Stock Exchange: Are You Guilty of Voodoo Chart Reading?

Michael Kahn, a leading technician and columnist, provides the inspiration for this week’s Stock Exchange. In a recent post he take on a quest: Unmasking the Voodoo of Chart Reading.

This topic really hits home with our Stock Exchange Group. Since they cannot explain their methods in great detail, outsiders sometimes think of them as “black boxes” with mysterious decision criteria. In fact, their general methods are quite clear. Through this series, we share many of their specific decisions. When I review the output, I see it as suggestions from a group of wise friends.

Kahn emphasizes this point.

[Charts] do not tell us what will happen. They are meant to give us clues as to what to do.

Rinse, repeat.

Charts do not forecast the future. They suggest that it is time to take an action.

You don’t sell when the market is overbought. It may still be going up and will get more overbought. But you pay attention because if the market does start to succumb to supply, the indicator – whatever told you it was overbought – will back down by a certain amount.

This is a great attitude to take when employing your technical indicators. Let us try to take the voodoo out of our group’s current ideas!

Review

Our last Stock Exchange considered how to trade a market with a lot of headline risk. If you missed it, please check back and catch up on this important topic.

Market Tech Take

We are adding a new feature this week – a technical market overview. We will feature our proprietary measure, MHI, the market health index. This is a specialized combination of breadth and strength in our proprietary universe. For contrast, we will include an alternative technical measure each week. We welcome suggestions. What is your own favorite indicator?

One popular indicator of strength is the percentage of stocks above the 50-day moving average. Stock charts provides an excellent way to follow this indicator.

Another good one is new highs versus new lows. This is based on our special universe. It is over a two-year period. I will improve the time scale for this feature.

The market health is our key indicator. Once again, it covers a two-year period. It is important since nearly every method experiences the worst drawdowns when MHI give a negative signal.

Comments are most welcome on this segment – a work in progress. Vince and I will provide more ideas about interpretation. Meanwhile, watch out for the red line crossing above the green one!

Let’s turn to this week’s ideas.

This Week—How to Take the Voodoo Out of Your Chart Reading

 

Felix

I’m just getting into Wynn Resorts (WYNN). I’ll admit this is an unusual pick for me. Since I could be in this position for as long as a year or two, buying on peak isn’t generally my style. For my holding period, it takes a significant move to trip my trigger.

I find a few things attractive here. For one, the 200-day moving average increased steadily in 2016 despite rapid price fluctuations. It’s since leveled off, and now the 50-day moving average is climbing. I feel I can count on reliable growth here despite some short-term swings.

J: Are you worried about the company’s sensitivity to revenues from Macau? Those fell 40% in 2016.

F: That was just the subsidiary. The Chinese love to gamble. Look to the long run.

J: At least you have a choice that has a reasonable valuation and solid earnings growth. There is even a dividend. Chuck Carnevale’s excellent research tool helps us generate this chart:

F: I am glad you like the earnings, but I am focused on the price. What is this rumor that Mr. Carnevale is taking your job?

J: We hope to have him as our guest expert next week. He has his own job. I am taking a long birthday weekend with Mrs. OldProf. What about questions from your fans.

F: I always appreciate reader questions. The extra work helps my pay.

J: Are you responding to every request?

F: I am making a list of top choices from the “reader universe.”

J: What if a reader request is not on the list?

F: Then I do not see it as an attractive long-term choice. I respond to email with more specific questions.

J: And where would that be?

F: ETF at NewArc dot com. At least until you give me my own personal email address!

 

 

 

 

 

 

 

 

 

 

 

 

 

Oscar

In an unusual twist, I don’t have a new sector for this week. I generally try to hold three sectors for a period of 2-4 weeks each – which means I’m a fairly active trader. This week, however, I’m good with my current holdings. In lieu of a new selection, let’s review one of my favorite picks so far this year. The Aerospace and Defense sector (XAR) was very kind to me.

I recommended this one back at the beginning of February. As you can see, that pick enjoyed some steady growth until the end of the month. As I said, I generally exit around the 4 week mark at the latest, so it was easy to walk away with a nice chunk of change here.

J: Yes, we enjoyed booking some profits on that trade. What about your current holdings? I see some hotels and also Roadrunner’s AVGO idea in your account. Are you too caught up in your NCAA brackets to give us a fresh pick?

O: No way, but I really need North Carolina to lose.

J: Good luck with that. What about the reader questions?

O: Like Felix, I am emphasizing the top choices from the reader questions.

J: So they are not necessarily your own favorites?

O: No, but there is plenty of overlap.

 

 

 

 

 

 

RoadRunner

(Commentary translated from various pecks, rapid movements and beeps).

Reader PN informs me that I can get better performance from RoadRunner if I improve the birdseed diet. She writes, based upon personal experience in Oklahoma, that the best food consists of “small mammals, lizards, and insects.” Birdseed is a last resort. RoadRunner beeped with approval as I read PN’s email.

RR: I’m right up there with Oscar in terms of time frame. I like to get out of any new position within 20 business days at the absolute maximum. Short term growth is imperative. For Broadcom (AVGO), that’s exactly what I expect.

RR: This year has been a steep climb upwards for AVGO, with only a few bumps in the road. To me, the current price point looks more like an investment opportunity than a peak.

J: Your method is to look for rising channels, buying at the bottom?

RR: Yes.

J: I can see that on the chart, but why not draw it for us?

RR: That is your job! I can’t draw.

J: Broadcom looks good on a fundamental basis as well. Here is the fundamental analysis, once again from Chuck Carnevale.

RR: Once again, I am interested only in a four-week trade.

J: It is always better to trade stocks where the fundamentals are solid.

RR: Beep beep.

 

Athena

On occasion, I’ve been known to buy once a stock has already jumped. With Consol Energy (CNX), I’m confident that I’ll be jumping in early enough to come away with a tidy profit.

J: On occasion? That is your regular method.

A: The stock is about matched with its 50-day moving average; however, its 200-day moving average is still basically flat. We’ve seen a pop up from recent lows in early March. Who’s to say this one couldn’t recover to its prices from the beginning of the year.

J: I find myself asking each week: Have you ever learned about earnings? Look at the fundamental chart! The price chart looks like RoadRunner’s old nemesis – Wile E. Coyote.

A: I play for big, short-term winners. If necessary I will move on.

Holmes

I love QEP Resources (QEP) this week. Here we’ve got a stock that’s just gone through a huge correction, bringing the price well below both the 50 and 200 day moving averages. Past performance is no indication of the future, of course, but in my mind, there’s dramatic room for growth here.

Even a modest increase pack to $15.00 would make spending a few weeks with this stock worthwhile.

J: This is another energy name with no earnings.

H: As we all keep telling you, the market often does not require earnings.

J: There is a lot of bullish sentiment on energy. President Trump has been helping the group. CNBC pundits were enthusiastic today.

H: Who is Trump? What is CNBC? What is a pundit?

J: A sound attitude! That is why we keep you on the payroll. Err… I mean the biscuit roll.

 

Conclusion

Charts are always subject to interpretation. When I analyze the results from our models, the charts are a result – not the starting point. A careful look provides ideas about what the model is “seeing.” It is certainly not voodoo, and my own analysis has been sharpened over the years by the constant review of model picks.

The stimulus from new ideas and interpretations is one of our goals at the Stock Exchange.

We welcome comments, suggestions, and followers for each character. Even Jeff. I try to have fun once a week in writing this, and I hope you get a chuckle or two from reading it. Here is a scorecard for the characters, and information about how you can join in.

Stock Exchange Character Guide

Character Universe Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum One month Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value One month or long term Risk signals Recession risk, financial stress, Macro

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Questions

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

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers. Sign up with email to “etf at newarc dot com”. Suggestions and comments are welcome. In the tables above, green is a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the underlying universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

 

 

 

 

Stock Exchange: Can Humans Compete with High Frequency Traders?

Many individual investors have been frustrated by the growing prominence of High Frequency Trading. Complicated algorithms can process new information and react in fractions of a second. It sounds intimidating, and in some sense, it is. Individual Investors would be poorly suited for direct competition.

Instead, stick to what the market is giving you. The connections made by these programs are often spurious – totally unrelated to the fundamentals of a given business. This is intentional. After all, they’re after a quick buck rather than a long-term investment.

For that reason, a stock being walloped for frivolous story in the 24-hour news cycle may present an attractive buying opportunity. It all comes down to the individual investor’s process and commitment to their goals.

To help give us perspective this week, we’re bringing in earnings expert Brian Gilmartin. Since 1995, Brian has managed Trinity Asset Management. You can find his regular writings on Fundamentalis.

This Week—Holmes sniffs out a deal

It can be tempting to make a trading decision based on a glance at its recent chart. Unfortunately, a stock that has underperformed in recent days might be providing a big opportunity. Holmes uses a mix of advanced trading techniques and technical analysis to avoid significant drawdowns. When he chases after a down stock, it’s because he sees some serious upside. Let’s see what he’s up to this week:

Holmes

Holmes: This week I’m buying  Jack-in-the-Box (Jack) a restaurant chain in the U.S. (95.98).

It’s not easy finding stocks that fit the exact criteria I’m looking for. I try to find stocks that have been trending higher, then have broken down below that trend, and have started to base a for reasonable period of time.

This gives me a good entry with limited downside risk and upside gains that may get back to the previous levels before the most recent debacle. I like risk/reward ratios of 2:1 or better.  With Jack, my downside is 93.70(Stop), my upside is 106, risking $2.28 to make $10.02. Woof Woof!

Brian: a comp miss sent the stock down to its 200-day moving average after February ’17 comp’s for JACK as the industry that the “low-end” consumer has taken a breather. Forward earnings and revenue estimates are a little weaker following the February ’17 miss, but JACK is trading at 20(x) expected ’17 earnings for expected 17% growth. Even if EPS growth slips to 15% or even low teens the stock is cheap on a PEG (P.E to growth) basis.

Holmes: Glad to hear you approve! Jeff is usually a bit harsher.

Brian: It’s not a bad pick, depending on how long you’re holding onto this one.

Holmes: My usual target is about 4-6 weeks, though I wouldn’t hesitate to unload this if another downturn became apparent.

Brian: Solid reasoning – for a talking dog, at least…

Oscar

Oscar: My big pick this week is the China Large-Cap ETF (FXI).

We’re in the midst of March Madness, so let’s call this pick a rebound. Not in the classic sense: that’s better suited for FXI’s behavior through early January.

Still, I made this my pick on 2/9 and hung with it for a couple of weeks. Now that we’ve seen another drop, I’m ready to jump off the bleachers and get back in the game.

Brian: BRIC’s and Emerging Markets have traded well since the bottom in Q1 ’16. FXI is the safer asset class in a crowded China ETF market. As someone who was never a fan of China as a strategic or even tactical asset allocation recipient, Emerging Market ETF’s might be a better risk / reward. The ETF is scraping along its 200-day moving average.

Oscar: So, you like this one too?

Brian: I’ve always thought China was like playing the US stock market in the late 1800’s – it is the Wild Wild West of outcomes, as a Communist country tries to centrally plan a free-market economy.

Oscar: It’s a risk I’m willing to take!

Felix

Felix:

Continental Resources (CLR) is my next long position.

The decline here has been sustained and significant, which I find attractive. At $43.22, there is definitely potential for the stock to improve near previous highs above the $55 mark. I could hang onto this one for months.

Brian: Continental took a beating on Wednesday as crude oil fell 5%. The Energy sector is a battleground sector as crude gyrates around $50 per barrel and CLR is leveraged to the price of crude. The stock is oversold and trading below its 200-day moving average.

Felix: I agree the stock is oversold, but I don’t like the sound of that “battleground.” How do I know when I’ve hit a proper valuation here?

Brian: Tell me what crude oil will do and you can figure out what CLR will do.

Felix: Uh oh.

Athena

Athena: I understand my methods are often met with skepticism. That’s why I like to pause now and then and reflect on some small successes. Let’s review my recent foray into Advanced Micro Devices (AMD).

I recommended this stock back on 2/9/17, just after a huge spike in price. Put lightly, this was not my most-loved pick. That was fine by me. Because I had the right time frame in mind, I was able to collect a tidy sum and close out this position near the end of the month.

Brian: A semiconductor company that was a serial capital destroyer for most of its life and long an “also-ran” to Intel, AMD had an impressive string of “earnings beats” and raises in 2016. On the other hand, the valuation is stretched with the Street looking for $0.07 and $0.26 thus AMD is trading at 50(x) next year’s earnings.

Athena: Would you say something like this might be due for another pop in the near future? How hot is this trend?

Brian: The semiconductor space looks good both technically and fundamentally, and AMD is a resurgent laggard in the space.

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.

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).

Conclusion

The growing establishment of High Frequency Trading algorithms has changed the investment landscape. However, that doesn’t spell doom for the individual investor. Overreactions to trivial matters, like a POTUS tweet, can actually create bargain opportunities. Keep these ideas in mind:

  • Do not compete directly by trying to react more quickly to news.
  • Find a method that differs in time frame.
  • Do not use stops that become limit orders.  A random move can take you out of a position at a poor price.
  • If possible, use the HFT algorithms to your advantage.  If a stock is solid, consider buying dips by having some standing buy orders.

Take what the market is giving you.

Stock Exchange: How to Trade an Overbought Market

For the last three weeks, the term “overbought” has been frequently used to describe the overall market as well as many specific stocks. What does this really mean?

It has a dangerous sound, and that is indeed the common message. A stock, or a sector, or the overall market has rallied more than expected over an extended time.  What does that mean for traders?  Or for investors?

It is an excellent question for our experts.

Review

Our last Stock Exchange focused on trading sector rotations, Oscar’s regular mission. There was an excellent discussion. It provides special value when readers engage with our crew of “technical analysts.”

To encourage this discussion and diversity we will have some visiting experts for the next two weeks:

  • Brian Gilmartin of Trinity Asset Management, a leading expert on corporate earnings and fundamental analysis reported at his blog, Fundamentalis.
  • Robert Marcin of Defiance Asset Management. Bob is an oft-quoted legend, a deep value manager, and a curmudgeon par excellence.  While I often do not agree with him, I always listen carefully in our discussions on Scutify.  You will enjoy the banter and can keep your own scorecard.

Today’s Theme

An extended stock move is often described as overbought or oversold.  For most observers, an overbought stock or market is poised for a selloffSome technical analysts measure this in terms of relative strength measures (RSI).

How important is this warning sign?

Pension Partners warns of an “optical illusion,” citing multiple prior examples and then considering the current NASDAQ 100.  Look at the interesting evidence in the entire article leading to this conclusion:

If one is going to predict anything based on extreme overbought levels (and I would advise against doing so), it would be further gains. I realize that doesn’t conform to the prevailing narrative of “overbought is always bearish,” but the truth in markets rarely does.

Chris Ciovacco has a nice chart pack of prior overbought conditions.  The mixed results are a warning to anyone thinking about trading on this approach – despite the recent somber warnings from the NYSE floor via Art Cashin.

What do our Stock Exchange experts think about overbought markets?  We will hear them out and, as usual, I will conclude with a brief observation about the key points. I will begin with Athena, who specializes in short-term momentum trades.

This Week—Trading an Overbought Market.

Athena

My approach is to find winners and ride the gains.  Fundamental analysts are skeptical of momentum, but trend-following is one of the strongest historical methods.  The “trend is your friend” is not just a cliché. Principal Financial Group (PFG) is a great example; it has been on tear for a month. That is enough to put it on my radar. The sharp increases may be off-putting to some, but they are mistaken.  The trend line is strong. I’m looking for an increase of 2-3% over the next 2-4 weeks.

J:  Are you concerned that the stock might be overbought?

A: In my evaluation methods, the price action is a sign of strength.

J:  At what point would a major gain worry you?

A:  I like stocks that are showing strength, but I am ruthless when it comes time to get out.

J: So, you do not worry about overbought conditions on the entry?

A:  Some of the best trades come when an “overbought” stock gets more overbought.

J:  For a welcome change, your choice is also attractive on a value basis.

A:  Value?  What does that mean?

J:  You can see it in the fine chart from F.A.S.T graphs.  Let us turn to Felix, who also follows a momentum strategy.

Felix

I will once again begin with my responses to reader votes for the favorites list.

My list provides rankings within each zone, as well as the basics about buy, hold, and sell.  The list includes the most recent reader questions as well as former requests where my rating has moved.

J: AMD is still on top?

F: It leads the reader list, but not my own.

J:  I have had some questions about that.  Readers want to know your own top picks.

F: If I talked about that here, I would be revealing what I recommend for your clients.

J: That is a problem.  I want to be helpful to readers, but emphasizing that it should be a start for their own research. We did have a couple of questions last week.  What do you think about reader Jim Irving’s questions about CRX and CXRX, which he identifies as debt-laden drug companies?

F:  He is right to be concerned.  CRX is on my sell list and CXRX is a very weak hold.  I wish that more readers would submit such questions.  I need my incentive bonus to kick in.

J:  Do you have anything fresh for us this week?

F:  Nothing new, since my focus is longer than the others.  Let me take up a holding that some are worried about, NVIDIA Corporation (NVDA).  This was one of my long-term picks in early December of 2016. We’ve had two major spikes in price since then, followed by decline in February. Those with a short-term mindset are worried.  Since I’m interested in holding out for the long haul, I haven’t been preoccupied by the dips. I’m up about 10% here after nearly a full quarter in the position – nothing to sneeze at!

J: Would you call this an “overbought” stock?

F:  Not on my time frame.  The definition of overbought should adjust to your investment purpose.

 

Oscar

We haven’t hit March Madness yet, so I am mostly thinking spring training.  For many teams the question is whether to play big ball or small ball. In small ball baseball, players trade the long odds on huge plays in favor of more manageable base hits.  Sometimes the small ball approach generates more runs and winning baseball.

On that theme, I’m looking closely at the Russell 2000 Index (IWM). Small caps and large caps performed very differently in 2016. Large caps were generally in favor due to their relatively low volatility and risk. However, I see potential for growth in the small caps over the next several weeks. From the looks of the chart, I’m probably not alone!

 

J:  Are you worried that small cap stocks might be overbought?

O: What I see is strength?

J:  What if the small-cap sector fades?

O:  As I always do, I’ll dump it and move to what is working.  I always like to have my money working.

J:  Does that mean that you are getting ready for March Madness?

O:  That is where a longshot can really work.

J:  I suppose we are going to hear more on that subject.

O:  You can count on it!

J:  Do you have your updated sector ratings?

O: Yes.  I monitor about 40 sectors and hold positions in the top three.  $IWM is a new holding.  It is not on the list because no readers asked about it.

 

Holmes

This week I’m buying YELP, an internet content & information provider in the U.S. (34.66)

Although it traded at 97 in 2014, I have no illusions that is going back there. Instead I like this stock because it’s showing some resilience at 32.5 level. Trading down to 32.5 in late October this stock rebounded all the way 42.5 before getting pounded again down towards the 32.5 price, BUT, it didn’t get there before turning up. So now we have a stop, (32.5), and a price target 42, with a current price of 34.66, I like the risk/reward this setup provides. Plus, I like the name, it reminds me of my pack when I was a young pup.

J:  Are you worried about overbought stocks.

H:  Never!  I let others chase the recent winners.  I find strong stocks experiencing a temporary setback.  I don’t need to worry about “overbought” market conditions.

Conclusion

The term “overbought” can mean many different things.  Effective trading systems use recent trends and technical indicators in quite different ways.  No single method has a monopoly on success.  Drawing upon expert systems, let’s highlight three key conclusions.

  1. Overbought need not spell danger. Overbought stocks and sectors often get even more overbought.  This might even be the best part of the move, augmented by short covering.
  2. You must gauge your reaction and stops to your price target, loss tolerance, and time frame.
  3. Your system must fit your trading personality, as illustrated by our four models.

If you like selling the rips and buying the dips, do not take a momentum approach.  Check out our post on dip-buying.  If you are contrarian and flexible, consider this week’s advice about various ways to deal with momentum.

We welcome comments, suggestions, and followers for each character.  Even Jeff.  I try to have fun once a week in writing this, and I hope you get a chuckle or two from reading it. Here is how to join in.

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Questions

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

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list.  You can suggest three favorite stocks and sectors.  We report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers.  Sign up with email to “etf at newarc dot com”.  Suggestions and comments are welcome.  In the tables below, green is a “buy,” yellow a “hold,” and red a “sell.”  Each category represents about 1/3 of the underlying universe.  Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

Weighing the Week Ahead: Have Stock Prices Lost Touch with Reality?

It is a big week for economic data and the first address to Congress from the new President. Most of the punditry is engaged in a collective head-shake about overbought conditions. Even if the data flow remains strong, pundits will be asking:

Have stock prices lost touch with reality?

 

Personal Notes

I always try to publish for Sunday morning, which is convenient for most readers. Occasionally circumstances delay me. Sorry about this weekend.

On a second front, a reader thought he spotted me at a political rally. Readers know that I emphasize political agnosticism in investing. Like most of you, I have opinions, but try to keep them separated from our decisions. With that in mind, I have an alibi for this occasion!

Last Week

Last week the economic news was mostly positive, and stocks responded.

Theme Recap

In my last WTWA I predicted a discussion about Trump policies and the business cycle. This was partially correct, but the prevailing theme – by a widespread margin – emphasized the likely delays in key economic policies. That will be a transition point for the week ahead.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes yet another record close based on the week’s gain of 0.7%.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post for 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!

This week’s news was mostly positive.

The Good

 

The Bad

  • Hotel occupancy softened over the last few weeks (Calculated Risk).
  • New home sales missed expectations. The prior three months were all revised lower. While sales were up 5.5% year-over-year, the comparison months were among the weakest. Calculated Risk notes that these were the first months after mortgage rates moved higher and provides analysis and this key chart.

  • European tourism interest in America is down 12% after the travel ban. (Forbes).

The Ugly

Russia may have interfered with the Brexit vote say UK officials. Jake Kanter and Adam Bienkov have the story at Business Insider.

 

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 EconompicData, for an important and careful analysis of the effect of rising interest rates on bond investors.

The problem is that the debate over the Fed and interest rates became political. To maintain consistency, many argue that higher rates will be good for bond investors. Here is Jake’s summary of the problem:

I’ve read too many posts / articles that outline why a rise in rates is good for long-term bond investors (as that would allow reinvestment at higher rates). While this can be true depending on the duration of bonds owned and/or for nominal returns over an extended period of time, it is certainly not true over shorter periods of time and absolutely not true for an investor in most real return scenarios… even over very long periods of time.

There are a range of possible assumptions and consideration of each. Here is a key illustrative chart:

To summarize a great post – which bond investors should read carefully – higher rates will be great for future bond investors, but painful for those with current holdings.

 
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 very big week for economic data, with all of the big reports except the employment situation.

The “A” List

  • ISM index (W). Important for both concurrent and leading qualities. Strength continuing?
  • Auto sales (W). More gains from a key sector or “peak auto?”
  • Consumer confidence (T). Will the great strength continue?
  • Personal income and spending (W). January data, but a very important business cycle series.
  • Fed beige book (W). With the Fed resuming a role as a key worry, there will be extra attention.
  • Initial jobless claims (Th). How long can the amazing strength continue?

The “B” List

  • ISM services index (F). Continuing strength? More important than manufacturing, but harder to interpret.
  • GDP Q4 (T). The second estimate includes more data, but little change is expected.
  • Durable goods (M). January data in a volatile series, but progress is needed.
  • Pending home sales (M). Not as important as new construction, but a good read on the market.
  • Chicago PMI (T). Best of the regional surveys is a little preview of the national ISM report the next day.
  • Construction spending (W). Big rebound expected in the important but volatile series.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

President Trump’s first Address to Congress on Tuesday night will command attention in many ways. Most importantly for our purposes will be hints about legislative priorities and the Congressional reaction. Insider tip: Watch for things that get applause from both sides of the aisle.

Next Week’s Theme

 

The punditry, locked into a mindset about valuations, Trump policies, Fed significance, and daily preoccupation with what could go wrong is engaged in a collective head shake. Isn’t it obvious that many of the Trump policies will be delayed? Won’t this derail the “Trump Rally?”

The commentary increasingly expresses amazement, wondering:

Have Stock Prices Disconnected from Reality?

On one side, those who date the rally from the day of the election infer cause and effect. Anything that damages the prospects for tax and regulatory relief also damages the bullish story.

Another group notes that the market, after an extended period of strength is “overbought.”

An increasing number of observers is questioning whether Trump policies are actually the basis for the increase in stock prices.

If these policies are crucial, Tuesday night’s Presidential Address to Congress is definitely the key moment of the week – regardless of economic data.

What does this mean for investors? As usual, I’ll have a few ideas of my own in today’s “Final Thought”.

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. (see below).

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

Doug Short: 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 several interesting approaches to asset allocation. Try out his new public Twitter Feed.

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

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. His most recent post notes that the expected growth rate in S&P earnings is now 8.41% — the highest level since October, 2014.

The legal Marijuana business will create nearly 300,000 jobs by 2020.

 

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. All our models are now fully invested. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our four technical experts, and some rebuttal from a fundamental analyst (usually me). We try to have fun, but there are always fresh ideas. Last week the focus was on sector rotation strategies, with a recent example from Oscar.

Top Trading Advice

 

Brett Steenbarger explains how knowledge is part of trading. He makes a powerful analogy between traders that can see both the macro and micro pictures and a quarterback who sees the entire field. His work always helps traders discover both what they should know, and how to learn it. While this was my favorite for the week, the daily posts should all be on the trader’s must-read list.

The early T-Wops (a negative Presidential tweet) had a negative impact on stocks. Traders learned this, of course, and the high-frequency algorithms did automated tracking. As often happens, once everyone catches on, things change. The WSJ shows that a Negative Tweet may not crush a stock

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 Warren Buffett’s annual letter to his investors. It is full of wit and humor – and plenty of great insights. You can learn about tax policy, accounting issues, stock buybacks, and Mr. Buffett’s ten-year bet where he took the overall market versus hedge funds.

Stock Ideas

 

Mr. Buffett’s dividend stocks versus the “dogs of the dow.” Jon C. Ogg crunches the numbers.

Big biotech? Battered down, but with good earnings and cash flow. Some of the companies also have a pipeline. Check out some large cap choices.

 

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is the post from Dan Danford. He explains the difference between excellent but general advice from experts and advice specific to your circumstances. Keep this in mind when reading the Warren Buffett letter. Here is a key quote:

Those experts don’t know a thing about you or your situation. They don’t know your age, health, marital status or personality quirks. They don’t know where you live or how much your house cost. They don’t know how much you spend on groceries or hobbies, or that you were forced into early retirement by an ungrateful employer. They know none of this. Nada.

 

Seeking Alpha Editor Gil Weinreich’s strong series is ostensibly aimed at financial advisors – a must-read for them. It also attracts many DIY investors. The zesty topic of the week started with an explanation from a noted writer and advisor, David Merkel, on why investors need good advice. I strongly agree with David, but I realize that some investors enjoy doing the work to maintain a successful program. (Is that you? My (free) short paper on the top investor pitfalls is a good test of whether you can successfully fly solo. Send a request to main at newarc dot com).

 

Watch out for…

 

Rising interest rates. In a riff on this week’s Silver Bullet analysis, Davidson (via Todd Sullivan) explains some key fundamentals about rates, the yield curve and the Fed. It is another myth-busting analysis.

 

Final Thoughts

 

How the punditry interprets the current market depends on how one defines base valuations and expectancy.

  • Stock values are attractive
    • Emphasis on earnings expectations and forecasts
    • Belief in relative valuations – comparing stock expected performance, with bonds, real estate, gold, etc.
    • Confidence that a recession is not imminent.
  • Stocks are over-valued
    • Emphasis on trailing earnings
    • Analysis based partially on 19th century data
    • Belief that valuation is absolute. A sector’s value is independent of the alternatives
    • Focus on headline risk – uncertainty, world events, etc.

The result?

Most people choose the over-valued path. It is the conventional wisdom in the media. Even the bullish pundits choke out a statement that stocks are “reasonably valued.” This world view requires some explanation of why the stock rally continues. The explanation has changed over time —

  • Stocks are overvalued and a crash is likely.
  • A crash might not happen, but returns over the next five, ten, twelve years will be lower.
  • Valuation is not a good method of market timing, and who knows when the “half-cycle” will end?
  • Stock strength is due to extraordinary Fed policy, providing liquidity that banks or the plunge protection team use to buy stocks. It will end with the end of QE, which probably will never happen.
  • The end of QE merely shifted focus to Europe, where the ECB has taken over the money printing.
  • The current rally is based upon Trump promises, which will never come to pass and might not even work.

Investment Conclusion

I hope most will notice that the forward valuation approach and the recession data I report weekly is a simple explanation. The current market is what we would expect. The Republican victory had increased small business confidence, but is not the main driver of stock prices.

The prevailing explanation was wrong-footed at the start and has remained so. Like bad science, it has not explained anything, so it must be continually re-invented.

It is really not complicated. There will be a time to become cautious. Meanwhile, mid to late- stage cyclical stocks, financials, homebuilders, and technology remain attractive.

Weighing the Week Ahead: Will Q4 Earnings Confirm Recent Economic Strength?

We have a light calendar for economic data and a short week of trading. The biggest news will come from corporate earnings reports. Some financial stocks reported on Friday, but this is the first big week for Q416. Earnings season is always important, but sometimes it is special. This week the pundits will be asking:

Will improving corporate earnings confirm perceptions of a stronger economy?

Last Week

Last week the economic news was strong, but with little reaction from stocks.

Theme Recap

In my last WTWA I predicted a punditry focused on the incoming Trump Administration. The confirmation hearings provided a lot of fresh news, and there was not much going on in daily trading. My guess that people would be “digging down” for clues about policy changes was a pretty good one.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. As you can readily see, both the range and the weekly change were very small. You can also see the 1% intra-day move during the Trump press conference.

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!

This week’s news was quite good—almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments. This is a good week to illustrate the problem with the so-called “economic surprise” indexes. So much depends on how you determine the expectations. If conditions are good, they are good, even though some expect continued improvement each week.

The Good

  • Mortgage applications up 5.8%, despite concerns that higher rates would hurt the market. This is a very nice surprise.
  • Jobless claims at 247K continues at an extremely low level.
  • Michigan sentiment at 98.1 on the preliminary survey remains very strong (although a slight miss on expectations).
  • Sea container counts end the year on a strong note. Steven Hansen (GEI) does his expected deep dive into the data, providing plenty of long-term analysis. Here is a key table:

  • NFIB small business outlook surges. Scott Grannis has the story, including references to consumer confidence as well.

 

The Bad

  • Retail sales? More spin – good or bad?

U.S. retail sales disappoint at end of the year (MarketWatch) at 9:10 ET.

Holiday retail sales rise 4% to beat NRF expectations (MarketWatch) at 10:29 ET.

 

  • Gasoline prices are up about 20% year-over-year. New Deal Democrat has the story.
  • Business inventories? Some regard this as bad because of the m/o/m increase of 0.7%. Last week I called this a very spinnable number. Inventories are either wanted or unwanted. Going into the number we knew that the level was depleted. This is really a neutral report.

The Ugly

Volkswagen Diesel Scandal. We now know that this was the responsibility of important executives – not just low-level employees or a faceless corporation. Fiat Chrysler is also charged, but claims important differences.

 

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. There is week’s award goes to David Moenning (a nomination from a reader, Lasrman) for his helpful discussion of “Alts.” He writes as follows:

The pitch is strong. “Alts,” as they are called, are touted as a source of diversification, a way to create non-correlated portfolios, and a means toward potential risk reduction during severe market declines. I’ve heard some folks even suggest that alts are a way to produce a solid “riskless” returns!

And….

…who doesn’t want to own an investing strategy that is designed to produce a nice, steady 6-8% return without the vagaries associated with the traditional asset classes?

And the problem….

Investopedia goes on to note that most of these alt strategies are designed for sophisticated investors. “Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of the complex natures and limited regulations of the investments,” the website says.

[Jeff] The most attractive track record I ever saw was from Bernie Madoff – consistent strong returns and minimal drawdowns. It was too good to be true. David’s experience is quite like mine. I get pitches for these products on a regular basis. Some of them are theoretically sound and might work. The average investor does not have the skill to evaluate them.

We also published our annual review of winners. If you take a look at the excellent work reviewed (here and here) you will see the advantage of following these contrarian sources. You will be surprised at how much it can help your investing!
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

It is back to normal for the volume of economic data, but fewer of the most important reports.

The “A” List

  • Housing starts and building permits (Th). The most important leading data in a key sector.
  • Industrial production (W). The expected rebound would improve overall confidence in the economy.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Beige Book (W). The Fed’s district-by-district look will be scoured for signs that rate hikes might come more quickly than expected.
  • Philly Fed (Th). Earliest read on the new month has gained more respect in the past year.
  • CPI (Th). Interest in the inflation reports is building, but the worrisome stages are not imminent.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Fed speakers are still on the trail, with appearances every day. Chair Yellen will make two appearances.

Earnings reports will be the most important news.

Next Week’s Theme

 

It is a short week, with a light calendar of data. The Trump story continues as confirmation hearings shed a little more light on possible policies. There will be plenty of FedSpeak.

Despite these factors, the start of earnings season should give the punditry a break from All Trump, all the time. Because of recent economic strength, people will be skeptically searching the earnings news for signs of weakness or a negative outlook. The key question will be:

Do Earnings Reports Confirm a Stronger Economy?

The basic positions are simple.

  • Reports normally beat estimates, and there is plenty of potential this season (FactSet)

  • Some recent laggards are looking strong—energy, tech, financials (Brian Gilmartin).
  • Corbin Perception suggests that expectations are very high. This is an interesting collection of survey data. Read the full report, but here is a nice summary:
    • Heading into 4Q16 earnings season, 85% of surveyed investors expect results to be in line or better than consensus, an increase from 78% last quarter
    • Expectations for improving organic growth surpasses worsening for the first time in more than a year
    • Investor sentiment towards the U.S. has improved dramatically; 70% now forecast higher U.S. GDP while recession fears have pushed out
    • Rate hikes drive sector views: participants most bullish on Financials while Utilities and REITs see dramatic pullback in sentiment
    • 67% of investors report feeling better about the U.S economy post-election; recession fears off the table for 2017
  • Earnings are inflated by peak profit margins and bogus analyst forecasts. “Organic” growth is low and so is revenue growth. (I see these comments, but we would all appreciate some credible sources).

 

What does this mean for investors? As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

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

 

Although dropping last week, the yield on the ten-year note has increased significantly since the election. This has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The C-Score has also dropped. The relationship is not linear, and it remains in the “safe” zone.

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.

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. His most recent research update suggests some “mixed signals” from labor markets.

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.

Doug Short: The World Markets Weekend Update (and much more).

Davidson (via Todd Sullivan) notes that Markets Do Not Peak Until Spread Shifts To Zero

The indicators in this fine post are consistent with what we see from our regular sources. Many of these subsume the concept mentioned.

 

 

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar is fully invested, but the sectors are less aggressive. The more cautious Holmes has taken some profits, but is still about 90% invested. The group meets weekly for a discussion they call the “Stock Exchange.” In each post I include a trading theme, ideas from each of our four technical experts, and some rebuttal from a fundamental analyst (usually me). There are fresh ideas each week. You can also ask questions and have a little fun.

Top Trading Advice

 

Sir Michael Hintze suggests that “Trump volatility” is good for active managers. This is also true for investors and traders. Check out Eddy Elfenbein’s account of the Trump press conference effects on healthcare.

Adam H. Grimes has advice aimed at new traders, but everyone can benefit. a useful and timely post for traders turning the page on the calendar. While the focus is on motivation, he has several specific suggestions. He analyzes each of the following important points:

Decide if you want to trade or gamble.

Have an open mind, but a critical mind.

Understand what “proof” looks like.

If you want to trade, bet size is really important.

Psychology matters, but these things are more important.

Dr. Brett Steenbarger illustrates how to make Internet discussions work well. He links to the Grimes post and extends some of the arguments. An intelligent discussion of important factors is one of the most important sources for traders (and investors). He has almost daily posts. Any serious trader should read them all. Another great example from this week shows how to turn failure into strength.

Those who join us in reading Brett Steenbarger’s regular posts will enjoy his appearance on Barry Ritholtz’s acclaimed MiB series.

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 account of his dinner with Daniel Kahneman. It is a nice summary of Kahneman’s basic ideas – all worth reading. Morgan has a great sense for what is important and what you need to know about it. Here is my favorite quote:

On education changing thinking: “There are studies showing that when you present evidence to people they get very polarized even if they are highly educated. They find ways to interpret the evidence in conflicting ways. Our mind is constructed so that in many situations where we have beliefs and we have facts, the beliefs come first. That’s what makes people incapable of being convinced by evidence. So education by itself is not going to change the culture. Changing critical thinking through education is very slow and I’m not very optimistic about it.”

 

Stock Ideas

 

Do you believe that managers with a ten-year success record might have good ideas? If so, look at these picks. (We own several of them, which encourages me to put the rest on our watch list).

Many stocks are attractive, despite the popular valuation perception. Rupert Hargreaves reports the Jefferies take. Hint: Cyclicals and value look good.

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, including four or five specific ideas that we are buying. This week the dip-buying Holmes (who has been very hot) likes Michael Kors (KORS). Check out the post for my own reaction, and more information about the trading models.

Seeking yield?

How about Raytheon? William Stamm describes the dividend hike and the potential.

Kohl’s 5% looks safe. (Josh Arnold). This is one where we enhance yield by selling near-term calls.

But watch out for companies where the dividend might not be safe. Can you depend on 5.7% from Blackstone? (Brian Bollinger)

And a key question: Should dividend investors be worried about rising interest rates? Rebecca Corvino provides some great links.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. My personal favorite this week is Megan McArdle’s post on the importance of saving. Investors should understand that the 401(k) is not a substitute for the old guaranteed benefits plans.

I have often commented that when Tadas has the time to write a standalone post, it is a special treat. This week he wrote about the “evidence-based” movement, the endurance of outmoded ideas, and what it all might mean for investors. A general conclusion is that many investors should minimize fees, choosing cheap robo-advisors or doing some basic rebalancing on their own.

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest has quickly become a must-read for financial professionals. Somewhat to my surprise, the topics also stimulate comments from active individual investors. It has added to the value of the posts for both groups. Gil engages the same topic as Tadas – the need for financial advisors. (and also here).

This is a topic that hits close to home. I am quite sure that an intelligent investor who never made the common mistakes could avoid the fees of a professional advisor. I even provide a way for investors to check this out. Just ask for our free report, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo! If not, you might be losing 4-8% each year. Less than 1% of my regular audience consists of clients. I started writing to help average investors, and that remains my principal motivation. I am disappointed to see what seems like an increasingly commercial approach by so many of my friends. I know that they all seek to provide excellent and special service.

 

Final Thoughts

 

As the Q2 and Q3 earnings seasons began, I wrote about the possible end of the “earnings recession” and an inflection point in forward earnings. Those events have come to pass, but we now have a new concern: the outlook. Conference calls and the company’s guidance is always interesting, but this quarter is special. Companies cannot know what the policy changes will be, nor can they predict the effects on their business.

In each week’s “Final Thoughts” I offer opinions based upon facts. Sometimes my conclusion is a description of what I find important to watch. So it is this week. My scorecard for earnings season will look for the following company characteristics:

  • Confidence. I expect most to have a murky outlook, with no reason to set the future bar very high.
  • Important trade relationships – imports or exports. Comments on these fears may create some buying opportunities.
  • Concern about a stronger dollar. Everyone is teed up to watch for this, and we should as well.

Earnings reports help us interpret the strength of the economy using non-government data. In this earnings season, it is especially important to know the story as well as the numbers.

 

Stock Exchange: Does the Symbolism of Dow 20K Affect Technical Analysis?

Last week’s Stock Exchange focused on making hay while the sun is shining. The week before we discussed risk, where every trader and investor should start. Now the models must deal with news and symbolism. Dow 20K is grabbing the headlines as I expected. It is very nice to get some recognition for my early call on the most important investor perspective – concern about “upside risk.”

How does this affect the decisions of our technical experts? The models are not caught up in the symbolism of Dow 20K or the promise of Trumponomics. It is all about the charts.

Getting Updates

I have offered a new service to subscribers (free) on our Felix/Oscar update list. Each can suggest three favorite stocks and sectors. I plan to report the “favorite fifteen” in each category– stocks and sectors. Sign up at etf at newarc dot com. Ideas and comments are welcome, as always. Green represents a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. For now we are not holding the list to the top fifteen, but we soon will. Sign up now to vote your favorite stock or sector onto the list!

favorites-table-121616

 

This Week— Coping with the symbolism of Dow 20K

Holmes

Holmes: Amgen (AMGN) is an interesting opportunity. The early November drop and recovery attracted my attention. The market message seems to reflect a concern that has been re-evaluated. We could easily see some price recovery here, perhaps to the level of the 200-day moving average.

J: Do you understand that the Presidential campaign involved everyone attacking drug prices?

H: What campaign?

J: Do you know that the President-elect is tweeting about drug prices?

H: I do not know what a President-elect is. And by the way, what is a tweet?

J: Do you know that everyone is focused on Dow 20K?

H: What is this “Dow.” I am talking about Amgen. Whatever you humans might think to be important, the message of this chart is clear – a possibly dubious selloff and a great rebound opportunity. It is my kind of trade!

Athena:  Some might think I have been a little late to the party on some recent picks. In the long run, you all will see. This week I especially like McDonalds (MCD). There’s been a bit of a recovery in place since early August. More importantly, though, the SMA 500 and 200 are both itching to shoot up a little higher. I’d be very surprised to see the price decline, or even start to flatten out, within the next couple weeks.

J: This is yet another of your over-valued picks. Take a look at the excellent analysis from F.A.S.T Graphs:

A: As I keep explaining to you, valuation is not relevant for my trading time frame.

J: Do you realize that this stock is caught up in the “Trump Rally” and the quest for Dow 20K?

A: Unlike the other models, I am aware of news. It is a reflection of my superior wisdom and knowledge. Whatever the causes that motivate you humans, I will enjoy this rally. When it ends, I will sell.

J: That sounds like what some call the “greater fool theory.”

A: There is a limitless supply of fools!

J: I like biotech stocks that have real earnings, like AMGN, but there are better choices. The bottom might well be a few months away.

Felix

Some might be apprehensive about buying a stock at a 12 month high. I like to see a sustained recovery in price and volume, since I plan to buy for a holding period of more than a year. US Steel (X) pushes all my buttons. With improving strength in the overall economy, I predict consistent growth over the next 12 to 18 months.

J: Your choice might also be helped by Trump trade policies against China.

F: Who is Trump and where is China?

J: Those are important fundamental considerations.

F: If it is important, it is all reflected in the price.

Oscar

They may call it the Lombardi Trophy, but there will never be a Super Bowl in Green Bay. And that’s not just because it’s inhospitable there come February (though it is). There simply aren’t enough hotels around to hold the massive crowds. After all, they can barely find a place to host the Vikings fans in Appleton!

J: Very interesting. Moving beyond your favorite part of the newspaper – the sports section — do you have a sector pick for us this week?

O: Right – I got distracted thinking about REIT Hotels. VNQ is the most popular REIT, but I have it rated as a “sell.” The group has been on a downswing the past six months.

J: I expect REITs to be hit hard by rising interest rates. That is what your chart shows. I especially do not like VNQ.

O: Well, there are some better charts.

J: Don’t hold out on us.

O: I really like APLE; it is better oriented to a growth sector.

J: I agree. This is a REIT that we hold for clients who really need fixed income. I expect it to handle higher interest rates via economic growth.

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.

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).

Conclusion

Are the models ignoring the Dow 20K story? None of them watched my CNBC appearance reprising my 2010 call, even though they all work for me! As true technical analysts, they focus on their own setups and expect anything really important to be reflected in price, momentum, and volume.

Will 20K represent resistance? If so we will see some interesting adjustments next week.

Stock Exchange: How to Maximize Gains

Last week’s Stock Exchange focused on risk – my first step in speaking with a new client. If you take on too much risk, you will find yourself bailing out at the first modest downturn. Our guest expert last week, Blue Harbinger, helped us in discussing the topic. Mark did a great job, just as he does consistently on his blog, and we got a very favorable response from readers. We will invite some other guest experts in the coming days, and we also hope to bring Mark back.

Once you have a handle on risk, it is time to maximize your returns. This is much more difficult than it seems. There are always many reasons to be fearful. It is only when you have confidence in your methods that you can stay the course through the inevitable blips.

Our models help with this problem. There are differing approaches, but all have been doing great. Holmes has just completed his impressive first year of real-time trading, beating the market with a lot less risk.

Readers see many bloggers who publicize alleged results. Some readers ask us to join in this deceptive game. Those others are either reporting on newsletters or they have bad lawyers! A legitimate investment advisor understands the regulations on reporting results. It is very tricky to put anything on the Internet, no matter how honest you are. We’ll respond to any inquiries by qualified investors with detailed results and a discussion. For most of my readers I must explain in more general terms. Today I include a recent discussion with Vince – the man behind the models. (More background here). I am trying to provide some ideas for your own consideration. While we view them as low-risk when employing our stops, no general results should be regarded as specific advice.

J: The models have all been doing well. Is it just because of the market rally?

V: When the market is strong, the models are even stronger. A rally helps.

J: What if things turn South?

V: Each model has a disciplined exit rule. No method comes without risk, but we do a good job of limiting it. How did Holmes do during the January dip?

J: Holmes pulled back a bit, dipping less than 4%. I was impressed. How do you develop such confidence in your results?

V: My method involves extensive training while preserving a generous out-of-sample period. If the latter period performs like the training time, you know you have something.

J: I add an extra test. When we start trading in real time, I track every trade. I am verifying that the model does what it is supposed to – making the right sort of trades and exiting when needed. It confirms the test results, but does much more.

V: That is only what I would expect. Humans are not really needed in my models.

J: Which brings us back to the old story of the space capsule, previously carrying only monkeys. Humans were supposedly not relevant. The designers of the manned capsule insisted on a window and engineers (like you) thought it was unneeded. The explanation? So that the astronauts could see to pilot the craft! We do not override the model choices very often, but humans remain in control.

To summarize: You need to make hay when the sun is shining. Do not get mired in pessimism. A disciplined method helps you to stay the course.

Getting Updates

I have offered a new service to readers on our Felix/Oscar update list. Each participant can suggest three favorite stocks and sectors. I plan to report the “favorite fifteen” in each category– stocks and sectors. If your favorite is not picked as part of the group, I’ll try to provide some individual answers. Sign up at etf at newarc dot com. Ideas and comments are welcome, as always.

This Week— Profiting from the Rally

Holmes

Recently TAP (Molson Coors Brewing) showed up on my list I’m the rebound specialist, and this one really fits the bill. Buying at 97.50 with a 94 Stop, looking for a move back to the 50d MA of 103.75.

I really like the risk/reward of this type of setup. If the stock starts to really move in my direction, I can raise my stops and raise my target price, although I would be likely to take some profits.

While I don’t play strict attention to what analysts say I see that there is a price target of 120.73. This is an added source of comfort for me.

J: Congratulations on your great first year of real-time trading! How much luck did you have?

H: There are always good rebound plays. My method is a natural for traders, and it minimizes risk.

J: Your choice of TAP makes no sense to me. The P/E ratio is over 26 and earnings growth is in the single digits.

H: You humans keep drinking beer! I am playing for modest rebound. You will see.

Athena:  SM Energy (SM) has been down this past week – I see that as more of a buying opportunity than a trend. Energy stocks have been favorable across the board, and here I see an opportunity to take part in a sizeable rally.

J: You and your colleagues all seem to be reaching for energy stocks. In general, I see the idea, but why not pick a name with some earnings.

A: Earnings? Look at the chart, the uptrend, the support…. This is a story. Earnings are not relevant to sustain the uptrend.

Felix

Nvidia (NVDA) recently experienced a sharp bump in price, but don’t let that scare you. The long-term trends here have been moving higher at a steady rate, suggesting the potential for gains over the next year or so. Some correction may be inevitable, but that’s a storm you’ve got to weather to hold out over the long term.

J: The company beat earnings expectations and guided higher, a winning combination.

F: The chart reflects that strength. I see this as a long-term winner.

J: Should we wait for a pullback?

F: For long-term investors it is more important to make attractive purchases when opportunities present.

Oscar

I want to talk about defense this week, and I don’t just mean the Kansas City Chiefs. (That said, eight straight games with at least one turnover is worth mentioning). My favorite sector this week is Defense (XAR).

In the past six months, we have seen a solid upswing in the moving averages here. I still think there’s plenty of room for growth here. I couldn’t say why it’s taken off so drastically since November, though.

J: Did you hear about the election?

O: Sure. Bud Selig in the Hall of Fame???? I did not vote for him.

J: You have a vote?

O: I mean that if I had a vote, I would not have picked him. That All-Star game home field advantage is strange.

J: I was referring to the Presidential Election. The results are viewed as favoring defense stocks.

O: The reason does not really matter, does it? This is a great trade!

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.

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).

Conclusion

Last week we noted that accepting risk before year-end might well be correct. This week we balance the risk assessment with attention to possible rewards. The group still sees a very positive outlook.

Stock Exchange: Spotting a Great Chart

Technical analysts dominate the daily discussion of stocks. Fundamental concepts change slowly. Chart patterns change constantly. Usually the calls are dramatic, because no one cares about advice that says, “all is well, keep holding.”

Traders live on stock charts, but investors also pay close attention. Everyone wants to know whether a stock is breaking down, breaking out, or stuck in a trading range. Here is the key question:

How do you spot a good chart?

We have several great charts this week. The Stock Exchange provides an expert-level debate on technical and fundamental analysis. (Important background is available here). Comments, dissent, and specific stock questions are welcome!

This Week—Is Felix right about KHC?

One issue with charts is the wide difference in interpretation. Do analysts see what they want to see? Are the interpretive criteria constant and objective? This week (without telling him) I searched for other opinions on one of our expert selections, Felix’s choice of KHC. The same principles would apply to all the picks, but this is a convenient example. Before turning to Felix, let’s look at other approaches.

This one provides a complex chart and plenty of additional points of interest. It makes a lot of specific predictions, suggesting many trades with moves of less than one point.

 

Here is another, one-year term and 50-day MA. This is a much longer time frame with an implied criterion reflecting that.

And a dramatically different time frame from the same source. Instead of a 50-day MA, we now have two hours.

And one more site, which invites predictions. I am not sure what conclusion you would reach, but the participants have many different conclusions.

The key point of this comparison is the widely differing images and viewpoints. The time frame matters, and so does added complexity.

Let’s see what Felix has to say, and also check out my own conclusion to this article.

Felix

I look for long-term themes, and I have a great one this week. I have a pick without an army: KHC. It is my lone soldier of the week, a strong company. The recent selloffs provide a good point of entry with the rebounds already underway. This should be good for another 5 points.

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

Question from Fred Barone:
Any opinion on CVI thank you

 

Felix: This is a stock I won’t be holding for a while; it has been going downhill since 2013. There hasn’t been much upside. On the other hand, it does rank in the top 25% of my universe, so it is not terrible. I would take a guess that you have been holding this for a while?

[F] Please keep your questions coming. I could use the overtime pay. And by the way, Jeff. Are we working next Thursday?

[J] Next Thursday the market is closed and we are all taking a day off to give thanks and spend time with family.

[F] I don’t have a family and I could use the overtime bonus.

 

Athena

I hope I’m not too late to the party on this one. Teck Resources Ltd (TCK) has been on a solid rise since March. We’ve had the stock price quadruple since then, which is remarkable to say the least. While I don’t expect to cash in on that kind of return in the next few weeks, there is still a tidy profit to be had here.

[J] This pick is not completely hopeless. The company has some earnings. There is plenty of fluctuation but excellent growth expectations. This might work.

[A] The market is sending a message that it will work. I listen, Jeff, and so should you!

Oscar

While I focus on sectors, sometimes ideas get as narrow as a single country ETF. My regular sports channels had a brief blurb about some guy named Abe meeting with Trump. Some of my sources suggested that I should check out the WisdomTree Japan Hedged Equity ETF (DXJ) this week. Much like Japan’s national sport, sumo wrestling, this pick is all about momentum off the bottom.

[J] So you are telling us that you have been following the visit of Japanese Prime Minister Abe? The first foreign leader to meet with President-Elect Trump?

[O] Not exactly “following.” It was on my Facebook news feed.

[J] Why did you choose the Wisdom Tree ETF, which is adjusted for currency variation?

[O] Variation?

[J] Yen for each dollar.

[O] I’m not sure, but on my last visit, dollars were welcome.

Holmes

This week I’m picking DXCM, DexCom a specialty health stock. After a sharp decline on November 1st, this stock has proceeded to consolidate and slowly climb back up from a low of 61.00. I will put in a stop at 62.50.I bought this stock at 70.96, looking for a nice rebound to low 80s or even higher. If we start to rally, I’ll be moving up my stop aggressively. My major concern is that move is based on perceived changes in medical policies from Washington, vs. improvement in the outlook of this company. I’ll be very tight on the trigger if the stock starts to drift lower day after day.

[J] Do you understand that his company has no earnings, no dividend, and no real prospects for the next two years?

 

[H] How have I been doing?

[J] Your picks have been profitable. I also like your frequent decisions to take profits and move on. You are not overstaying your welcome.

[H] That is a very honest. I like that in a human. Next you must learn to be more intuitive. Sometimes stocks rebound before the fundamentals confirm. I often spot such cases.

[J] Are you really considering policy changes from Washington?

[H] Of course not. The price and volume reflect that information!

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.

 

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).

Conclusion

 

My first job in the investment business involved a wide variety of research tasks. My boss, a clever fellow, became suspicious of conclusions from our technical analyst. He asked me to create some stock charts with the data inverted. He presented one group to our analyst, and got a verdict of bullish on all fronts. A bit later he presented the same charts, with the pattern inverted. As he suspected, those were also deemed to be bullish!

Technical analysis is interesting, but usually lacks rigorous testing. In today’s example, I do not know precisely why Felix likes KHC, but here are three ideas:

  1. The stock chart is like those I have seen before — descent from a prior high, a new base, and often an uptick.
  2. Some might see this as a “cup-and-handle” but not all such patterns qualify for Felix.]
  3. When we get a pick, it represents thousands of similar training cases, and hundreds of test cases. It is not just an idea with an argument, but a scientific conclusion.

You cannot identify a “good chart” unless you have many, many comparisons.

Stock Exchange: Is Technical Analysis Effective Post-Election?

A truly disruptive event generates surprisingly large moves – sectors, stocks, and sometimes the overall market. Methods that work well in normal times may break down under this stress. Traders and investors must ask:

  • Is my system still working?
  • Should I adjust?
  • Should I suspend operations for a time?

When trading based upon scientifically developed models, these questions are somewhat easier to answer. We have solid expectations for behavior and performance, because of extensive testing on a generous helping of out-of-sample data. Most importantly, the human managers know and understand the model inputs.

We have great respect for our group of models, but we retain human control. This week, for example, Oscar liked our solar sector. We knew something that Oscar didn’t – the likely effect of Trump policy on solar stocks. What appeared to be a buying opportunity, might be an illusion. The trade might still work, but there are other, safer choices that are nearly as good.

Technical analysts can always be tempted by confirmation bias and their knowledge of events. When using models, you very sparingly use exceptions. If you view every trade as a suggestion, you wind up doing your own trading, with your model advice used only for (biased) confirmation.

The Stock Exchange provides an expert-level debate on technical and fundamental analysis. I have placed more background at the end of the article. Comments, dissent, and specific stock questions are welcome!

This Week—Athena Loves Amgen

This week’s featured expert is Athena. Vince (our modeling guru) designed Athena to be very aggressive in finding new positions, but swift to exit those that were not working. These are not “stops” as we normally think of them. Exits are not based upon specific downside limits. Instead, there is an increased risk warning (IRW) that signals a change of behavior in how the stock is trading. The result is exceptionally good risk control both for individual positions and the overall portfolio. While we have not told the other models, Athena is Vince’s favorite.

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

Athena

I love to make a quick buck finding trends. An insider secret: There’s nothing trendier than the baseless speculation following a big election. My pick this week is AMGN, one of many biotech stocks rocketing skyward since this week’s big news. It’s still attractive at this price, but I’ll dump it in a heartbeat, maybe by Inauguration Day.

[J] You actually know about the election?

[A] Yes, but don’t tell the other models. They already resent my wisdom. I do not use fundamental information, but I am aware of it.

[J] This choice does seem logical on an earnings basis, as you can see from this chart. The stock trades at a discount and has a nice 2.7% dividend yield as well.

[A] It is nice to see that you finally agree with me on a choice. My other picks have also done well.

Felix

I look for long-term themes. Oil and gas stocks have been a very long-term holding. We are picking up and I still am adding to the sector. I am going to pick ECR as the example this week. This is a fairly small company with modest revenue but the chart reflects that of the big boys. That is a good sign and something that I like immensely.

[J] You have been early (a euphemism for “wrong” on energy and mining).

[F] I sold some miners, as I will do when necessary. The energy investments will prove out in the long run.

[J] I have suggested a ceiling on energy prices in the low 50’s, mostly due to more supply returning.

[F] That is a short-sighted, I mean short-term viewpoint. You will see.

Questions for Felix

From Seeking Alpha

 Tiki Bar Capital comments:

Great call on healthcare, Jeff! And BMRN in particular.

The biotech sector is close to retesting its lows. Biotech and pharma in general seem like the sectors that will see the biggest rallies once the smoke clears after the election.

1234gel joins in:

Ditto the BMRN call…

[F] Those were not comments for me—or for you. BMRN was an Oscar pick.

From A Dash

Phil

Comments on my two favorites- AAPL & BRK/B?

[F] AAPL is a weak buy and BRK/A as about neutral.

[J] I like AAPL a lot.

[F] This is my question section. I need more of them since I am saving up for Spring Break.

[J] It is only November…

[F] With what you are paying me for each answer, that is how long it will take for a nice trip.

Oscar

Basketball season is back in full swing, which means I’m looking for a rebound. My favorite sector this week is Diversified REITs, demonstrated here by CMO. This area was already looking up at the beginning of October, and now we’re seeing gains as a part of the broad based post-election rally. Grab the rebound, make an easy layup, and move on to the next play.

[J] I thought that Holmes was our rebound specialist.

[O] Sometimes the dog and I agree.

[J] This one has fundamental appeal as well. The dividend of 9.5% is great. The PE is 12.3, above the average level of the last nine years, 7.9. What will happen as interest rates rise? Chuck Carnevale’s excellent tools help us out on that question. This chart shows the P/E versus interest rates over the last nine years.

Holmes

This week I’m picking TSCO, Tractor Supply a specialty consumer cyclical stock. After a sharp decline in September, this stock has proceeded to consolidate and backfill making a low of 61.62 on October 28th. This is a logical place for a stop. I bought this stock a few days ago at 65.91 so it is slightly higher now. I am looking for a nice rebound to low 80s. If we start to rally, I’ll be moving up my stop aggressively. Risking $4.30 to make $15.00 is the sort of Risk/Reward scenario I like. If I’m right just half the time, I can still be a big winner.

[J] There are plenty of these stores around here. It is not just tractors. Think clothing, footwear, hunting supplies, garden, parts, and more. If they do not have it, you probably do not need it. The costal elites do not understand this.

[H] As I told you last week, you only need to track the information from technical data.

[J] You were right about BMRN.

[H] As I told you last week, and I quote “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] You were right.

[H] My YTD results are also great.

[J] It is unseemly to boast. See how you can do in the poker game!

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert.

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: 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.