight sessions before bottoming and starting a nice little zig zag run up and to the right. That is a stock with rebound potential! I would look for this stock to get back to its highs with a downside stop at 133.75.

[Jeff] it is a bit over-valued, but it does have a 2.5% yield. To get the rebound you expect you will need yield seekers who are not that sensitive to valuation.

[Holmes] There are plenty of those folks around!

Athena

I have a great choice this week, Advance Auto Parts (AAP). This one’s been in the doghouse following an 18% drop last November, but I’m predicting an upside here.

[Jeff] Even after the drop, the stock is still overvalued by 30% or so according to Chuck Carnevale’s first-rate methods.

[Athena] I am sure that Mr. Carnevale is very nice, but my wisdom has been accurate for many centuries.

[Jeff] It might be a bit out of date. I have been looking for some guests to help keep this group in line. Perhaps we can persuade him to visit.

[Athena] That would be fine. I am always willing to share my wisdom.

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 are allowed to choose me, although my feelings will not be hurt very much if you prefer one of the models).

Cast of Characters

Felix is fussy, precise, and very cautious. He looks for what is working, but it also must have upside potential. He is an investor who thinks long term. Felix will not usually announce new picks, but he will answer questions, saying what he thinks about specific stocks. He will also comment on favorite themes and sectors.

Oscar is naturally optimistic and a bit excitable. He definitely likes to go with winners, and focuses on a one-month time frame. He trades either sector ETFs, or a basket of stocks (equally weighted) that reflect a sector. Oscar will mention a favorite sector each week, and will also answer questions about sectors.

Holmes is a trader, but a cautious one. Holmes emphasizes asset protection through profit taking, stops, and trailing stops. He is careful in selecting new positions, and generally looks at an intermediate time frame. While he does not know the definition of “mean reversion” he loves rebounds! There is no set holding period, but two or three months is not unusual. Holmes will tell us one stock recommended that week. For those who sign up for his email list (no charge, privacy respected, holmes at newarc dot com) he will report exits with a one-day delay.

Athena trades more frequently than the others, but still limits risk. Her inspiration helps to find good ideas. Her excellent quant skills find attractive risk/reward opportunities. Her wisdom leads her to exit trades that are not working. Athena will provide a new idea each week.

Jeff usually has some comments about stock or market fundamentals. Unlike the other witty participants, he sounds like an old prof.

An Important Note to Readers – from Jeff

All of the characters (except me!) are models, carefully engineered and tested by one of the leading developers of the last thirty years. I humanize them to make it easier to understand the characteristics in their design. I always remind readers that my posts are informational, not investment advice, and that is especially true here. While we are trading based upon all four models, we are always watching and can act quickly when necessary. The models are not suitable for all investors. If you like the approach, reach out to us (info at newarc dot com) and we will provide more information.

The conversation is light-hearted, but the stock analysis is serious. We own positions in each of the stocks mentioned.

Finding great stock picks need not be boring. Please enjoy the banter and join in.

Weighing the Week Ahead: Time to Look Past the Gloom?

We have a huge week for economic data. The Fed is now on hold until after the election. The election can still go either way. It is easy to find something to worry about. That said, the fourth quarter is usually good for stocks.

Should investors look past the gloom?

Last Week

There was plenty of economic news, and it was generally positive. The election had a lean to Clinton, which the market seems to like, but not a decisive verdict. There were two wild cards – the rumors about an OPEC deal and the concerns about Deutsche Bank. Both introduced day-to-day volatility, but not a lasting effect. The jury remains out on both.

Theme Recap

In my last WTWA, I predicted a focus on the first presidential debate, wondering if this would provide a clear path for investors. That was half right. The debate dominated discussions early in the week and post-mortems continued for a couple of days. There was no clear KO, so the election effects are still in doubt.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a flat week and a rocky path.

Doug has a special knack for pulling together all of the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective. You can easily see the whipsaw on the OPEC and Deutsche Bank stories. In a break from recent trends the market traded inversely with oil early in the week before the “OPEC rally.” Some attributed this to the debate. The Deutsche Bank story sent markets lower on Thursday, with many seeing another “Lehman moment.” One day later, the pundits explained why the circumstances were not the same as in 2008. Who really gained from the scary stories on Thursday?

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something really good. 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

  • Earnings are set to improve. Earnings guru Brian Gilmartin has been on this theme for weeks and adds to the evidence. Dr. Ed Yardeni joins in, suggesting that Q2 was the trough.

  • Congress avoided a government shutdown. The Hill explains how. Are prospects for compromise better?
  • Trucking increased sharply. Calculated Risk has the story.
  • Global activity is stronger. Scott Grannis suggests that stable oil prices might be the reason. Readers may remember that I mentioned the possibility of a “sweet spot” in oil several weeks ago.
  • New home sales were strong, beating expectations and up almost 21% year-over-year. Calculated Risk explains why this is important for the economy.
  • Chemical activity is stronger. I noticed that several sources are now following this data series. Calculated Risk shows the leading quality of the indicator, represented in this chart:

 

The Bad

  • Pending home sales declined 2.4%, missing expectations.
  • Restaurant performance decreased 1% from July. Several sources are citing a “restaurant recession.”
  • Deutsche Bank faces a large fine, possibly requiring more capital. Many worry about effects on other banks. Some hedge funds have reduced trading and maintaining collateral with DB.
  • Durable goods production showed no increase.

 

The Ugly

Potential hacking of US elections. While it is unlikely to change the outcome, it is important that results are perceived as legitimate. (Yes, I have heard of Mayor Daley). Even Nixon accepted the 1960 results. The CFR opines that Congress should warn Russia.

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 I want to highlight Evidence Soup, by Tracy Allison Altman. She definitely has the right idea in her work. This week’s theme of whether immigrants disrupt US employment is both important and timely. She highlights evidence that supposedly disproves this notion, but there is a lot of work in evaluating it. I sympathize with this challenge. What do you think?

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 big week for economic data. While I watch everything on the calendar, you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.

The “A” List

  • Employment report (F). Rightly or wrongly, even rather small changes create large reactions.
  • ISM Index (M). Rebound expected in a private indicator with some leading qualities.
  • ADP private employment (W). A strong measure of employment changes, deserving of more respect.
  • Auto sales (M). Private data on an important growth sector.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • ISM Services (W). Not as interesting as the manufacturing index, but only because the series is shorter.
  • Construction spending (M). Important sector, but August data.
  • Trade balance (W). Important part of the GDP calculation for Q3.
  • Factory orders (W). Volatile August data, but an important sector.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

Did you get enough FedSpeak after the FOMC meeting, the press conference, the speeches last week, and the Yellen Congressional testimony? No? If not, you will have several more opportunities to get even more transparency and clarity this week!

Next Week’s Theme

Despite warnings to sell in May, the worst month of August, and the dangers of September, stocks have posted another positive quarter. The fourth quarter is positive over 80% of the time. But wait! To some the list of worries seems more important than usual. The biggest include the following:

  • Election uncertainty
  • Recession chances/economic weakness
  • Length of the bull market
  • Misleading corporate earnings

These factors have most market participants in a gloomy mood. The market resilience this year will have the pundits wondering: Is it time to look past the gloom?

The ever-witty Alan Steel wonders if sentiment is detached from reality.

Yes, and it’s always been that way; the consensus of opinion and the investor herd move in exactly the wrong direction at exactly the wrong time.

That’s because investors rarely focus on anything beyond what they’re hearing and seeing today.

And in the words of our good friend Mike Williams of Genesis Asset Management in Chicago, “It’s not what’s now that matters, it’s what’s next.”

Bill Kort uses actual reader counts to demonstrate the effect of negative headlines – SELL ALL STOCKS!!!. He notes, “The articles I publish with overtly negative titles draw far more readers than those with neutral to modestly negative elements”.

As always, I’ll have a few ideas of my own in the conclusion.

Quant Corner

We follow some regular great sources and also the best insights from each 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.

The recession odds (in nine months) have nudged closer to 10%.

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

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. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

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

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

The ECRI has been dropped from our weekly update. It was not so much because of the bad call in 2011, but the stubborn adherence to this position despite plenty of evidence to the contrary. Those interested can still follow them via Doug Short and Jill Mislinski. The ECRI commentary remains relentlessly bearish despite the upturn in their own index.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has a number of interesting approaches to asset allocation.

James Picerno takes up a frequent question about the slope of the yield curve: Is it still relevant given the heavy-handed central bank involvement in the markets. My own thoughts are in the comments.

How to Use WTWA

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 six 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?

My objective is to help all readers, so I provide a number of free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and also less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

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 also the best advice from sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested. They now have a regular Thursday night discussion, which they call the “Stock Exchange.” This is the place to get some ideas from the best technical analysis – and you can ask questions!

Top Trading Advice

Brett Steenbarger continues to provide a great piece of trading advice every day. It is always difficult to pick a favorite. One of the big trading questions is how much risk to take. How do you decide? Brett writes:

There are risk-averse traders who never make significant money.  There are risk-seeking traders who blow up.  Then there are smart traders who take calculated risks.  They make selective bets.  Like the skilled poker player, they know when they have a good hand and they know how and when to bet that hand.

Related, from Adam H. Grimes – why forecasting volatility is important.

Also – how not to “outthink” yourself when you hit a bad stretch.

Repeat after Bella: ALWAYS have a good entry price!

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 Morgan Housel’s explanation of the difference between a bubble and a cycle.

According to various media sources we now have at least 14 bubbles:

A new real estate bubble.

A bond bubble.

A tech bubble.

A VC bubble.

A startup bubble.

A stock bubble.

A shale oil bubble.

A healthcare bubble.

A dollar bubble.

A college tuition bubble.

A Canadian housing bubble.

A central bank bubble.

A social media bubble.

A China bubble.

One economist recently gave up and just said “Everything’s a bubble.”

At a conference I attended a few years ago, Yale economist Robert Shiller said something amazing: The word “bubble” wasn’t even in the economic lexicon 25 years ago. Not in textbooks, not in papers, not in schools. But now we have bubbles everywhere.

Read the full article for Morgan’s excellent analysis of how to distinguish real bubbles from hype.

Stock Ideas

 

When you read Chuck Carnevale’s articles – and you should – prepare for a stock idea combined with a great lesson. This week Chuck analyzes Consolidated Edison (ED), a popular choice among retirement investors. He explains why valuation is a key to understanding whether it is a sound investment. A few minutes spent with this post and a cup of coffee can save you megabucks!

Abba likes Delta (DAL). We do, too, but we have calls written against the position.

Peter F. Way’s interesting approach highlights current opportunities in chip stocks. As always, he has plenty of ideas, but you need to read the entire post for a full analysis and a list of interesting ideas.

Political commentary on drug prices have put a lid on biotech stocks. Michael Brush (MarketWatch) notes the decrease in such commentary and cites a number of “catalysts around the corner” for the sector. Buyouts ahead?

Our newest trading model, Holmes, has been contributing an idea each week, something we recently bought for clients. I will mention it here, but you can see it sooner (along with other interesting ideas) if you read my new weekly column, the Stock Exchange. I have a “conversation” with disciples of our four trading models. This week we took up the two most popular trader questions:

  1. Technical or fundamental analysis; and
  2. Ginger or Mary Ann

Since each model has a different personality and style, there are often disagreements – especially with me! While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position. This week Holmes added several stocks, including DuPont (DD). See the Stock Exchange for a more complete analysis and ideas from the other experts.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is Tony Isola’s list of “deplorable” investments. I see the ads for many of these and become ill. If there was only some way to help individual investors before they lose a lot of money on an overpriced, illiquid asset. Here is a list of products that provide big fees to those offering them, and significant restrictions on the buyers:

  • Equity-Indexed Annuities – How about an investment with limited upside but large potential for a substantial loss? Throw in a 10% sales charge and no dividend participation (50% of historic market returns) and we have the ingredients for a deplorable retirement scenario.
  • Funds with 12b-1 Fees – Fund size and investment returns are negatively correlated. Investors are paying a fee to brokers designed to increase assets and reduce returns. Kind of like paying a restaurant to give you food poisoning!
  • Proprietary Mutual Funds – This is cross selling at its most heinous. Never buy a mutual fund created by a broker’s employer- this is the ultimate perverse incentive.
  • Non-Traded REITs – A false promise of safety combined with 10% upfront commissions, this is a true sucker’s bet. Just because something is not traded doesn’t mean it cannot go down in value. By the way, their publicly traded cousins have vastly outperformed this group over time, because of greater transparency and lower fees.
  • Commodity Funds – High risk combined with low returns rarely ends well. These products specialize in something called “Contango.” Investor translation: Nearer dated futures’ prices are lower than the longer dated ones, or more commonly known as buy high and sell low, rinse and repeat.
  • Variable Annuities – These are often sold on the pretense of guaranteed income and tax-deferred growth. In reality, very few investors need this product fraught with complexity and egregious fees. These are often placed inappropriately in tax-sheltered accounts; investors do not need both a belt and suspenders.
  • Front-Loaded Mutual Funds – Investors pay a premium of 5.75%, and an additional 1% a year in fund fees to purchase an investment that is almost guaranteed to underperform an unmanaged index fund costing .05%, annually. There is NEVER a reason to pay this fee.
  • Over-Niched ETFs – Healthcare Shares Dermatology and Wound Care ETF and Pure Drone Economy Strategy funds are all that needs to be said. The prosecution rests its case.
  • Hedge Funds – 2% annual fees combined with 20% of yearly profit makes it pretty hard for investors to bring home any type of meaningful positive returns. While there is a small minority of hedge funds that are worth the steep price, they are either closed or have account minimums that rule out everyone except for the Bill Gates’ crowd.
  • Market Linked C.D.s – The ultimate vanilla investment has been hijacked by Wall Street. Unless you enjoy paying a 3% commission and having the possibility of losing principal due to early withdrawal, run away from anyone who approaches you with this nonsense. Purchasing a complicated structure that will underperform your Credit Union’s basic offering is a deplorable choice.

Great work.

Less dramatic but also important is a Morningstar article on how to consider Social Security as part of your retirement planning. For many investors, even those with significant planning and savings, this can play an important role. You need to get it right.

And last but certainly not least in a great week for personal finance readers, check out Gil Weinreich’s three-part series on the issues facing those who “can’t afford retirement”.

Market Outlook

Eddy Elfenbein looks at the tough streak for value investing, and also the recent improvement.

Watch out for…

Overconfident forecasts. Tony Isola explains the dangers in coin-flip market timing strategies and predictions based upon politics.

Pension Partners underscores this advice, highlighting the danger of blindly following a “guru.”

Final Thoughts

 

Concerning the debates, there are three different methods of scoring.

  1. Points on specific issues – the method for formal debates. You look at each issue and determine who got the better.
  2. Technique. This is how we coach. You look for opportunities to insert carefully prepared “blocks.” These have pre-tested language and evidence.
  3. Change of opinion. This is, of course, what ultimately matters.

As someone who has judged hundreds of debates and followed them closely in all presidential elections, I thought that Secretary Clinton did better on point one and decisively better on point two. Being a coach for Mr. Trump would be very frustrating! He really likes to wing it.

That said, there was no knockout blow or major blunder. Voters are not watching this like debate judges. Mr. Trump’s message obviously resonates with many. The polls show a slight move toward Clinton, but the issue is still open with two debates to go.

Recession odds are low. Every week we see wannabee analysts who have no track record. This includes those at big-name firms. Understanding the economic cycle is one of the biggest advantages for the astute investor.

Bull markets (and economic cycles) do not die of old age. This is another great misconception. The odds of four heads in a row is 1/16. What do you think it is after you have already flipped three?

Energy earnings have colored overall results. We need to look forward.

The current market worries are no worse than ever. For perspective, look back at how negative everyone was when people criticized me for suggesting Dow 20K.

A list of negative headlines does not represent fundamental analysis. TV know-it-alls “explaining” yesterday’s news provide no edge. The best investments come from recognizing and ignoring bogus advice.

Stock Exchange: Technical or Fundamental?

Market participants split sharply on whether it is better to use technical or fundamental analysis. The question rivals “Ginger or Mary Ann” in popularity.

Technical experts are a rich source of new stock ideas. Our trading models each specialize in a different time frame and level of risk. Before their weekly poker game, they spend a few minutes trading ideas. They like to call this their “Stock Exchange.” I am the only human and the only one using fundamental analysis.

The group had a winning call on energy two weeks ago, without clear support from the fundamentals. Just luck? Temporary? Time will tell.

The key difference between the approaches: The technical analyst thinks the market is describing the world. The fundamental analyst looks to the world, and then for mispricing in markets. This series expands upon this story, with interesting new ideas each week, as well as answers to reader questions.

This Week’s Ideas

Our technical experts have varying ideas this week. As usual, I disagree with most of them. Let us have a word from each.

Felix

I look for long-term themes, and I have already shared several. Another good one is technology. One of my favorites is Hewlett Packard Enterprises (HPE).

[Jeff] Ahh! That is the portion Meg Whitman chose to run after the company split into two parts.

[Felix] Who is Meg Whitman?

[Jeff] She is the CEO of the original Hewlett Packard and now HPE.

[Felix] I only know that the market approves! Investors are applauding her. This is an excellent example of momentum in action. I expect more gains to come.

[Felix] We had some questions for this week’s post! I thank my fans, and I am happy to answer.

Seeking Alpha’s poorman#whocares asks: What does Felix think about RIO?

 

My response (via Jeff Miller):

I rank RIO in the top third of our stock universe, with a pretty solid hold/buy rating. In our own trading we stick to the top 20, so it is pretty exclusive.

Thanks for joining in!

 

Our second question comes from Seeking Alpha’s 03FOSTER: How does Felix feel about UNH? It would seem to fit his personal presences.

 

My response:

I rate UNH in the middle of the rankings — still a reasonable, positive rating. I do like the company, but I am not overly excited about the stock. Some human once said that a good company is not necessarily a good stock. This intelligent reader raised a very good question.

 

Oscar

I like the Diversified Utility sector (XLU). It is March Madness in action. It’s been on a breakaway since the early spring, and it’s still an easy layup. We may be off the yearly highs, but to me that seems like a buying opportunity more than anything else.

Looking closer, holding EXC (a part of XLU) is a near mirror image of that wider sector. You’d be opening yourself up to a bit more volatility there, though that may carry some extra upside along with it.

[Jeff] You got your nose out of the sports section long enough to spot EXC. I do not care for most of the sector, but Exelon is a good dividend stock especially if you write calls against it as I do for our Enhanced Yield program. The valuation is reasonable and the yield is 3.7%.

[Oscar] Thank you – I think…

Holmes

I like DuPont (DD) This giant Chemical company sold off pretty hard in the last 6 weeks, seems to have rested and consolidated, and is now ready to resume its long term bullish move. I expect new highs pretty soon.

[Jeff] I like a lot of industrial stocks, but this one is significantly overvalued.

[Holmes] I sniff out opportunities, deduce the risk and reward, and swiftly change course when I am occasionally mistaken. This pick fits my approach.

Athena

I have a great choice this week, but before I share it, what is this Ginger or Mary Ann question? Why not ask “Gilligan or the Professor?”

[Jeff] Hmm. That question has not caught on yet.

[Athena] Perhaps it will as wisdom improves. Turning to my excellent choice this week, if you had ever wondered what a textbook definition of “momentum” would look like, here it is. Intel (INTC). After climbing out of lows early in 2016, this stock has been red hot. Of course, I expect the gains to continue for some time. If something goes wrong with that plan, I’ll drop the stock and find a stronger and wiser warrior.

[Jeff] This is a reasonable choice, but I do not see the explosive upside from current valuations. It is another stodgy holding suitable for writing calls.

[Athena] Are you going to fight with me every week? You shall learn my wisdom!

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 special expertise. Who is your favorite? (You are allowed to choose me, although my feelings will not be hurt very much if you prefer one of the models).

Cast of Characters

Felix is fussy, precise, and very cautious. He looks for what is working, but it also must have upside potential. He is an investor who thinks long term. Felix will not usually announce new picks, but he will answer questions, saying what he thinks about specific stocks. He will also comment on favorite themes and sectors.

Oscar is naturally optimistic and a bit excitable. He definitely likes to go with winners, and focuses on a one-month time frame. He trades either sector ETFs, or a basket of stocks (equally weighted) that reflect a sector. Oscar will mention a favorite sector each week, and will also answer questions about sectors.

Holmes is a trader, but a cautious one. Holmes emphasizes asset protection through profit taking, stops, and trailing stops. He is careful in selecting new positions, and generally looks at an intermediate time frame. There is no set holding period, but two or three months is not unusual. Holmes will tell us one stock recommended that week. For those who sign up for his email list (no charge, privacy respected, holmes at newarc dot com) he will report exits with a one-day delay.

Athena trades more frequently than the others, but still limits risk. Her inspiration helps to find good ideas. Her excellent quant skills find attractive risk/reward opportunities. Her wisdom leads her to exit trades that are not working. Athena will provide a new idea each week.

Jeff usually has some comments about stock or market fundamentals. Unlike the other witty participants, he sounds like an old prof.

An Important Note to Readers – from Jeff

All of the characters (except me!) are models, carefully engineered and tested by one of the leading developers of the last thirty years. They are highly-modified momentum models, with different time frames and features.

I humanize them to make it easier to understand the characteristics in their design. I always remind readers that my posts are informational, not investment advice, and that is especially true here. While we are trading based upon all four models, we are always watching and can act quickly when necessary. The models are not suitable for all investors. If you like the approach, reach out to us and I will see if you qualify for one of the programs.

The conversation is light-hearted, but the stock analysis is serious. We own positions in each of the stocks mentioned.

Finding great stock picks can be fun! I hope readers will join in making it so.