Weighing the Week Ahead: A Lull Before the Storm?

The official calendar is pretty quiet.  Earnings season is over.  Politicians are on vacation in the US and European leaders are just returning.

Beginning with the annual Kansas City Fed gathering at Jackson Hole and proceeding through a series of meetings in Europe, and the US political conventions, we will have a flurry of activity by key policymakers.  Calculated Risk has a nice, long-term calendar of these events.

Here are the questions that could have the biggest market effects:

  1. Will the Fed initiate another round of QE at the September meeting?
  2. Will European leaders (including various institutions like the German Supreme Court) take more aggressive action to help the periphery countries?
  3. How might the US election affect stocks and specific market sectors?

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 quite a bit of economic data last week, and it had a generally positive tone.

  •  The economic surprise index from Citigroup is reversing the recent decline (via Cullen Roche).
  • Building permits are very strong.  This is important, since a rebound in housing would really help the economy after a multi-year drag.   Steven Hansen has a good analysis.

Building permits

 

  • Inflation data remained tame.  The CPI charts are not very interesting, and the Fed expects to be on hold for years.  I prefer to look at Doug Short's CPI components.  This will help us predict future Fed actions.

CPI-categories-since-2000

  • Good news on profit margins, from Doug Short's innovative comparison of indicators.
  • Leading Economic indicators from the Conference Board turned nicely higher.
  • Retail sales spiked higher.  This is good news and important since it is the only one of the major recession indicators that has turned lower in recent months.  We still need more data to have real confidence.  Shortly after the announcement, the typical bogus story made the rounds:  The entire gain was the result of fictitious seasonal adjustments, out of line with anything from the last ten years.

[rant on]

I have tried to explain the pernicious effect of sources that have no clue about data analysis — no one who has actually done a seasonal adjustment.  The story often starts with a site that is bigger than any of the reputable bloggers — bigger than Barry or Calculated Risk.  The story is immediately repeated on dozens of other sites.  It is repeated on CNBC.

There is a huge market for fear and conspiracy.  Each week I get reader inquiries about some bogus chart, but I cannot be a one-man truth squad.  There is only one of me, and there are many Tyler Durdens!

On this particular topic, there is an obvious answer.  Retail sales are seasonally adjusted for the number of weekends.  It is just what you and I would do if we looked at a long data history, since weekends make a difference.  July 2012 had only four weekends instead of five.  Also the 4th of July was mid-week, affecting travel and other factors.  The conspiracy site chopped off their analysis at ten years.  If one of the several Tyler Durdens had wanted to be honest, he would have looked back two more years, where there were 4 1/2 weekend days and mid-week holidays.  It takes very little effort to be honest, but apparently that is not the way to become the leading financial blog, so they chop their analysis without including the relevant years.

Here are the adjustment factors.  See for yourself by looking back to 2001.  Here is a source doing an honest job on the adjustments.

Also, you should note that seasonal adjustments net to zero over the course of a year.  Why doesn't Tyler ever highlight the times the adjustments suggest better data?

And finally, there is no conspiracy.  Government statisticians cannot change the procedures in a heartbeat to make things look better.  Sheesh!  This is so aggravating.  So many people are being duped — including those who should know better.  This stuff is repeated via email, mostly because it fits the bearish pre-disposition.

[rant off]

The Bad

The was a little negative news.

  • Gasoline prices moved higher, up another seven cents and higher than a year ago (via Bonddad, with other high frequency indicators as well).  This implies less discretionary spending for the average consumer.
  • The earnings beat rate drifted south as did that for revenues.  Bespoke has the story and great charts.  I am showing the revenue chart, which reflects Europe effects.  We should all note that part of the reason that revenue is worse than earnings it the currency effect.  Companies with significant foreign revenues also have lower costs.  Scott Rothbort, who writes a great daily column at Wall Street All Stars (subscription required, but I have some discounts available so write me if interested), noted this effect, which seems to have eluded the general punditry.

Revenueswrapup

 

  • Facebook after the lockup (preventing insider sales) expired  Bad for those who bought the IPO and also for individual investor confidence.  Abnormal Returns had a great post exploring the nuances of this experience.  Everyone appreciates the daily links from AR, but when Tadas has the time for this type of story, it is especially helpful.  Bespoke has a dramatic chart, comparing to Google at the IPO stage.

Facebook vs Google Post IPO

 

  • The drought.  Some readers have taken me up on my invitation to comment, wondering why I have not featured this bad news.  I agree that the drought is bad on many fronts.  The problem in fitting it into my weekly series is "when?"  We have a short-term focus.  But I agree.  Barry Ritholtz has an excellent post with great charts.  Take a look.
  • Regional Fed surveys were poor.  I do not regard these as very important, but I do emphasize the ISM survey.  Calculated Risk explains why I should pay attention — a good correlation.

ISMFedPrelimAug2012

  • There may be real demographic limits on GDP growth — demographics and productivity.  Kate Mackenzie at the FT has a fine article explaining this problem.
  • Unemployment might be much worse this month (via the Gallup Poll).

The Ugly

Financial fraud.  This time it is Peregrine Financial — a guy in Iowa.  It is difficult for honest advisors when the stories of fraud keep pouring in.

Eddy Elfenbein has a great post on how to spot these frauds.  Here are the key elements:

"Specifically, [investors] should learn to recognize Ponzi schemes, of both the Waserdorf and the Bernie Madoff variety. These schemes have several tell-tale traits:

  • They promise minimum or steady returns;
  • They claim their opportunities are exclusive, available only to a select few;
  • Their means of making money is too complicated or secret to explain;
  • They make it difficult to withdraw your money, saying that funds have been frozen;
  • They issue statements that lack detail, or that frequently show discrepancies that cannot be explained;
  • They are frequently run by a single individual whose charm and charisma allow him maximum leverage over investors’ fears—and greed."

Reputable advisors participate with a major brokerage where you can check your positions online and have full insurance protection.  Mailed statements need to be verified.

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.

I was trying to earn my own award this week by alerting investors to bogus stories on election correlations.  I decided to write an outrageous headline and follow a silly premise, explaining the "rest of the story" in the conclusion.

While many readers enjoyed the approach, many others did not read past the headline and the first few paragraphs.  Humor and irony are difficult to achieve online.  After seeing the reaction, I was reminded of Doug Kass's April Fools joke in 2008.  At the time he had been pretty bearish, but he flipped bullish in the joke article.  The story was actually picked up by clueless editors at major news sources.

If you look at my story, please keep in mind that I am trying to illustrate a point on statistical inference, not something about politics!

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.

Bob and I did some videos last week explaining the recession history.  I am working on a post that will show how to use this method.  As I have written for many months, there is no imminent recession concern.

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 prior posts.

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 081812

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 a few 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 not much to look for in terms of economic data this week. 

The big item will be initial jobless claims on Thursday.

Housing data include existing and new home sales on Wednesday and Thursday.  We also get the FHFA home price report, although this gets less attention than the competing measures.  Friday brings the durable goods report.

There will be Fed news, with speeches by two regional bank presidents (Lockhart and Evans) on Tuesday and Wednesday, and the FOMC minutes on Wednesday.  There has been some market reaction to various Fed commentary in recent weeks, mostly for hints of another round of QE.

Angela Merkel, mostly late in the week, will have meetings with leaders from Greece, France, and the head of the eurozone finance ministers.  Nothing definite will be decided, but everyone is interested in the German position toward both bailouts and ECB bond purchases.

I am expecting a quiet week, but with so much interest in Fed and European policy, expect pundits to pounce on any hints.

Trading Time Frame

Our trading positions continued in fully invested mode last week.  Felix became more aggressive in a timely fashion, near the start of the recent rally.  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.

Felix does not try to call tops and bottoms, but keeps us on the right side of major moves.

Investor Time Frame

A problem with market timing is the wide variety of methods with varying conclusions.  This week I saw an interesting and unusual contrast.

  • Morgan Stanley's Adam Parker is sticking with his forecast for the S&P 500 to close the year at 1167, a decline of nearly 18% before the end of the year.
  • Georg Vrba, whose excellent work on recession forecasting has helped our readers, has two different market-timing methods.  His most recent article explains that the next great bull market might already be here.

The interesting contrast is that Parker uses forward earnings and Vrba uses backward-looking Shiller data!  You should read both articles to see the rationale.

Which of them is right?  A great deal depends upon what is already anticipated by the markets.  The average investor reads the financial news and thinks that gives him an edge.  That only tells him what everyone else knows and is worried about.

Scott Grannis raises a great question:  What if something goes right?

In short, if you don't know that the world is beset with problems and threats of mega proportions, then you just haven't been paying attention. And if you have been paying attention, you're extremely worried about all the things that could wrong, and it's a good bet that your portfolio is extremely conservative. The charts above tell the story: for the past three years, investors have been pulling money out of equity funds and stuffing it into the relatively safety of bond funds, despite the ongoing rise in equity prices. Markets everywhere are depressed because of all the concerns over all the things that might go wrong. Forecasts for future growth range from a depression to, at best, 2.5-3% real growth. Contrarians take note: no one is forecasting growth in excess of 3-4%.

If you have been following our regular advice, you have done the following:

  1. Replaced your bond mutual funds with individual bonds;
  2. Sold some calls against your modest dividend stocks to enhance yield to the 10% range; and
  3. Added some octane with a reasonable input of good stocks.

There is nothing more satisfying than collecting good returns in a sideways market.

Beware of "pure dividend stocks", as explained by Bespoke.

Stocks vs Yields

If you have not done so, it is certainly not too late.  We have collected some of our recent recommendations in a new investor resource page — a starting point for the long-term investor.  (Comments welcome!)

Final Thoughts on the Lull and the Storm

Here are a few fearless forecasts.

The Fed will act, but not another round of quantitative easing.  They might link action to actual lending by member banks and/or quit paying interest on reserves.   The problem is increasing the money supply, so that might be the focus.

Europe will continue the incremental progress toward the final solution, a patchwork compromise that is not a plan.  It will be the result of a process.  The epiphany for investors will come when it is too late for most.

Nothing in the political campaign will be helpful for markets.  The fiscal cliff will be with us until after the election, as will the resulting anticipation and fear.

 

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!