Romney? 100% Chance of Recession!

In the entire history of official recession dating (beginning in the 1850's) there is a startling fact:

Every newly-elected Republican President has brought a first-term recession.  All of them.  "Always and only" as we hear from a popular data-mining pundit.

You can check out the list of GOP Presidents here.  And the official recession dating here.  I use "elected" because there was no recession in the brief term of fellow Michigan man Gerald Ford.

It is not quite "only" since Democratic Presidents avoided recessions on a 10-2 basis.  I am not surprised that there was no first-term recession for Bill Clinton or JFK, but who would have expected a clean record for FDR or Jimmy Carter?

Economic Comparisons by Party

According to this Bloomberg article, Democratic Presidents Are Better for the Economy.  The author, Richard J. Carroll is an economist at the World Bank.  Here is a summary of his findings:

IACKKlITTQtQ
The Truman legacy has truly grown over time!

Here is another study that says Democrats win on a balance of economic indicators, 11-2.  The authors conclude as follows:

"President Barack Obama does not feature in the rankings, as he has not yet completed a four-year term. But if Obama were evaluated now on all 12 of the indicators, he would fall somewhere in the middle of the pack, Deitrick says. The bottom of the pack overall is populated by Republicans: Presidents Richard Nixon, Gerald Ford, George W. Bush and Herbert Hoover."

Lessons in Inference

I trust that readers will understand my tongue-in-cheek approach to this subject.  It is silly to conclude, based on this evidence, that electing Romney will lead to a recession.

Meanwhile, many people use similar evidence to make bold claims about recessions.  Their readers consume the pseudo-scientific claptrap and blindly follow the pundit to a dubious decision.

If you agree with me that the conclusion about Romney is not valid, then maybe you need to reconsider the work of the guy who keeps describing a syndrome involving his Aunt Gertrude.  The methodology — using many years of backfitted data — is just the same as you see here.

Causal Modeling

Causal reasoning in economics involves many variables.  Especially when the number of cases is relatively small and the number of variables is large, the causal model can be tricky.

Try this one:  When a Republican is elected, it is often the result of Democratic economic failures.  This means that the GOP winner is saddled with a bad economy.

See how easy it is to create reasons after the fact?  Check out one of my favorite stories from "the old days."  The smarter you are, the easier it is to fool yourself.

Investment Conclusion

If you understand this article, you can win an Olympic all-around medal!

  1. Separate politics from your investments;
  2. Ignore bogus pseudo-science;
  3. Beware of recent trends in both fear and greed;
  4. Look for stocks with attractive valuations.

Each week I summarize the very best recession forecasts.  Since those with the best records are not featured in the financial media, this gives thoughtful readers an advantage.  Those scared witless by the recessionistas are selling cyclical names and tech stocks while piling into defensive sectors and dividend stocks.

The comparative valuations are becoming extreme.  I favor early-stage cyclicals like Caterpillar, Cummings, and Illinois Tool Works.  I like tech stocks including Apple, Oracle, Microsoft, and Marvel.

When I look for "dividend stocks" I am not seeking those with super-high yields, but strong balance sheets and PEG ratios, where I can also sell calls to enhance the yield.

The individual investor can find many good opportunities, but you must start with a good grasp of the business cycle.

(HT to Bob Dieli, whose whimsical comment inspired this post.  And no, the election result is not one of the factors in his excellent system, Mr. Model.)

 

 

 

 

 

Weighing the Week Ahead: Time for Politics?

As I have frequently written, we should all separate our political viewpoints from our investment decisions.  This does not mean that we must ignore politics.

The astute investor analyzes possible political outcomes.  This should be done without passion or emotion.  What are the possible scenarios, and what will it mean for investments?

Last week I noted the relative absence of data and events, allowing time for assessment, analysis —- and vacations for politicians in Europe and Washington.  While this week's data calendar is also on the light side, the story will be quite different.

The GOP Convention is now only two weeks away, with the Democrats' a week later.

Now that we know Romney's choice for his running mate, the political campaign has a new edge and focus.  I expect a week filled with speculation and projections about the Presidential election and what it means for financial markets.

Most of the commentary will focus on how the addition of Ryan will change the election odds.  Before the choice, Nate Silver wrote a great column showing the expected return from each choice.  Ryan was one of the lower picks, partly because of questions about whether he can even bring in Wisconsin.  Silver also notes that Ryan is the most conservative VP candidate in many decades.

11fivethirtyeight-ryan-dwnominate-blog480

After the announcement, Silver suggests that this could be a bold move, necessary to get the needed addition of votes.  This is all excellent analysis from a source well worth watching.

You will be bombarded with VP stories in the next few days, but I like this one from Princeton's Julian Zelizer via CNN.  He has a nice review of how various past VP choices contributed to the ticket.  It provides a nice background for us to think about the current scenario.  (Anyone remember Spiro Agnew?)

I'll offer some of my own expectations in the conclusion, but first let us do our regular review of last week's news.

Background on "Weighing the Week Ahead"

There are many good sources for a list of upcoming events.  With foreign markets setting the tone for US trading on many days, I especially like the comprehensive calendar from Forexpros.  There is also helpful descriptive and historical information on each item.

In contrast, I highlight a smaller group of events.  My theme is an expert guess about what we will be watching on TV and reading in the mainstream media.  It is a focus on what I think is important for my trading and client portfolios.

This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.

Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!

Last Week's Data

Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
  2. It is better than expectations.

The Good

There was not much news last week, but there were a few positive highlights.

  • Trade data showed higher exports and a lower deficit.  This could add significantly (0.5% or more) to the Q2 GDP revisions.
  • The baseline economic growth remains positive, but at a sluggish 2% or so.  This is not such good news, but it contrasts sharply with the recession talk.  Tim Duy's level-headed article helps us keep perspective.  He has many great charts, all showing that we seem to have a moderate growth trend.  Of special interest is his note that the six and twelve-month growth trends in employment have converged on a gain of 163,000, just as we saw last month.
  • Eurozone risk is significantly lower, if judged by data (via Scott Grannis) rather than by opinion and headlines.  Swap spreads tell the story.
  • Initial jobless claims declined again, down 6000 from last week's (slightly revised) 367,000.  The series should now be outside the range of unusual seasonal fluctuations.  Doug Short has a comprehensive look at unemployment claims.  Joe Weisenthal calls it the "best market indicator" and shows this chart as evidence:

Initial claims v S&P 500

 

The Bad

The was also not much negative news in a week with a light calendar.  I will focus a little more on some key themes.

  • Gasoline prices moved higher, up fourteen cents (via Bonddad, with other high frequency indicators as well).  This implies less discretionary spending for the average consumer.
  • The earnings beat rate drifted south and is the lowest in the bull market recovery (Bespoke).  I take this as negative, since most of my analysis is earnings driven.  Mark Hulbert cites Ned Davis research for a contrarian take.  Briefly put, when growth is "too high" investors are really skeptical and assign a lower multiple.  Read the whole story for interesting details.
  • The fiscal cliff effect.  Most experts do not expect a "fiscal cliff" disaster, putting odds at a (still significant) 15% or so.  The problem is the uncertainty.  Even though a partisan political process, augmented by poor political leadership, may eventually avoid disaster, will that be enough?  The uncertainty created by the process is already producing negative effect.

"You can hear the bafflement, the anger, on the just-completed run of company earnings calls. Typically scripted and banal, the calls have become an unexpected public platform for chastising Democrat and Republican alike for what's become of our way of governing."

  • Objectively measured, policy uncertainty is high (via the academic team reporting at Economic Policy Uncertainty).  They provide evidence that "…an increase in economic policy uncertainty as measured by our index foreshadows a decline in economic growth and employment in the following months."  Here is a history of uncertainty from their index.

Main_index

  • This is showing up in economic forecasts, like that from the Philly Fed's survey of professional forecasters, now showing significantly lower projected growth.

The Ugly

Urban bankruptcies.  There is a continuing problem with cities facing declining revenues, the inability to raise taxes, and growing retirement obligations.  It is not at the level forecast by Meredith Whitney, but there is a growing list of problem cities.

Bloomberg suggests that the California debate favors unions rather than bondholders.

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.  Think of The Lone Ranger.

This week's award goes to Invictus, writing at The Big Picture.  The story starts with John Crudele, who relies unquestioningly on a single dubious source while blaming the BLS for "making workers disappear" and also blaming it all in Clinton.  Invictus does an authoritative takedown, covering the history of the change, the reason, and a careful comparison of the two methods.  You should read the whole story to see that the changes took decades, were mostly sparked in the Reagan era, and significantly improved the overall measurement of discouraged workers.  He shows a great side-by-side comparison and concludes as follows:

"[Importantly, note the improvement in data collection – from 1/4 of the sample, tabulated quarterly to the entire sample, tabulated monthly. That bastard Clinton was trying to get more accurate and reliable information! Damn him!]

See what Crudele’s all worked up about? Me neither. But these are slow summer weeks and there are column inches to fill. That doesn’t, however, mean that the facts should take a vacation."

The Indicator Snapshot

It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:

The SLFSI reports with a one-week lag. This means that the reported values do not include last week's market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a "warning range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

The SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events.  It uses data, mostly from credit markets, to reach an objective risk assessment.  The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.

The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli's "aggregate spread." I'll explain more about the C-Score soon.  We are working on a modification that will make this method even more sensitive.  None of the recession methods are worrisome.  Bob also has a group of coincident indicators. Like most of the top recession forecasters, he uses these to confirm the long-term prediction. These indicators are also not close to a recession signal.

The evidence against the ECRI recession forecast continues to mount.  It is disappointing that those with the best forecasting records get so much less media attention.  The idea that a recession has already started is losing credibility with most observers.  I urge readers to check out the list of excellent updates from last week.

Readers might also want to review my new Recession Resource Page, which explains many of the concepts people get wrong.

The single best resource for the  ECRI call and the ongoing debate is Doug Short, who has a complete and balanced story with frequent updates.

  Indicator Snapshot 081112

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions.  This week we continued as bullish.  We have been bullish since June 23rd, with a one-week move to neutral two weeks ago.  These are one-month forecasts for the poll, but Felix has a three-week horizon.  The ratings are higher, and the confidence is improving.

[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

There is a lot of data on tap next week, but little that might really surprise us.

The featured story might turn out to be Tuesday's retail sales report, since that has been the one series providing a touch of support for the recessionistas.  Wednesday's industrial production is also of interest.

No one expects danger from the inflation data.  We have regional Fed indexes from the Empire State and the Philly Fed.  I do not place much stock in these reports, but they can move the market if far from expectations.

Initial jobless claims (Thursday) are of continuing importance as the best single real-time indicator of employment changes.

Friday's leading indicators are expected to show a non-recessionary uptick.  I am also interested in the Michigan consumer sentiment index (Friday), despite the recent mixed signals.

To summarize, there will be plenty of data, but a big market move from any single report would be surprising.

Trading Time Frame

Our trading positions continued in fully invested mode last week.  Felix became more aggressive in a timely fashion.  Since we only require three buyable sectors, the trading accounts look for the "bull market somewhere" even when the overall picture is neutral.  As the tape has improved, the ratings from Felix have gotten stronger.

Investor Time Frame

Josh Brown has an excellent and thoughtful article, taking his helpful insider perspective on why investors hate the market.  He has five reasons, but plenty of subpoints.  It is very cynical, and he says that (eventually) it will be right to be a contrarian.  It is a great read.

In a similar vein, I believe that this is a very important time for the individual investor, many of whom are making serious mistakes.  Here is my list of frequent investor errors:

They try to be traders

The successful investment strategy differs markedly from trading.  It is especially important to establish good, long-term positions when prices are favorable. Most individual investors seriously underperform long-term results by selling low and buying high.  Most successful professionals, of course, do the opposite.

Even successful years have significant drawdowns.  15% is not unusual.  The investor needs to expect this.  If it feels stressful, then your asset allocation is wrong.

They think they are experts on world events

Taking a long-term perspective is easier said than done.  With everyone on TV explaining with great confidence what just happened (please check out my article on the "message of the markets") it is easy for the average person to think he is out of step.  For several weeks I have emphasized the folly of attempts at short-term market timing.

They want to wait too long — until there are no problems

This is the single most costly mistake.  If there were no problems, the market would be at 20K or higher.  Investing requires balancing risk and reward, not waiting for complete safety.

There is no magic moment.  Resolving market worries is a process, not an event.

I tried to explain the most important concept for individual investors in this article about the Wall of Worry. I have had many emails from people who had a personal breakthrough in their investing when they understood this concept. If you missed it, I urge you to take a look.  You can contrast this with the many  pundits who claim miracles of market timing.

The market action in the last four weeks has once again illustrated market moves based on unpredictable factors.  Skeptics can call it a "mystery rally," but that is just an admission of the failure of their market-timing methods.

They fail to see what is working

Our single best strategy through the various gyrations has been buying dividend stocks and selling calls for enhanced yield.  Doug Short notes the decline in volatility, calling it "Siesta Time."  This is music to the ears of those selling calls against their dividend stock positions for a yield of 8-10% with greater safety than pure stock ownership.

Take what the market is offering!

…and here are my examples. 

Final Thoughts on the Election Effects

Most of the election discussion will focus on how the Ryan selection changes the possible outcome.  It is fun to discuss the "horse race" aspect of campaigns.  The personal pluses and minuses of candidates are also great for discussion since anyone can join in without actually doing much research.

We will get a major dose of this on the Sunday morning talk shows, but both campaigns are already in full spin mode.

By contrast, here are two themes to consider, based more on changing the framing of issues:

  • Should US policy place greater emphasis on deficit reduction?  At what costs?
  • Will Ryan offset and/or clarify the Romney position on health care?  What stocks could be affected by Medicare changes?

In issues like this, stocks may react even before the election, just because the issues have been defined differently.

And one bonus forecast:  Mark your calendar for October 11th, the night of the VP debate.  There are already advance predictions for the success of the smooth-talking Ryan versus Joe Biden.  One commentator made the Olympic analogy of LeBron James versus a smaller opponent — dunking and shooting three's.  In the debate game, driving expectations lower is half the battle, so the Biden camp will encourage these thoughts!

Weighing the Week Ahead: Time to Assess the Evidence?

Many times we can plan for the week ahead by considering the calendar of data releases and the schedule for official policy announcements.  This week is extremely light on all fronts.  Even Congress has left town for the "August recess."  It is still a little early for election intensity.  Many are enjoying vacations and the Olympics.

Just as nature abhors a vacuum, the market media must fill all of that space and air time.  How?

I expect a week with a focus on reassessment.  Journalists and pundits (at least those who are not at the beach) can digest the recent economic data, the Q2 earnings results, the promises of policy leaders, and the latest political polls.  With all of this information at hand, I expect a series of stories looking ahead to the rest of the year — economy, politics, and markets.

There are a lot of exciting investment themes right now, but most investors are missing them.  While this weekly article focuses on short-term events, I always include a special section for long-term investors.  This week I have more to say, but I also suggest four ideas that illustrate the many good themes available right now.

I'll offer some of my own expectations in the conclusion, but first let us do our regular review of last week's news.

Background on "Weighing the Week Ahead"

There are many good sources for a list of upcoming events.  With foreign markets setting the tone for US trading on many days, I especially like the comprehensive calendar from Forexpros.  There is also helpful descriptive and historical information on each item.

In contrast, I highlight a smaller group of events.  My theme is an expert guess about what we will be watching on TV and reading in the mainstream media.  It is a focus on what I think is important for my trading and client portfolios.

This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.

Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!

Last Week's Data

Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
  2. It is better than expectations.

The Good

There was plenty of news the market liked, but it is still a mixed picture.

  • ECB chief Mario Draghi (Day 2) Before the ink was dry on stories about Draghi's failure to deliver on last week's promise, the revisionist thinking began.  See one of the best examples here.
  • Initial jobless claims declined 35,000 to 353K.  This continues a wild series of gyrations, possibly influenced by fewer auto plant closings this year.  It does provide another decline in the four-week moving average, and it looks nothing like recession territory (as noted by Bonddad with some great charts well worth checking).  These data were not part of the survey period for next week's employment situation report.
  • Rail traffic is stronger, now at the highest level of the year.  Todd Sullivan writes, "I think the economy is slugging along and growing, not running but certainly not falling backwards. When you couple rail data with what is happening in both the auto sector and now the housing sector we have to discount the recession talk."
  • Earnings reports have continued to beat the lowered expectations, and revenues are also a little better.  (via Bespoke with the expected great chart.)  The recent upturn in economic surprises is good news for earnings expectations.

Eps-revisions-vs-economic-surprise-index-2012-08-03

  • The growth of payroll jobs at 163,000 beat expectations nicely and broke the trend of lower growth.  (See Steven Hansen's strong analysis of the data). Like every monthly report, the story has a lot of complexity (see below in "The Bad).  One factor is the continuing discussion about seasonal adjustments, typically quite large in July.  The key question is whether this year's adjustment is over-stated because of unusually small auto plant closings.  The growth was actually about the same as last year for private employment.  The difference?  The loss of government jobs was lower.  Bob Dieli's clients get his monthly analysis of the jobs data.  This was a key insight.

Employment history - Dieli
If you compare the blue columns from last year and this, and then also compare the red and black columns, you will see the key point.

The Bad

 The was a lot of negative news.  Everything seems to come with spin.

  • Bernanke did nothing — except talk.  Those looking for an instant QE buzz were disappointed.  As i noted in last week's preview, the expectations were too high.  The FOMC statement did seem to indicate higher awareness…..
  • Draghi did nothing  — except talk.  Markets sold off hard on the disappointment.  The initial reaction was that he had made bold and impulsive promises, but could not deliver.  Most market pundits see this as part of a continuing pattern of vague solutions for Europe.
  • ISM Manufacturing was once again below 50, indicating contraction in that sector.  While this is still roughly consistent with other growth indicators, it is discouraging.  Tim Duy has a complete analysis and charts for the overall index and key subgroups.
  • The household component of the employment situation report disappointed on all fronts.  The labor force was smaller.  The number of employed was smaller.  The unemployment rate upticked to 8.3% from 8.2%.  While this change was overstated by rounding, this is the data point that most captures public attention.  While the household survey has "only" 60,000 participants, this is adequate for the purpose of avoiding sampling error.  It is plausible that this survey captures the people who are working outside of traditional jobs.  Scott Grannis notes that the two approaches are coming together in the overall forecast, and that it is not recessionary.

Private Nonfarm Employment

  •  Job gains may be overstated.  Here is some negative news you will not see anywhere else.  Each month I suggest that there are multiple estimates of "the truth" which is not known until we have the reports from state employment agencies.  Since we do not have that for eight months or so, no one pays much attention.  This should be featured as a way of keeping score.  On Thursday we got the most recent update, and it was very disappointing.

QCEW Q411

This shows that job gains were only 368K in Q411, not the 550K or so that we thought.  The ADP estimates of private employment were even higher.  The BLS now tries to do "concurrent adjustments" in the birth/death model to reflect new data.  There will eventually be revisions to job growth, and some may come quickly.

The Ugly

The "Knightmare" trading glitch wins the ugly award for this week.  Professionals (just as in the flash crash) could see quickly that something was wrong in certain stocks.  The average investor requires some protection, so the big story is about risk:

  • Do the computers and algorithms endanger investors?
  • Do exchange procedures offer enough protection?
  • Is government regulation adequate?

These themes are newsworthy, so expect plenty of continuing attention.  It contributes to a sense that the average investor has no chance to succeed in a rigged market.

I especially like the analysis from Tom Brakke, who looks both at Knight Trading and a "high-yield product" that some investors bought:

"I put these different situations together because they seem symptomatic of today’s world.  We are promised wonderful execution in the markets, but can pay a tremendous price when the machinery doesn’t work correctly.  Desperate for yield, we buy the sausage from the structured finance factory and don’t know what is in it, liking the taste of the income and not paying attention to the poisoning that might come our way.

The game is out of control.  We have engineered in everything except common sense."

See Tom's analysis and chart.  My own take is that the biggest dangers are for those who blindly seek yield and those who have inflated ideas about their own short-term trading skills.

The threat to the average long-term investor is exaggerated.

The Indicator Snapshot

It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:

The SLFSI reports with a one-week lag. This means that the reported values do not include last week's market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a "warning range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

The SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events.  It uses data, mostly from credit markets, to reach an objective risk assessment.  The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.

The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli's "aggregate spread." I'll explain more about the C-Score soon.  We are working on a modification that will make this method even more sensitive.  None of the recession methods are worrisome.  Bob also has a group of coincident indicators. Like most of the top recession forecasters, he uses these to confirm the long-term prediction. These indicators are also not close to a recession signal.

The evidence against the ECRI recession forecast continues to mount.  It is disappointing that those with the best forecasting records get so much less media attention.  The idea that a recession has already started is losing credibility with most observers.  Here are some of the best stories from last week:

  • New Deal Democrat (writing at The Bonddad Blog) does a long, thoughtful and careful analysis of the ever-changing story from the ECRI.  He shows how the story has changed over the last 10 months — timing, which indicators, how to measure the variables, and finally the current claim that the recession has started.  This article is chock-full of detailed evidence and charts.  Here is the key conclusion (but you really need to read the whole article):

"With yesterday's release of June real income, we now have full data through midyear 2012.  Unless there are downward revisions to the critical series upon which the NBER relies, it can confidently be stated that no recession began by that time."

  • Doug Short also does a comprehensive update, with great charts of the NBER's big four factors.  Here is the key summary:

Big-Four-Indicators-Since-2009-Trough

Doug also cites Dwaine van Vuuren of RecessionAlert using a shorter time frame from the one we include each week.  "Dwaine's analysis now puts the implied probability of recession at 2.1%. For more on his analytical approach, see his The NBER co-incident Recession Model – "confirmation of last resort"."

PAYEMS-120803

Readers might also want to review my new Recession Resource Page, which explains many of the concepts people get wrong.

The single best resource for the  ECRI call and the ongoing debate is Doug Short, who has a complete and balanced story with frequent updates.

Indciator snapshot 080412

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions.  This week we switched to back to bullish.  We have been bullish since June 23rd, with a one-week move to neutral last week.  These are one-month forecasts for the poll, but Felix has a three-week horizon.  This week's decision shows the ratings strength, but we assign a low confidence rating.

[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

This is a very light week for data and also for other news.  On Thursday we have trade data (significant for the current quarter GDP) as well as the weekly installment on initial jobless claims.  We will also get the JOLTS report on labor turnover, but this is older and less significant than last week's data.

In the quiet environment, we can expect any story about Europe or politics to get a bigger play.

Trading Time Frame

Our trading positions continued in fully invested mode last week. This surprised me, since I was expecting a move to the sidelines.  Felix actually became more aggressive in a timely fashion.  Since we only require three buyable sectors, the trading accounts look for the "bull market somewhere" even when the overall picture is neutral.

Having said this, the overall advice from Felix remains cautious.

Investor Time Frame

This is a very important time for the individual investor, so I want to emphasize some key points.  Most individual investors are making serious mistakes.  Here they are:

They try to be traders

The successful investment strategy differs markedly from trading.  It is especially important to establish good, long-term positions when prices are favorable. Most individual investors seriously underperform long-term results by selling low and buying high.  Most successful professionals, of course, do the opposite.

Even successful years have significant drawdowns.  15% is not unusual.  The investor needs to expect this.  If it feels stressful, then your asset allocation is wrong.

They think they are experts on world events

Taking a long-term perspective is easier said than done.  With everyone on TV explaining with great confidence what just happened (please check out my article on the "message of the markets") it is easy for the average person to think he is out of step.  For several weeks I have emphasized the folly of attempts at short-term market timing.

They want to wait too long — until there are no problems

This is the single most costly mistake.  If there were no problems, the market would be at 20K or higher.  Investing requires balancing risk and reward, not waiting for complete safety.

There is no magic moment.  Resolving market worries is a process, not an event.

I tried to explain the most important concept for individual investors in this article about the Wall of Worry. I have had many emails from people who had a personal breakthrough in their investing when they understood this concept. If you missed it, I urge you to take a look.  You can contrast this with the many  pundits who claim miracles of market timing.

The market action in the last three weeks has once again illustrated market moves based on unpredictable factors.  After Bernanke and Draghi, who would have guessed that the market would move 3% in a few hours and finish higher on the week?

They fail to see what is working

Our single best strategy through the various gyrations has been buying dividend stocks and selling calls for enhanced yield.  This week provided great opportunities to set new positions early in the week and sell calls against existing holdings late in the week, just as we suggested last week.  Anyone unhappy with bonds should be doing this for a yield of 8-10% with greater safety than pure stock ownership.

Take what the market is offering!

…and here are my examples.

Final Thoughts on the Mid-Year Assessment

There are a number of key themes, all of which are on my agenda.  As usual in the weekly column, I am sharing my conclusions, but I'll write more on the various themes.

  • Recession.  Not close.  Recessions start (by definition) at cycle peaks.  This market cycle will be longer than average.  We might be in the third inning.
  • Europe.  The market is gradually learning how this works.  It is a multi-part bargaining process.  Draghi held out the carrot and then explained the requirements.  The ECB gets a better deal as a result.  It is happening one step at a time, but few of the market pseudo-experts have the vision to see the outcome.
  • Earnings.  Revenues are a bit lower partly due to currency effects (which also helped costs).  Earnings are OK and multiples are low because of expected declines.
  • Politics.  Plenty of news to come, with the market (incorrectly) viewing a Romney victory as bullish.  It is a lot more complicated.  More later.
  • Cliff Diving.  Great media story, but it will not happen.  The election outcome does not matter to this one.  The nature of the solution will change, but something will get done.