Weighing the Week Ahead: A Tall Wall of Worry

The stock market continues to grind higher in the face of skepticism.  It is a familiar story.  Nearly a year ago we highlighted the “wall of worry” concept.  I wrote as follows:

Our Take

We have no illusion that every story
will turn out to be wonderful.  Our own position has varied both with
economic events and the tape.  Over the last several weeks there have
been many positive signs and we have identified many profitable sectors.

The media and the
blogosphere remain skeptical of any positive news.  This is the
definition of the Wall of Worry.  The average front page at Seeking
Alpha has a rash of featured bearish bloggers.  The links from Abnormal
Returns now include many sassy skeptics.  The comments everywhere tilt
heavily bearish.

We now know that this advice was very accurate.  It is time to revisit the concept.

Everyone Knows the Negatives

The economic worries are widely understood.  It was a focus for me in the last few days.

Having just returned from the Kauffman Foundation’s Economic Blogger’s Forum. I am inspired and invigorated.  The organizer and moving force was Tim Kane, who did a fine job in every respect.  I should also acknowledge Kauffman CEO Carl Schramm.  He had a scheduling conflict, so we only got to hear his closing remarks, but his support for this endeavor is crucial.  The conference  brought together economic  bloggers from widely differing perspectives and provided ample opportunity for interaction.  I love the format.  You had a chance for one-on-one discussions, small groups, breakout sessions, and a webcast.

I plan to write several articles drawn from my experience, but let me start with an overall perspective.  This group has plenty of worries.  The final panel was a gloomy approach to dealing with the budget deficit.  You can see the webcast here, including my friendly employment bet with Mish.  More on that later.

This conference represents a pinnacle — the best summary —  of the economic blogosphere.  What should we conclude?  Let’s take it a piece at a time.

Last Week’s Action

Here is my take on the key data from last week.  I am not trying to
be comprehensive, nor am I taking a viewpoint.  I will highlight what I
found significant, trying to be objective.

The Good

The best news of the week was the stock market action — a slow grind higher.  A number of indicators were solid — inflation reads, Fed actions, etc. — but these were all expected as I noted in last week’s forecast.

There were no striking positives in the economic data.  The modest recovery is the accepted norm, with plenty of threats.  Michael Santolli, writing in Barron’s, does a nice job of capturing the story.

Turning the page at Barron’s we find a nice article from Gene Epstein.  He explains why most of the economists who are betting their careers on their predictions have a positive outlook.

The Bad

None of last week’s data were very important.  The inflation numbers were as expected and the Fed decision and statement were also in line.  Jobless claims were down a touch, but still bad.  This was all as I predicted.

There is a nice cottage industry for researchers.  The  requirement is that you have to find a new indicator that is bearish.  Or maybe you can find a new slant on an old indicator — one that is in extreme bullish territory but off of the absolute highs.

If you want your dose of bad news, Alan Abelson is your man.  He cites a number of the regular bearish sources to provide confirmation bias for his followers.

From my perspective, I saw nothing bearish in the weekly data.  It would be nice to see jobless claims declining faster.

The Reality

I wrote about health care and the legislative prospects.  This is playing out exactly as I forecast, but many still disagree.  As I write this on Saturday night, we are facing an imminent vote.  I still expect the legislation to pass.  My viewpoint was widely contested last week, and challenged yesterday by colleagues at the Kauffman event.  We will see the outcome tomorrow.

I understand that many also disagree with the financial forecasts. Congress relies upon analysis from the nonpartisan CBO.  To check that out we need to find the best sources.  Don Marron was one of the Kauffman forum participants.  We were lucky to have someone with his background — a Georgetown prof who is  a former Director of the CBO, former Council of Economic Advisors member, and veteran of the Joint Economic Committee Staff.  I enjoyed talking with him and regard him as  a strong  “outside” source on the CBO forecasts.  He parses the methodology, the assumptions, and explains the conclusions in this nice article.  This is the basis for the Congressional decision.  Check out the entire article.  There are many nuances to measuring the savings in health expenditures.

The Week Ahead

 

This week may have a few different themes.  Housing is important to the economic recovery, so existing home sales will be important.  Data on home prices are also of interest, since this relates to consumer confidence and consumption.

In practice, this rates to be a slow week for data, with plenty of opportunity for the technical analysis types and econ-spinners to do their thing.

Our Trading Forecast

Our own indicators (see our regular ETF updates for an explanation) are now
neutral, and that was our vote in the weekly Ticker
Sense Blogger Sentiment Poll
. Here is what we see:

  • 58% (up from 27% last week) of our ETF’s have positive ratings.
    This is improving nicely.
  • The median strength is -7.5  (up slightly from -15), still
    negative, but improving.
  • 100%  of the sectors are in
    the “penalty box,” showing an extremely high level of risk and uncertainty.
  • Our Index Package has moved to neutral territory.

Investment Implications

Our investment angle still has a health care focus.  Our forecast last week played out pretty accurately.  The health care legislation is moving forward and figures to pass tomorrow.  Here is the chart of the trading market from InTrade:

Chart126891661780221687

 

I  have been accurate in predicting the outcome of the health care debate and most have disagreed.  Meanwhile, the stocks have not given us the pull back that we might expect from the passage of the legislation.  I have some health stocks in my basket, but I am still shopping.

Anyone who has been looking for an entry point has found the last few weeks to be quite frustrating.

Weighing the Week Ahead: A Decision on Health Legislation

Health care legislation has been a focal point for national debate for more than a year.  One way or another, the fate of legislation supported by President Obama will soon be decided — probably this week.  The final maneuvering will be the most important story of the week.

Sure, the Fed will meet.  We will also have some economic reports, but the health care story is one that is both less frequent and more important.

I have some comments below about the investment implications.  First, I want to answer a question from reader BK, who seeks advice on sources for health care reading.  BK is willing to do some work, but is frustrated by the black-and-white portrayals from most sources of information.

Health Care Reading List

Here at “A Dash” I avoid positions on elections and partisan issues.  I have my own viewpoints of course, including health care, but this is not my forum for opinion.  I am active in local citizen groups, and I never miss an election.  I urge everyone to think about issues and to get involved.  Meanwhile, the best investors are political agnostics.  It is possible to find a good investment thesis no matter who is in power.

Here are some sources where you can get information that is factual and unbiased.  You can augment this with strident arguments from partisans if you wish.

  • The Rand Corporation (at Rand Compare) provides both facts and comparisons, as well as news updates.
  • The Kaiser Family Foundation provides a side-by-side comparison of proposals.
  • FactCheck pulls no punches and finds fault with partisans from both sides.  I found their discussion of the President’s Health Care Summit to be much more helpful than any other news coverage.
  • CBS News had a nice piece, a few months old but still relevant, on 10 health care reform myths.  I am avoiding most regular media sources, since nearly everyone imputes bias to them all, but I thought this was a helpful piece.  Decide for yourself.
  • Consumer Reports, viewed as an authoritative voice on many topics, has a lot of material devoted to health care.  Since they evaluate health insurance companies, they have an interesting perspective.

Thanks to BK for the suggestion.  I certainly would not have done this without the question.  I will try to address a reader question each week.

Last Week’s Action

Here is my take on the key data from last week.  I am not trying to
be comprehensive, nor am I taking a viewpoint.  I will highlight what I
found significant, trying to be objective.

The Good

There were a few pieces of good news.

  • Jobs are important.  The IT market (nice jobs) is heating up.  Most ignored this, but it fits my thesis for 2010, where tech stocks take the lead as businesses catch up.
  • The latest JOLTS report from the BLS shows the highest ratio of job openings since February of 2009.  I might have been the first of the economic bloggers to highlight this relatively new release.  The permabear types pounced on it to show the terrible ratio of openings to job seekers.  That ratio is improving.  Many observers focus on the level (still bad) rather than the direction (improving).  I see it as good news.
  • Consumer spending — despite the skepticism of the bearish crowd (consumers spent-up, not pent up  est. 2002) total consumer spending is solid.  The analysis–from Gene Epstein in Barron’s?  Total payrolls are only off about -0.8% from a year ago.
  • Stocks.  Still strong, somewhat to the surprise of everyone.

The Bad

There was much to dislike last week.

  • Concurrent indicators that I like — initial jobless claims and Michigan sentiment — both showed a downtick.  I still do not see net job creation, and certainly nothing like what is needed for a solid recovery in employment.
  • A new “leading index”,  highlighted by Econbrowser and created by a group featuring excellent members, suggests that the recovery is lagging
  • The ECRI leading index ticks lower.  This one is humorous.  You can read the story at Reuters, “Weekly Leading Index Rises” or Barron’s “Weekly Leading Indicators Weaker.”  Same data, two headlines.  The ECRI index is still in solid growth levels, but less solid than before.  Astute readers can compare to the JOLTS report above.  Please submit info from any pundit who uses level for one indicator and change for the other.
  • States and local governments are in trouble — big trouble.  Everyone knew this, but the timing of state budget processes is moving this into the news.  State and local governments are generally required to maintain balanced budgets.  Even though they cheat (a lot) they are still pro-cyclical in their behavior.  There are serious questions about whether federal policy was large and long-lasting enough to offset state issues.

The Week Ahead

Everyone will fixate on the Fed for the early part of the week.  Why bother?  It is easy for people to criticize and get great exposure.  Those who hate the Fed as an institution or who get page views from pounding on Bernanke have another week to enjoy.  These are all cheap shots with little help for your investments.

I expect little in the way of fresh news from the Fed.  Everyone is trying to parse nuances in statements about exit strategies. and new appointments.  It is wasted effort.  The Fed is going to move slowly as long as there is significant risk to the economic recovery.

In the economic releases, I always watch building permits as a clue to housing.  I do not think that CPI or the various regional indexes will be market movers.

Politics and legislation will be important.  With respect to the health legislation, I expect the bill to pass.  I think that the Democrats will do enough horse trading to garner a majority in the House.  The House hates the Senate bill, but the approach will be done in a way(reconciliation) that guarantees some amendments and only requires a simple majority in the Senate.

Regular readers may recall that I have been predicting this outcome for quite some time.  The result is now upon us.

Our Trading Forecast

Our own indicators (see our regular ETF updates for an explanation) are now neutral, and that was our vote in the weekly Ticker
Sense Blogger Sentiment Poll
. Here is what we see:

  • 27% (up from 18% two weeks ago) of our ETF’s have positive ratings.
    This is weak, but improving.
  • The median strength is -15 (up slightly from -20), very
    negative, but improving.
  • 89%  (down slightly from 93%) of the sectors are in
    the “penalty box,” showing an extremely high level of risk.
  • Our Index Package has a slightly negative rating.

Investment Implications

My expectation is that the health legislation will pass.  The market reports see the outcome as in doubt, so it will be something of a surprise.  The market reaction will be negative.  Even though the CBO projects a ten-year cost savings from the bill, it is pretty obvious that most market participants disagree.

I continue to look for opportunities to buy more health stocks, including insurance companies (the current bad guys in Obama speeches) and health information technology.  This week may be the last good chance for those interested in buying these names.

Weighing the Week Ahead: The Fed Takes Center Stage

Last week's trading was an upside surprise for most, including our trading models.   The risks were evident to all, but there seemed to be a change in tone.  Our indicators are still bearish for the three-week time horizon, but it is a confusing and challenging picture.  I would not be surprised to see a mid-week shift if technical levels hold.

The Fed Surprise

In my analysis and forecast last week, I did not expect the Fed to play a major role.  We were sitting at our conference table at a meeting Thursday afternoon, CNBC on mute and TIVO on as usual.  Olympic curling was scheduled in a short time.

The financial world has renewed its interest in curling from four years ago during the Winter Olympics and the CNBC coverage.  All of a sudden, the financial punditry includes many experts on last end strategy, when to employ blocking stones,  and whether the US team needs to replace Skip John Shuster (pictured below).

John-shuster

To everyone's surprise, the Fed announced an increase in the discount rate.  The after-hours financial trading was a knee-jerk selling reaction.  In a way this was pretty silly, and typical of what can happen in the thin, late afternoon market.  Actually, in a strange way, it made sense.  News breaks.  Is it positive or negative.  This was certainly not positive.  There is an instant reaction to sell.

To my surprise, the confusion lasted into the next day.  There were many stories about what happens at the start of a Fed tightening cycle.  Wow!  There are two things wrong with that analysis:

  1. This was not tightening.  It was a technical move intended to restore the differential between the discount rate and the fed funds rate.
  2. Reducing policy accommodation and tightening rates are different — very different, as I showed in this article.

In response to the financial crisis the Fed has employed a wide variety of unusual measures.  As economic conditions improve, these measure will be reduced and withdrawn.

Those who can monitor the Fed accurately, dispassionately, and without bias will be the best placed to evaluate these consequences.  Since this requirement excludes 95% of the investing punditry, it offers an opportunity to the thoughtful and informed investor.

Or you can use the same skill you have in following curling to follow the Fed.  The biggest mistake would be the mis-application of the old saw, "Don't Fight the Fed."

Last Week's Action

Let's start with a look at
the key data from last week.  As usual, I am not trying to be
comprehensive, nor am I taking a viewpoint.  I will highlight what I
found significant.

The Good

Earnings season is finishing up on a very strong note.  Barron's reported the facts while also emphasizing the bearish interpretation:

Nearly 68% of companies reported fourth-quarter profits that beat
estimates, while 71% topped revenue targets. Companies raising
forecasts, as
Deere
(DE) and Whole
Foods
(WFMI) did last week, outpaced those cutting by
2-to-1. Yet investors are more concerned about how profits will hold up
as interest rates and taxes inevitably rise.

Bespoke Investment Group is more balanced in the earnings assessment.  They note that bearish pundits have dismissed strong earnings in recent quarters as the result of cost-cutting.  This quarter was different, with an exceptional revenue "beat rate."  BIG asks, "Does this put the "strong bottom line, but weak top line" bearish
argument to rest?"  Here is their chart, but go the article for more of their great graphics:

Revbeatrate219

The CPI news showed a decline in the core rate, the indicator most relevant to Fed policy.  Policy will remain focused on the threat of economic weakness, not inflation.

Housing starts were OK as were permits, two of the indicators we cited last week.  Industrial production was a bit better than expected.

There was plenty of discussion about the one-year anniversary of the stimulus package, and the effects so far.  This is a complex story in a highly-charged political debate.  I'll take a closer look soon.

The
Bad.
 

The continuing jobless claims were weak, despite weather that many thought would impede new claimants.  The inputs for our payroll employment model are also quite weak.  In addition, some believe that the weather will reduce reported jobs for February, since the survey week included the worst of the weather.

The other bad news came from surprising sources.  Two different studies emphasized the continuing rate of mortgage defaults and the resulting increase in "shadow inventory."  The definition and analysis of shadow inventory remains murky, and no one discusses shadow demand.  The analysis of the housing market would benefit from the involvement of some real economists with no economic or personal agenda.

The situation in Greece has not improved nor has it gotten worse.  The stock market continues to trade higher when the dollar is weaker.

The Week Ahead

Next week will have a political focus.  The new jobs bill is up for a Senate vote on Monday and prospects are not good.

Fed Chair Bernanke will testify on Wednesday and Thursday in the semi-annual "Humphrey-Hawkins" testimony.  I doubt that there is anything new to say, but there will be some tough questions, especially from Ron Paul in the House and Jim Bunning in the Senate.  Any discussion of exit strategy is unlikely to have a bullish result.

There will be a health care "bipartisan" meeting on Thursday.  I am not optimistic about this either.

The economic news includes plenty of information on housing:  Case-Shiller pricing data on Tuesday, FHFA data on Thursday, as well as new home sales on Friday.  Housing is crucial right now, so all of these stories will be important.

Thursday's jobless claims and Friday's Chicago PMI also have the potential to move the markets.

To summarize, it is an interesting week with plenty of news on tap.  It is difficult to predict, especially when the key indexes are all near key technical levels.

Our Trading Forecast

Our
own indicators (see our regular ETF updates for an explanation) are still
bearish, and that was once again our vote in the weekly Ticker
Sense Blogger Sentiment Poll
. Here is what we see:

  • Only 11% (down from 67% three weeks ago) of our ETF's have positive
    ratings.  This is extremely weak.
  • The median strength is -27 (down from -22 last week), very negative.
  • 95%  (up from 35% three weeks ago) of the sectors are in the "penalty
    box,"
    showing an extremely high level of risk.
  • Our Index Package has a negative rating.  We own SH, PSQ, and DOG, the
    inverse ETF's for the S&P 500, the NASDAQ 100, and the DJIA.

A Final Insight

I noted in my preview for this year that I would be watching for a chance to buy health care names.  Some of my choices have already caught upgrades and moved nicely.  This week's health care debate will provide one more chance for a dip in some names.  I am watching the service providers, recently under some pressure.

Weighing the Week Ahead: Are You Scared Yet?

If you find the current market action frightening, you are not alone.  There is a bull market in disaster predictions, with a chorus of pundits predicting “another 2008.”  Sentiment indicators show increasing fear.  Improvement in corporate earnings is seen as more evidence that something is wrong.  After all, a market that cannot rally on good news is showing weakness.

The chart of the S&P 500 from the last year makes the case for a market that moved too far, too fast.  Some see a new bearish leg — not a correction but a major move to the old lows.

Sp500 1 year

There is another perspective.  Conditions are much different from the time of last March’s low and also from the October, 2008, post Lehman period.  A decline of ten percent or so after a big move is to be expected.  Let us look at the S&P 500 with a two-year time frame.

Sp500 2 years

The indicators in the two charts are the same, but the context is dramatically different.  The fear from 2008 is ever with us.  Patrick J. O’Hare, writing Briefing.com’s regular feature, The Big Picture, summarizes it this way:

After the credit crisis of 2008/2009, which clearly presented a
systemic risk
few portfolios were positioned to deal with, there will be
hyper-sensitivity to
staying out in front of the next systemic risk.

To this point, consider for a moment how often the word “bubble” is
tossed
out to explain any uninterrupted rise in asset prices.  Before the
technology stock crash of 2000, the word “bubble”
was rarely invoked in the marketplace, and when it was, it was typically
used in
association with an exposition on the South Sea Bubble of the early-18th
century.

What there is today in the stock market is a bubble in the use of the
word
bubble.

That is a clever and accurate summary.  He might have added that black swans are not found in herds.

Last Week’s Action

Let’s start with a look at the key data from last week.  As usual, I am not trying to be comprehensive, nor am I taking a viewpoint.  I will highlight what I found significant.

The Good

The earnings news is petering out for this season, but the general pattern of strength continues.  Positive guidance is beating negative guidance by the widest margin in nearly a decade, according to Bespoke Investment Group.  (Click through for the fine graphics).  This is unusually good news, and eventually it will matter.

Some celebrated the weekly decline in initial claims.  This reverses a couple of weeks of poor data.  I disagree.  The weekly series is just too noisy.  Next week’s data will be distorted by weather, as will next month’s payroll employment data.  (The payroll survey is done during the week including the 12th of the month).

The
Bad.

The trade balance was a bit worse than expected and inventories a bit lower.  The revisions will make the 4th quarter GDP increase lower.  The revisions to the initial estimate of GDP come as we get more data.  The news is not good, but neither is it some big conspiracy as some maintain.

Regular readers know that I find the University of Michigan sentiment indicator to be important and helpful.  This month’s reading was lower than expected, and certainly not at the bullish levels of the ISM.  This is a helpful indicator for employment and job creation, so the report was bad news.

The bond auctions were weak, with long-term rates moving higher.  The ten-year has moved to about 3.7% and corporate spreads have also widened.  This is bad for stocks, since corporate bonds are a viable asset allocation alternative.

The news about Greece is certainly a negative.  Regardless of the outcome, investors need to worry about the extent of sovereign debt problems in Europe and what it means for the U.S.

Briefly put, there was plenty of negative news.

The Ugly.  Volatility!  When the market makes major moves lower on little news, and seems dependent on Germany’s attitude toward Greece —– well,  that is a problem.

Much of this translated into a stronger dollar.  While I have demonstrated that a strong dollar is just fine for stocks in the long run, the current relationship is a strong negative correlation.  The hot money sees a pattern like this and it becomes a self-fulfilling prophecy — at least until it quits working.

The Week Ahead

My focus for next week is on Wednesday.  Building permits are a good leading indicator of construction activity.  (These cost money and reflect actual plans).  Industrial production is also important.

I do not find the “leading” indicators to be very helpful nor am I concerned about the PPI and CPI right now.  I do not expect any surprises from the Fed minutes.

The European news and the dollar will continue to be important.

Our Trading Forecast

Our
own indicators (see our regular ETF updates for an explanation) continue as bearish, and that was our vote in the weekly Ticker
Sense Blogger Sentiment Poll
. Here is what we see:

  • Only 13% (down from 67% two weeks ago) of our ETF’s have positive ratings.  This is extremely weak.
  • The median strength is -22 (down from -15 last week), very negative.
  • 87%  (up from 35% two weeks ago) of the sectors are in the “penalty box,”
    showing much higher risk than
    in recent weeks.
  • Our Index Package has a negative rating.  We own SH and DOG, the
    inverse ETF’s for the S&P 500 and the DJIA.

A Helpful Insight

This is a good time for investors to think about long-term needs and goals.  There are some simple solutions for those who are afraid of a repeat of 2008.

I had some reader questions after last week’s update, wondering whether asset allocation models had triggered.  Mine have not.  The “correction” is still relatively small when compared to the recent gains.

We watch the asset allocation carefully for clients, and the indicators are closer to a conservative stance, but not there yet and certainly not short.

The average investor can try to do this at home.  There are plenty of ideas online.  You need to find a good method, continually update your indicators, avoid emotion, and execute the trades in a timely fashion.  Few investors can do this, even when trying to follow a “lazy” portfolio.   That is one reason why they trail the market by 4 percent a year while top advisors beat the market by solid margins.

Unless you are exceptional on these fronts, you might look for a good financial advisor.  If you do, insist on someone who has personal service —  who understands your specific needs, risk tolerance and requirements.  If the fees were low enough, and the stock picks were good enough, this would be better than you could do on your own.  Over many years, it might be the difference between a comfortable retirement and a few more years of work.

Whatever you do, you should still pay careful attention to your investments.  We no longer live in a “buy and hold” world.

I’ll try to answer a reader question each week in this article.

Keep the questions coming!

The Week Ahead: Fasten Your Seat Belt!

Professional investment managers never get far from the market.  When I was recovering from surgery a few years ago, I asked the nurse for an extra pillow.  Since I was supposed to be resting, she was suspicious.  "Why?"  My explanation — that I couldn't see the tape — fell on deaf ears.  In fact, she turned off CNBC.

Nearly everyone uses the weekend for some extra reading and planning.  Trading is easier when you have thought about possibilities in advance.  In this new series I am going to write down a few weekend thoughts.  Essentially, these are my own notes.  It is not a complete market commentary.  There are plenty of those already.  I am going to summarize a few points from the prior week.  I will highlight what I am watching for in the coming week.  I will often highlight some research that might otherwise get missed.  Finally, I will present our own trading indicators from our sector model.

I am not going to make a complete argument for each conclusion, as I usually do.  Regular readers will generally understand the reasons from past articles.  If there are interesting questions or comments, I will do a full article on the topic later.

This weekly piece is intended to be brief.  I will try to focus on the things where I hope to add value.  Especially while I am developing this concept, I invite comment and suggestions.

Last Week's Surprises

I liked the take from Neal Lipshultz, Unlikely Events Deliver Hellish Week For Stocks.  While many have been forecasting a market correction for months, no one guessed the unlikely stew of challenges.

The Good.  Corporate earnings continue to surprise positively.  For those who are skeptics about forward earnings (also solid) you cannot say that expectations are inflated when the companies keep beating.

Brown's victory in Massachusetts means that the Dems will have to do some horse-trading on taxes to avoid a filibuster.  This is market-friendly, although few seemed to notice.

The Bad.  Initial jobless claims ticked higher, and I am not buying the seasonality and short week arguments.  We need to see improvement here.  I did not mind the new home sales as much, since I like building permits as a leading indicator.

The Ugly.  President Obama's comments on regulation did not have the proper tone or timing.  The market punditry has a political agenda, leading to over-reactions.  Normally a President gets four years.  The voting public has a clear track record:  A poor economy and a shooting war are both very bad.  The electorate does not give good grades for effort, just for results.  Coakley was the first victim.  Fed Chair Bernanke could be the second.

The Week Ahead

The calendar is full.  Here is what I am watching:

  • Economic data.  I'm watching new home sales (difficult to interpret with the changing pattern of incentives), initial claims, and the Chicago PMI on Friday.
  • Bernanke.  The Senate will probably have a vote on his confirmation next week.  Voting against him is an easy way for a Senator to demonstrate that he does not like the Fed or money creation, does not like "bailouts", does not like past Fed policy, or is generally unhappy with the world.  Dumping Bernanke would be foolish and send a terrible message.  Fans of Austrian economics are not going to get a better candidate, so why bother?  I expect confirmation after some posturing all around.
  • Obama's State of the Union.  A week ago we might have expected a different speech.  Now there are some genuine questions.  Will he push health care?  Will he attack Wall Street?  Will he emphasize jobs and the economy?  I am confident that he will have a good delivery, but I am not confident that his team will come up with the right message.  Given the circumstances, this is more important than usual.
  • The Fed Meeting.  This is almost an afterthought.  There is a lot of misplaced attention on the Fed exit strategy.  There will not be any changes until the economy shows further improvement.

Some Helpful Insight

I try to track information that will be helpful in assessing the big picture.  The problem with these "big picture" issues is that they often have little relevance in the investment time frame.  They are basically unsolvable problems within any normal trading horizon.  One of the current topics is unemployment and how long it will take to achieve "normal" levels.

The research team at the Atlanta Fed estimates that it will take monthly job growth of 121K just to keep unemployment rates at the 10% level.  This includes an estimate for discouraged workers returning to the work force as well as new entrants.  It is a tall order, and a number to keep in mind.

Our Trading Forecast

Plenty of experts see last week's market decline as the start of something big.  Charles Kirk has his finger on the trigger (become a member at a modest price for an instant payoff):

Bottom line – we have a market that is in a major pullback and is now
threatening to move into a large-scale correction aversion phase
.

Bespoke Investment Group shows a long-term trend for a rebound after selling like this week's although recent results were not so good.

Our own indicators (see our regular ETF updates for an explanation) remain bullish, and that was our vote in the Ticker Sense Blogger Sentiment Poll.   We are now using our universe of about 60 highly-liquid ETF's with reduced correlation among individual entries.  Here is what we see:

  • 89% of our ETF's have positive ratings.  This is very strong.
  • The median strength is 23, a modest positive.
  • 44% of the sectors are in the "penalty box," showing lower risk than in recent weeks.
  • Our Index Package has a positive rating, and the QQQQ's are a buy.

I'll try to develop these indicators with more context in coming weeks.

To summarize, we are using the selling as an opportunity.  The model will give a "sell signal" at some point, but it is still within normal ranges, given the time and extent of the move.

A Final Thought

I tried to explain last week why long-term traders should use volatility to their advantage.  Instead of avoiding stocks where politics has caused selling, it is better to recognize when the speeches will have little effect and grab the opportunity.  I wish I had not used the highly-charged Goldman Sachs as my example, since it detracted from the main point.