Stock Exchange – Four Thumbs Up for Nvidia!

Readers have often asked why there is so much disagreement among our models. The essential reason is simple. Each has a different method, and they rarely align.

This week provides a rare opportunity to illustrate this, while also showing the process for each model.

That would already make it one of our most interesting posts in the series, but we also have another great guest expert. Cody Willard, a famous TV anchor and commentator, writer for many top-line sites, former hedge fund manager, and entrepreneur provides our guest commentary. You can follow my friend Cody at tradingwithcody.com. If you mention that you were referred from the Stock Exchange, you can get a valuable free month to look at his ideas. I have followed him for many years, partly because his style challenges my own. It is provocative, interesting, and loaded with ideas that you do not find if sticking strictly to a value approach. His themes highlight a vision of the future.

Review

Our last Stock Exchange took up the difficult question of back-testing and how you can use it. There were more comments on the Seeking Alpha publication of the post, and they were very good. If you missed the original article, please take a look, including the comments.

Let’s turn to this week’s ideas.

This Week— Four Different Takes on Nvidia (NVDA)

It is not quite as rare as an eclipse, but it is certainly unusual to get consensus among our models on a single choice. In addition, we have agreement from Cody. Here are the differing perspectives:

Felix: As the long-term investor, I look for a strong uptrend. This must have persistence over time – more than just a short-term momentum play. Here is what I see.

Athena: I love relative strength, but my time frame is much shorter than Felix’s. I also have less tolerance for losses. Here is what I see.

The stock easily meets my criteria.

RoadRunner: The short-term uptrend is just a start for me. I need both an upward channel and an attractive entry point within the channel. Here is what I see.

Jeff: The agreement from three of you is fascinating. This is a stock that value investors would not care for. I typically use a ten-year history from F.A.S.T. Graphs to capture an entire business cycle. Here is what that shows.

The over-valuation looks scary! Sometimes a different time frame will provide a more useful picture. Let’s shorten it up a bit.

It still seems a bit high, but the strong growth in earnings and typical P/E make it more reasonable.

Cody: I am a long-time holder of NVDA, so I am not surprised that your models have joined in. Neither the technical nor the fundamental charts can tell the real story. This is a platform play on both self-driving cars and deep learning. These are the fastest-growing and most revolutionary applications. Both are chip-intensive. If either of these markets hits, NVDA will have a market cap of in the hundreds of billions.

The intermediate-term weakness reflects the company’s decision to commit to long-term opportunities. The pull back in the short-term has cleared out some of the very short-term momentum players, so it is an interesting entry point. A near-term catalyst could be next week’s earnings report. I see downside risk of about 5%, and the potential to break the upside of the channel.

Athena: Thanks for the encouragement, Cody. Jeff is always so fussy about those value charts.

RR: Beep beep!!

Felix: I want to ask Cody about one of my longer-term holdings, Wynn Resorts (WYNN). It has been one of my holdings since the end of March. So far, so good. While the month started off slow, a significant pop in the last two weeks has already made this a worthwhile investment. As always, I’m looking for a long-term holding here. I don’t plan to cash out immediately, like Holmes or Road Runner might do.

Cody: I really don’t like Wynn. There are many ways to trade and invest profitably. There is no need to profit from something that is an addiction for so many. My second objection is that investors are at the mercy of regulators, especially the Chinese. If they crack down on gambling in Macau, Wynn will suffer.

F: The chart has looked good, but I am wondering whether to hold ’em or ‘fold em.

C: Did you learn that from Oscar?

Oscar: Felix makes his own poker decisions, and he is more likely to listen to Chopin than Willie Nelson. My sector choices include some interesting ideas. My top ranking is with consumer cyclicals. This includes retail, like the Gap (GPS).

What does Cody think about my choice here – a profitable one so far?

C: Every bricks-and-mortar retailer is feeling the Amazon effect. I don’t care for any of them on a long-term basis.

O: What about for a few weeks?

C: That is anyone’s guess, but beware of overstaying your welcome. BTW, Jeff told me that both you and Felix have regular stock and sector ratings. Any updates?

F and O: Yes, and we welcome more reader requests. Jeff gives us an incentive payment when we get more followers.

Holmes: Just a minute! Can I get a bark in edgewise? I have some interesting new choices. Look at W.W. Grainger (GWW). This could be a real steal for us dip-buyers.

C: I can see why the rest of your group does not like this chart!

Jeff: Thanks for joining in with some great comments and ideas, Cody. Readers should try Trading with Cody (using our referral) to learn more of your ideas. I hope you will return soon.

C: It was fun. You have some colorful characters here, and I like the range of styles.

Conclusion

This post added something new to our series: Multiple ideas about the same stock. This is a rare opportunity, since the model approaches are so different. Agreement is unusual. The time frame is so important regardless of your analytic approach.

Great trading ideas are not always great investments — and vice versa!

Cody Willard’s ideas added a valuable perspective. We frequently contrast fundamentals based upon value with the message from the charts.

Cody is a visionary. He looks ahead to discover emerging trends. These ideas do not always show up in the charts, and certainly not in the earnings history. It is a valuable perspective.

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 usually 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. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. 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: Can Employment Continue as the Engine of the Economy?

Market data has remained mixed.  The weak Q1 GDP is not consistent with some of the most important measures.  This week I expect pundits to be asking:

Will the jobs report signal continued strength?

Personal Note

In response to reader interest I am trying to do an abbreviated WTWA when I am away.  I will include the update of indicators and a few ideas about what I am watching.  Some noted that this would also provide a forum for some of our “regulars” to congregate.

Theme Recap

In my last WTWA I predicted a week of rebuilding the wall of worry.  Some problems have been avoided, even if not completely solved.  There are always new ones, and we did get some of that discussion last week.

The Story in One Chart

I always start my personal review of the week by looking at a chart of market performance for the week.  Once again, there was little change for the week.

Whatever the news, the net market effect was (once again) very small.

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

The best news is the strength of the earnings rebound. This is true both for year-over-year results and forward expectations. (Brian Gilmartin).

While the government shutdown deadline was merely extended for a week, I am encouraged by the handling of this issue.  The market hated this uncertainty on the past.

The Bad

The soft GDP numbers and uptick in initial jobless claims (not the time reflected in Friday’s payroll report) were the worst news.

The Ugly

Still Korea.

What to Watch For

Everyone wants to evaluate the Trump agenda, especially reflecting on the first 100 days.  I do not expect movement on any of the big issues without some participation by Democrats.

The key economic reports are ISM, the ADP private employment, and the official employment report.  It is a big week for data.

While there is no change expected from the FOMC meeting (and no press conference), everyone will be watching for hints on the pace of rate hikes.

 

Quant Corner

We follow some regular featured sources and the best other quant news from the 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.

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.

Doug Short: The World Markets Weekend Update (and much more).  His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating.  The latest update now includes the employment data.

 

Final Thoughts

 

Here is an update on my “Trump Matrix.”  Last week’s timber tariff decision shows why it is important to track what the administration can easily accomplish versus what requires cooperation with other governments or Congress.

Stock Exchange: Finding Trading Ideas in a Low Volatility Market

Ted Williams was a terrific ball player, but he had one tactic that many found…questionable. He almost never swung at the first pitch.

Many short term traders and individual investors could take a lesson. The market has been dragging sideways for weeks. Volatility is low. There’s a great temptation to force in a few trades. It can be difficult to resist.

As we often discuss, successful investors have a system – and they stick to it. That is as true for periods of low volatility as it is for any other market phenomena. Ben Carlson covered this topic recently, calling it “the hardest question in portfolio management.” He opens with a quote by Jim O’Shaughnessy:

“If you don’t have the discipline to stick with your underlying strategy particularly when it’s not going in your favor, it’s nothing. It’s data on a page.”

If you want to match the Splendid Splinter,  you must take what the market is offering. Wait for the right pitch.

This week, we’re joined by Chuck Carnevale himself. Chuck is one of our favorite sources of market wisdom and stock ideas, with a heavy focus on long-term earnings trends, cash flow, and balance sheets.

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

Last week we introduced our proprietary indicator, the market health index (MHI). This is a specialized combination of breadth and strength in our own trading universe. The index remains strong. For contrast, we are looking for alternative technical measures. What is your own favorite indicator?

 

Let’s turn to this week’s ideas.

This Week—Finding Trading Ideas in a Low Volatility Market

Holmes

Holmes: Proofpoint Price (PFPT) is my pick of the week. The price on this one has been shifting sideways for months, which creates an attractive buying opportunity.

PFPT pricing is down near the 200 day moving average, and the stock 12% off its all time highs. I’m confident we could see significant gains here over the short term.

Chuck: As a fundamental long-term oriented investor, I like good businesses.  Proofpoint is a young mid-cap company with a lot of debt and a weak earnings record.  But operating cash flows have historically been growing at enormous rates.  Based on cash flow growth, this company looks inexpensive for a high-growth stock. Free cash flow growth has been even better and the company also looks attractively valued based on this metric.

Holmes: I don’t know (or care) much about the mechanics of the business, but all that sure sounds encouraging! Jeff is usually harsher on us.

Chuck: Let’s not get ahead of ourselves. It would be hard to call this a prudent long-term investment.

Holmes: That’s fine by me. I’m only looking at the next few weeks.

Chuck: Well, at least you’re sticking with your method.

Holmes: It’s been working well for me so far.

Felix

I’m buying into a long-term position in Sprint (S). Much like last week’s pick, this is another one where the stock is up near its all-time highs. For that reason, I understand I might be criticized for jumping in here. It’s not my ideal situation; but for a long-term investor, this is what opportunity looks like right now. Let’s check the chart:

The trend lines on the 50 and 200 day moving averages  have been steadily rising for almost a year now. I certainly don’t expect the price to triple again anytime soon, but from my perspective this looks like a winner.

Chuck: Sprint reminds me of the old adage “price is what you pay – value is what you get.”  To me the price is high – but the value low.

Felix: Ouch. Isn’t there anything here you like?

Chuck: Not so much. As Kenny Rogers so aptly put it “You gotta know when to hold ’em, know when to fold ’em, know when to walk away, know when to run.”  As a fundamental value investor I believe that the “dealin’s done” on this one.

Oscar

Ted Williams is one of my favorites! I’ll help clarify your broader point: he always watched the first pitch, but he had a good reason for doing it. He wanted the most information he could get about a pitcher’s performance on a given day.

Here’s where the analogy breaks down. Once you’ve clicked through an order on your Trader Work Station, you’ve probably got the mechanics down. Naturally, I agree with the idea of waiting for the right pitch.

On to business, my pick this week is the Software Cloud and Computing sector. First Trust has an ETF for this, which captures the kind of growth and performance I expect.

For what people are calling a “sideways” market, this sector has been a clear outlier. These stocks are growing faster in 2017 than they did in 2016, and they’re doing it without a significant bump in November.

Chuck: Trying to find the best investments in cloud computing is a cloudy endeavor (pun intended).  You have pure growth stocks such as Amazon, Salesforce.com and Google.  In contrast you have stalwarts such as Microsoft, Oracle and IBM.

Oscar: That makes sense to me. How would you break these down?

Chuck: The trick here for fundamental investors is valuation.  IBM and Oracle are reasonable; Microsoft has gotten very pricey as has salesforce.com and Google.  Amazon has scant earnings but generates prodigious levels of cash flow.  To me, it’s tough to find a consistent investment theme in this sector.

Oscar: Point well taken. I have my own special mix of this sector, so I’m reasonably sure I can hit those value picks.

RoadRunner

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

I like Incyte (INCY), but only for the next 10-20 days. The pattern of growth is very attractive to me here. I can handle a brief lull if it’s capped off with a nice spike, and that’s exactly what we’re seeing here.

It may be a bit optimistic, but I’m anticipating that this most recent bump will bring us back to the $150 range.

Chuck: There are no fundamentals supporting this biotech company at all.  This is purely a hope and a dream speculation.  Maybe some of their pipeline will eventually bear fruit.  Nevertheless, the company has suffered losses for years but did begin earning a little money since 2015.

Road Runner: What if I’m approaching this like a short term trader? I might only be holding onto this position a few days.

Chuck: Earnings growth could accelerate in future years but not enough to support current levels.  This is a pure momentum play, a.k.a. a musical chairs stock.  Therefore, you better be sure to have a chair if and when the music stops.

Road Runner: Tough but fair.

Athena

Micron Technology (MU) is on a roll. The mid-march pop in price leads me to believe more short term gains could be significant. Is the price high? Sure. That’s my method, and I’m sticking to it.

Chuck: This stock is way too cyclical for my taste.  However, this might make it a short-term trader’s dream stock.

Athena: That’s the idea.

Chuck: Earnings go from losses to huge rates of change of earnings growth and stock prices tend to react over the short run.  I would consider this the classic sardine company that works like this.  I buy a can of sardines for $.50 and sell it to Oscar for $1.  He in turn sells it to Jeff who is hungry for $1.50.  Jeff opens the sardines and finds them rotten.  He complains to Oscar that he sold him rotten sardines.  Oscar then informs Jeff that he doesn’t understand sardines.  There are 2 kinds of sardines, Oscar says, there are eaten sardines and there are traden sardines.  I sold you traden sardines.

Athena: I think I just lost my appetite.

Conclusion

Despite the prevailing mood about the current market, there are plenty of opportunities for goal-oriented investors. The key, again, is to take what the market is giving you. Investors with a robust method should stick to it, even if it’s a bit harder to find new positions. Investors without a robust method probably shouldn’t be making any trades at all.

Chuck’s approach is value based, and that makes his recommendations extraordinarily consistent. Reading between the lines a bit, it’s clear that there’s some upside even in the companies he wouldn’t consider for his portfolio. What’s right for Felix and Oscar might not be a good fit for Holmes. There’s nothing wrong with that. After all, every batter has their own favorite pitch.

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: Trading in a Time of High, News-Driven Risk

Many seem convinced that market risk is elevated – perhaps at an all-time high. I know this from contacts on my vacation, where I see many high-net worth people, messages from my clients (an intelligent and cool-headed lot), and even some objective measures of angst. Whether it is uncertainty about the new President and policy, revisiting issues about valuation, or concern about foreign challenges – it is a popular time to be worried.

Charlie Bilello of Pension Partners looks at SKEW. While VIX has not generated warning levels, SKEW suggests an all-time high in crash risk.

 

Is this really important for trading? It is an excellent question for our experts.

Review

Our last Stock Exchange considered the role of valuation in trading. Deep value expert Robert Marcin provided some great observations. I thank him, and urge you to follow his regular observations at Scutify.

 

This Week—How Traders Can Cope with News-Driven Risk

We have a new participant this week – Road Runner. This beeping bird has a very specialized approach, but one that should be a favorite with traders. RR looks for stocks in an uptrend, identifies the trading range within that trend, and buys at the bottom. His holding period is only two weeks.

After extensive testing, we have invited him to join the group.

Road Runner

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

R: Look at Netflix (NFLX).

This sustained price growth provides a solid working range. I might look to buy around the 50-day moving average price, and sell just over $145. It’s not the world’s biggest gain, but it’s a great fit for my trading style.

J: Are you worried about a market crash?

RR: My holding period is only ten business days. Major selling takes me out of everything. My method requires finding some attractive stocks with uptrends.

Athena

My methods do not show any new choices. I look for short-term momentum picks with a solid base. The current market does not fit my style.

J: Is this a reflection of very high risk?

A: Not necessarily. The market has been pretty flat. It is less likely to find new short-term momentum opportunities.

J: Are you doing anything about headline risk and your current positions?

A: Only my normal measures. I will take note of alarming moves in the wrong direction, including both price and volume. Even a Goddess cannot anticipate what tomorrow’s tweet might bring. I am reactive, not anticipatory.

Felix

I will once again emphasize answers to reader questions. Here is the most recent list.

J: I did not see the list last week. What happened?

F: A small omission. Sorry.

J: When I am on vacation, this group is supposed to conduct business as usual. No dallying.

F: We were all working.

J: Do you have any new recommendations for us this week.

F: No, but that is no surprise given the market conditions.

J: OK, but please try to do better next week.

F: I have a question. Does adding the bird to the team mean that the rest of us will earn less?

J: Road Runner will have to earn his birdseed. It has no effect on you if you maintain your current performance.

 

 

 

 

 

 

 

 

Oscar

It’s no secret that the semiconductor sector (SOXX) is on a tear. Just look at this chart. The price looks like it’s ready to soar over the ivy at Wrigley field.

Usually it’s Athena who winds up taking flak for buying on a high. My approach is similar in that I don’t intend to hold onto this sector for very long. All I’m looking for is another 2-4 weeks of sustained growth, which seems likely at this point. In my program, I’m holding individual stocks within this sector. That opens opportunities for additional pops that might register as a small blip on the group as a whole.

J: Are you doing anything special about risk?

O: You mean my final round picks of Kansas and North Carolina?

J: No! Not your March Madness bracket. I mean the risk of a market crash.

O: There is no such indication in the data. If the situation changes, I will close positions and move on.

I also have my regular answers to reader questions about sectors.

J: Readers seem to be wondering about one of your favorite groups, chip stocks.

O: They are on the right track.

J: I see that you like regional banks (KRE), which had a tough week.

O: The sector is still strong.

J: The news emphasized lower used car prices. The reaction seemed overdone.

 

 

 

 

 

Holmes

CF Industries Holdings (CF) is my rebound pick of the week.

We’re well off of the all-time highs, with a flat 200 day moving average and a 50-day moving average that’s starting to trend downward. In my mind, that opens a big opportunity. If the stock climbs to its mid-February prices, I could exit this position with an increase of more than 15%.

J: Are you worried about a market crash?

H: No. My high-level indicators are quiet. Smaller moves are great for my dip-buying strategy.

H: One more thing – is that beeping bird really part of the group?

J: Yes. Some questioned the addition of a dog, so don’t complain. RR will be the last addition.

 

Conclusion

Markets always have news-driven risk. If you refuse to trade because of scary headlines, you should look for a new business.

A widespread perception of risk need not be accurate. And don’t be fooled by headlines calling it the “smart money.” Returning to Charlie Bilello’s fine analysis of SKEW, he demonstrates that it is not really a good predictor of large downside risk.

His powerful conclusion emphasizes that an indicator based upon perception may not reflect reality. This may seem obvious, but I doubt that many are aware of the underlying elements of SKEW.

Here are some key takeaways about news-driven risk and trading:

  1. Headline risk may be exaggerated – perhaps by a lot.
  2. Do not abandon your strategy and miss opportunities without confirming danger for your specific method.
  3. For some trading approaches, perceived risk may represent opportunity.
  4. If you are trading momentum, you should have a solid exit strategy. This is more than just a mechanical stop.

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 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!

Weighing the Week Ahead: Will a More Aggressive Fed Derail the Stock Rally?

The economic calendar is light until the Friday employment report. Most of the punditry are still digesting the more aggressive talk in the recent speeches from Fed participants. With many observers expecting a correction and looking for a catalyst, pundits will be asking:

Will a more aggressive Fed derail the rally in stocks?

Personal Notes

I have a vacation coming in a couple of weeks. I will not write WTWA next weekend, and possibly not the weekend after that. I will still be following the markets and email. I will join in if it seems needed. The Stock Exchange group is supposed to keep working.

Last Week

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

Theme Recap

In my last WTWA I predicted a discussion about whether stock prices had lost touch with reality. That was a good guess. There was plenty of talk about market valuation. Those bearish also questioned the lack of specifics in the Presidential Address to Congress – which had a greater immediate effect that the annual Buffett letter.

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 0.67%. We can also see the gap opening after the Presidential Address to Congress.

The rally story is even clearer in this chart, when begins before the election.

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, including the size and frequency of drawdowns.

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

  • Durable goods orders increased 1.8% after last month’s decline. Most of the increase was from the volatile transportation sector, but it was still a welcome boost.
  • Earnings news was positive. Brian Gilmartin emphasizes the favorable trend in estimate revisions.FactSet reports that the earnings and revenue beat rates are slightly lower, but outlook is stronger. Here is an interesting chart of surprises by sector.

  • Investor sentiment turned more bearish. The AAII reports that sentiment is within historic ranges, but off recent highs. This is unusual given past behavior in a rising market. I score it as “good” since most regard it as a contrary indicator.
  • Mortgage delinquency rate falls below 1%, the lowest since June, 2008. (Calculated Risk).
  • ISM Non-Manufacturing rose to 57.6 (from 56.5). The employment index also moved higher. February was stronger than January.
  • ISM manufacturing increased to 57.7 beating expectations and showing a solid increase over last month’s 56.1. The Chicago regional survey was also very strong.
  • Rail traffic in February was 4.2% higher than a year ago. Steven Hansen takes the look at the data we have come to expect, including various moving averages and trends. Read the whole post, but this chart captures some key points, especially the improvement over the last two years.

  • Consumer confidence spiked to 114.8, a post-recession high. Briefing.com covers this series.

  • Initial jobless claims rose slightly on the week, but dropped to the lowest level since 1973 on the widely-followed four-week moving average. (Calculated Risk).
  • President Trump’s speech was very well-received. Most preview articles mistakenly emphasized the need for specifics. Commentators right after the speech did the same. My own preview did not provide advice on what to go out and trade right after the speech. Instead, I drew upon experience and the current policy environment to highlight the key element – the potential for compromise. This chart shows the dramatic shift in this Trump presentation, more like SOTU speeches than nearly anything else he has done. (The Upshot)

 

The Bad

  • Construction spending fell 1%.
  • Money supply is drifting to the neutral range – possibly even tilting negative. (New Deal Democrat). Despite complaints about Fed policy, this is a possible economic drag.
  • Pending home sales fell 2.8% and December was revised lower.
  • Debt Limit will be reached in mid-March. Even the extraordinary efforts will be exhausted in September or October. Will this play out any better with a GOP President and Congress? Douglas A. McIntyre has a good story on this issue.

The Ugly

My concern about hacking and threats to the Internet’s weak spots continues. Rick Paulas’s article is not about events from last week, but is just as relevant. Perhaps even more so with the Barron’s cover story on robots.

The article explains that even rather unsophisticated attacks can work on the 6.4 billion Internet of Things devices in use. Little is being done to protect on this front.

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. Nominations are welcome. Potential award winners can find daily inspiration at several websites!
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 moderate week for economic data, featuring the employment report on Friday.

The “A” List

  • Employment situation (F). Despite +/- 100K sampling error and multiple revisions, this is seen as most important data
  • ADP private employment (W). Good independent alternative to the BLS numbers
  • Initial jobless claims (Th). Not the same time period as the Friday report.

The “B” List

  • Trade balance (T). Attracting more interest in the Trump era
  • Wholesale inventories (W). Desired or undesired? That is always the question.
  • Factory orders (M). January data. Modest gain expected.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

FedSpeak will be light and earnings season is ending. Employment will be the big story.

Next Week’s Theme

 

The punditry, especially those who explain the stronger stock market as enthusiasm for Trump policies, is even more amazed than a week ago. To them it seemed that the lack of specifics in Tuesday’s Trump speech should have provided a dose of reality.

Many will now turn to the most common explanation for strong stocks, the ever-popular Fed theory. With several speeches emphasizing that the March FOMC meeting is “in play” for an increase, interest rate markets are adjusting to the probability of three rate hikes in 2017.

Much of the commentary next week will raise the question:

Will a more aggressive Fed spark a stock market correction?

Some might add “finally”!

The question actually has two parts:

  1. Will the Fed increase rates at a pace greater than expectations?
  2. Will this lead to a correction?

Friday’s employment report will have special significance for those with these fears. It will be the final and most important piece of evidence for the FOMC decision.

Both questions have a bullish and bearish side.

  1. An increased pace of Fed rate hikes was the consensus at week’s end. (Bloomberg). Leading Fed observer Prof. Tim Duy’s careful look at the important Dudley speech (before Yellen) was not so decisive.
  2. Bears invoke the hoary adage, “three steps and a stumble.” (David Rosenberg). As you review the evidence, you might consider the starting point for interest rates, as well as the yield curve. More constructively, Neal Frankle analyzes the frequency (often) and severity (moderate) of corrections.

 

What does this all 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.

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.

Doug Short: The World Markets Weekend Update (and much more). His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating.

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, but some noted guests experts are coming). We try to have fun, but there are always fresh ideas. Last week the focus was on trading an overbought market. The week before we considered sector rotation strategies, with a recent example from Oscar.

Top Trading Advice

 

Morgan Housel draws upon Ed Thorp’s work to discuss the advantages and dangers of trading with a small edge.

I agree. Every busted card-counter starts with the statement: “The deck got really good”.

Brett Steenbarger has so many strong entries that picking a favorite is a challenge. Here is one I especially liked from last week – reading the market’s psychology. Hint: Do not impose your own preconceptions on what is really happening.

In case you were unable to attend Brett’s master class in NY, SMB’s Bella has a summary of key takeaways. I especially like #6. The successful trader finds more than one way to win. Check out the five “inspirations” as well.

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 once again be Warren Buffett’s annual letter to his investors. It is full of wit and humor – and plenty of great insights. Last week I recommended his annual letter to investors. For those who (mistakenly) did not take the time to read it, you can now check out the “Cliff Notes.”

  • Methodology and screening expert Marc Gerstein applies Buffett principles. Check out his interesting list emphasizing book value.
  • Twenty-eight highlights from Exploring Markets. I especially like this one: When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.
  • Ed Yardeni explains why the oft-cited “Buffett Rule” gets complicated when interest rates are so low. It is why Mr. B regards stocks as cheap.
  • Gil Weinreich has a list of great quotes with his own comments added.

Stock Ideas

 

Chuck Carnevale does his typical comprehensive analysis of j2 Global (JCOM). It includes business model analysis, the important stats, education on how to analyze, and much more. Even if this particular stock does not trip your trigger, you will learn from the article.

Our Stock Exchange always has some fresh ideas. There is usually something from four different approaches. Our momentum trading model, Athena, highlighted Principal Financial Group (PFG). You will probably identify with one of the characters, and your questions are welcomed.

Bottom Fishing

There are some high dividend stocks – often a sign of danger. Are these dividends safe?

Frontier Communications (FTR) yields 14%. Stone Fox Capitalanalyzes the risk.

Target (TGT) declined 12% after announcing poor earnings and a weak outlook. Simply Safe Dividends believes that the yield of 4%+ is probably safe, but a significant increase next year is unlikely.

How about Snap?

A fashionable IPO always attracts attention. In the absence of actual earnings data, everyone is free to spin a story. Initial trading was very positive. Does that mean that investors should consider buying it at market prices? (Those who get an allocation at the offering price have already made a bundle – depending upon when they sell).

Valuation guru Prof Aswath Damodaran provides the careful look we would expect from a top expert. While his final range is wide (and includes current prices) the overall conclusion is not promising. If you are attracted to the stock because you like the concept or company, you should look at this post.

MarketWatch reports that most analysts have stock targets below the $17 IPO price.

 

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 discussion of ten things you must know about personal finance. It is important to get fundamental decisions right before launching your investment program.

In a similar personal finance emphasis, Seeking Alpha Editor Gil Weinreich cites the top four savings ideas from BlackRock’s clients.

If you have been struggling with your own decisions, you might want to read my (free) short paper on the top investor pitfalls. It is a good test of whether you can successfully fly solo. Send a request to main at newarc dot com.

 

Watch out for…

 

Scam season. One person gets you in the back yard to discuss landscaping, while the other is inside your home, stealing. The IRS does not take payments through credit cards or gift cards. If it seems in the slightest bit suspicious, check it out. The elderly are frequently targeted.

Final Thoughts

 

Your investment conclusions are strongly influenced by your preconceptions and current position. Last week I had an especially good summary of the two main themes. If it matters, Warren Buffett went on TV the day after I wrote this, expressing a similar opinion about stock valuations.

  • 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.

Your choice of world view controls how you interpret fresh news, and your key investment decisions. If you are getting it wrong, you need an epiphany!

The market is rising despite the lack of specifics in the Trump plan and the realization that there will be delays in his proposals – even if he can sell them to Congress. The reason is straightforward:

The economy has been getting better in the post-election period. Dr. Ed Yardeni, declares that The Recession Is Over. He is thinking globally, noting that worldwide improvement cannot be linked to the U.S. election.

Charles Lieberman reviews the entire array of factors, including what to worry about.

Briefing.com’s excellent Big Picture column (worth a paid subscription) explores the possible causal relationships. Here is a key chart.

The Fed rate increases will be consistent with a stronger economy, an environment that implies solid growth in earnings. Scott Grannis explains why higher rates are not a threat in the current market:

It’s very likely we’re still in the early stages of more of the same. Interest rates are going to be rising, probably by more than the market currently expects, because the outlook for the economy is improving and inflation is at the high end of the Fed’s target range, yet interest rates are still relatively low because of the market’s willingness to pay up for safety—and that won’t persist for much longer. Stocks are going to be buoyed by improving earnings and the prospect of stronger economic growth. Interest rates will be moving higher because of stronger growth—higher rates are not yet a threat to growth. The Fed is still a long way from raising rates by enough to threaten growth. If the FOMC hikes rates in two weeks it won’t be a tightening, it will be a sensible reaction to stronger growth and improved confidence.

Worries?

Sure. If the Fed gets behind on inflation and accelerates rate increases, even though the economy is sluggish, it will be an early sign of an impending recession. I am watching this closely, and so should you.

Meanwhile, do not be scared witless (TM OldProf euphemism).

Stock Exchange: How to Play Sector Rotation

Sector rotation is a regular media topic, but few really understand it. Stock moves are often described in sector terms – retail, transports, industrials, biotech, etc. You get the drift.

There has been a movement to define sectors in terms of ETFs, but the slicing and dicing was not very accurate. Trades often included companies that were not directly related to changing news or the economy. While this was not important for the ETF traders, it presented an opportunity for those who defined sectors differently from the standard ETFs – the real Sector Experts.

Oscar is our sector trader, so he is featured this week. We’ll discuss his method. We also have some interesting stock ideas from the rest of the gang.

Review

Our last Stock Exchange featured a helpful discussion on how to buy the dips. The comments were great as well. There is special value when readers engage with our crew of “technical analysts.”

Today’s Theme

Sector rotation is a common trading and investment theme, but there is little agreement on what it really means. The introductory discussion (Investopedia) is helpful, but merely a starting point. For those who understand this process, this can be a very profitable trading method. As usual, I will conclude with a brief observation about the key points.

This Week—Playing Sector Rotation

Oscar

I’m back on REIT Real Estate (VNQ) this week. You might remember I picked this one back on December 15 (during a convenient little dip). It was fine for a short term holding, but I dropped in in early January once I’d made a modest profit.

My main problem with this sector is the volatility. The 200-day moving average is basically flat, but the prices have varied wildly. While VNQ was moving sideways, I was working other sectors with more of an upswing.

Still, I try to see the big picture. This sector is way off its all-time highs, and the stock has been appreciating in value all month. I’m okay with buying in again here – so long as I keep a close eye on it.

J: Why did you make the change in January?

O: I noticed that defenses were shifting against the rotation?

J: What?

O: You know. The Williams shift.

J: You are talking baseball?

O: Yes! Pitchers and catchers have reported – those happy words.

J: Many more teams have employed the shift. Even Joe Maddon, on occasion. The data-driven guys have nudged the game in a different direction.

O: Glad to see that you have noticed this trend.

J: I watched a White Sox game with my friend Ralph, (a brilliant trader, and the best baseball mind outside of baseball). We were in his seats behind home plate, watching Jim Thome at the plate. Left field was wide open. There was great opportunity because of the enemy expectations.

O: Are we talking baseball or stocks?

J: Both. How do you approach sector rotations?

O: First, I define sectors carefully. I do not accept some “textbook” definition. Next, I pick the right time frame. No reason to compete with those HFT guys, who change sectors because of a few words in a speech. Finally, I know when to exit.

J: And when is that?

O: When a different sector offers a better choice.

J: Do you want to elaborate on the VNQ decisions?

O: I monitor about 40 sectors and hold positions in the top three. When I sold the group in January, I bought some health insurance companies. When I bought back in, I sold China.

J: These were all sectors in the news – repealing Obamacare, trade agreement changes.

O: I don’t know about any of that. The chart tells all.

J: What about your current ratings and reader requests?

O: Here is the updated list. It does not show VNQ since no readers asked about it — but they should have!

 

 

Holmes

I like AutoNation (AN). Will higher lows lead to higher highs? In my training, this was a very positive signal. I do love to find stock that has dropped sharply without making a new low. The price action signals solid risk/reward plays for the short-term horizon. I don’t know why AutoNation fell from 52.50 to 47.68…but I see that is substantially higher than the previous low price on Nov 8 (40.26). I see a 3-4 dollar move in this name with a sell stop around 45.

J: In a pleasant change from your normal style, those emphasizing fundamentals agree with you. Look at the chart from Chuck Carnevale’s excellent F.A.S.T. Graphs site.

H: Dip-buying does not really reflect fundamentals.

J: Perhaps not directly, but it is easier to buy a dip when the value is there. Are you worried about the increase in sub-prime auto buyers?

H: I just explained why fundamentals are irrelevant for this trade.

J: The U.S. car market marks up the cars, and then gives rebates that you can count as part of the down payment. Over 30% of pickup truck buyers could not qualify for a credit card, but the payments get made.

O: As long as it keeps working for a few weeks. I will once again ring the cash register and move on!

 

 

Athena

I see short term potential here in Micron Technology (MU). Felix liked this one back in November of 2016 – in retrospect, a very wise move. At the same time, my goals are much different than his. Whereas Felix locked in a low price for long position, I’m comfortable buying up near the top and selling after a quick move.

This stock has been on the up-and-up since last May, with relatively few bumps in the road. The one exception, of course, is the downward slide MU has taken this month. That creates the opportunity for me to buy a small position, and look for it to appreciate within the next couple weeks.

J: This is one of the strangest fundamental charts I have seen. There is a valley of skepticism in this sector, with a sharp rebound expected.

A: That is the message of the market.

J: It is interesting to see that you and Felix agree. Readers often wonder what might bring you together.

A: Good question. I have wisdom while that fussbudget is eternally focused on twenty years ahead and whether his spice rack is organized.

 

 

 

 

 

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 it should be a start for their own research. Do you have any fresh ideas of your own?

F: It’s nice of Athena to mention my mid-November Micron buy. I just wish I’d made the same move with Pandora (P). The absolute cratering of this holding in October of 2016 was a huge overcorrection. I wish I’d noticed it.

Despite that, I think now is an appropriate time for a long-term position here. The stock price has already grown from below $8.50 in early 2016. I’m optimistic that 2017 will bode similarly well. Count me in for at least 6 months on this one.

 

 

 

 

 

 

 

J: I am a regular Pandora listener. I hope they succeed in a highly competitive field – and that we make a profit on this investment!

Conclusion

Sector rotation is often cited, but seldom understood. There are several things you must get right.

  1. An accurate definition of each sector.
  2. An effective time frame – recognition, exploitation, exit.
  3. A proven testing process.

Sector trading reduces single stock risk, while presenting most of the gains. You are rewarded for getting the main trend right.

The Stock Exchange features the best technical ideas. We also provide contrasting opinions from fundamental investors. Each approach can be profitable, and both provide good lessons.

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: Will Trump Policies Extend the Business Cycle?

We have another holiday-shortened week with little fresh data. While there are some Fed speakers on tap, it is not enough to feed the avaricious punditry. There are two competing themes: the spike in inflation and the continuing assessment of Trump Administration policies. Once again, I expect the two to be joined in most commentaries. Pundits will be asking:

Will Trump policies extend the business cycle?

 

Last Week

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

Theme Recap

In my last WTWA I predicted a conjunction of two themes as Fed Chair Yellen testified to Congress and President Trump considered candidates for several Fed vacancies. I was only half right. Yellen got plenty of attention from Congressional questioners and revealed that she plans to finish her term as Chair. She also gave some non-specific agreement with some of Trump’s principles about regulation. GOP questioners wanted to talk about the Fed balance sheet. President Trump did not comment about this. This topic will have continuing interest. Presidents are rarely fans of rising interest rates.

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 the record high and the overall gain of 1.51% for the week.

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

  • Retail sales increased 0.4% beating expectations of a flat report. December’s data was revised to a 1% gain from the prior 0.6%.
  • NFIB small business optimism shows that “economic growth is coming.” Dr. Ed opines that this must be a Trump effect.

  • Philly Fed survey rose 43.3, crushing expectations of 17.5 and the prior month’s 23.6. The six-month outlook also remains very strong. From the report:

  • Leading indicators remained strong increasing 0.6% and slightly beating expectations.

 

The Bad

  • Industrial production dropped 0.3%, missing expectations for a flat report.
  • Fewer developed market stocks are outperforming – 44% versus the 57% average. Eric Bush of GaveKal explains that this has a negative correlation with the overall market.
  • Kim Jong-un took two provocative actions, two days apart. Jonathan D. Pollack at Brookings wrote “…North Korea’s impetuous young leader, yet again reminded the outside world of his determination to defy international norms by all available means”. The ballistic missile test was a flagrant violation of agreements, and the assassination of his half-brother continues a policy of killing potential rivals. So far, the market has taken little notice of such events or other possible challenges to the new president.
  • Inflation data showed price increases greater than expected (Briefing.com consensus in parentheses). PPI was up 0.6% (0.3%). CPI up 0.6% (0.3%). Core CPI up 0.3% (0.2%).
  • Housing starts declined in January, so I am scoring this as a negative. The prior months were revised higher, and the result was a slight beat of expectations.Calculated Risk, one of the top sources on housing matters, ascribes the shifts to the volatile, multi-family sector. Bill expects starts to increase 3% – 7% in 2017. The range may seem wide, but he is careful to explain the expected error around his forecasts, which have been quite good. See the full post for charts splitting out multi- and single-family.

The Ugly

Malware is winning the race against antivirus software. Users are not taking the most important precautions. Hint: Strong passwords and a password manager. (Slate).

 

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 Josh Brown for his thoughtful analysis of debt, and what it really means. The arguments about excessive debt, the types of debt, and the threats to the system are easily made. It takes only a chart, and most readers are pre-convinced.

Explaining the data requires a deeper, second-order analysis. In his well-sourced aricle, Josh takes a comprehensive look at employment and lending. You need to read the entire post (twice) but the no-nonsense conclusion captures the key point for investors:

When bankers complain, the rhetoric is almost always a caricature of the reality. Today is no different. There’s probably room to streamline or clean up the crisis era regs, but to make the claim that “the banks can’t lend” flies in the face of the actual facts.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have a very light week for economic data, with all reports in a three-day period.

The “A” List

  • New home sales (F). Gains expected in this important sector.
  • Michigan sentiment (F). Important indicator for employment and spending.
  • Initial jobless claims (Th). How long can the amazing strength continue?

The “B” List

  • Existing home sales (W). Not as important as new sales, but is a read on the overall strength of the housing market.
  • FOMC minutes (W). No surprises expected.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Fed Presidents will be on the speaking trail. Earnings reports continue. Early actions from the Trump Administration have captured the spotlight and will continue to do so.

Next Week’s Theme

 

If the market did not have the extreme Trump focus, the question would be whether incipient inflation suggests the need for more aggressive Fed policy and the probably end of the growth portion of the business cycle.

With the daily parsing of tweets, executive orders, and (somewhat conflicting) policy statements, analysts are scrambling to define and re-define the “Trump Effect.”

In a holiday-shortened, light week for data, I expect a combination of these two themes:

Will Trump Policies Extend the Business Cycle?

Discussion of this topic includes both the policies and the business cycle. Most are not rigorous in separating them.

Scott Grannis does a good job by focusing on the inflation effect and the business cycle. He notes that core CPI inflation has been rather stable, and that it is “a stake through the heart of the deflation demon”.

By contrast, Barron’s focuses on the stock and market effects. In their cover story, they review each Administration move:

Will the week ahead provide any more clarity and focus? Maybe not, but investors should look for the following key points:

  1. Is there evidence of a business cycle peak? Here is Bob Dieli’s take, vividly comparing the disparate opinions:

  1. Will Trump policies extend the cycle? Some are citing confidence from both businesses and consumers as evidence of a return of “animal spirits.” The Trump administration is forecasting much stronger growth than does the CBO. (MarketWatch).
  2. Many Trump moves are generating opposition, sometimes with the Republican party.
  3. Most voters are looking for compromises. This is true of both parties. “The Hill.”

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 C-Score has again moved lower, reflecting more inflation via gasoline prices. The level is still not worrisome.

 

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.

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

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.

The Brooklyn Investor looks at Warren Buffett’s returns, comparing them to other great investors and probability estimates.

Michael Hartnett’s (BofA Merrill Lynch) methods suggest a “melt-up” of 10%. I can’t argue. When CNBC interviewed me about my 2010 call for Dow 20K, I suggested that the next 8-10% would be pretty easy.

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 when and how to “buy the dips” with a current example from Holmes.

Top Trading Advice

 

Dr. Brett is back on the job, with several great posts this week. It is difficult to pick a favorite! He has advice on picking the right instruments to trade, identifying real trader education, and why you need to ask the right questions if you are to learn. Do you, for example track prices right after you are stopped out of a trade? There are several other tough, but valuable questions.

Consider attending his trading workshop at the upcoming NY Trading Expo.

Ralph Vince identifies three factors highly correlated with the price of private property. Traders often forget that guessing when to be short is against the odds.

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 Chuck Carnevale’s discussion of MLPs. This is a popular investment for those seeking income. Many just look at the yield. Chuck demonstrates the complexity of these partnerships, explaining valuation, tax considerations, and whether you are simply getting your money back. You should not invest in an MLP without reading this first. In addition to his general warning, he provides several ideas worthy of consideration.

 

Stock Ideas

 

Airline stocks. Warren Buffett? Really? His famous jocular quote was that a capitalist at Kitty Hawk should have shot Orville Wright to save money for his kids. Philip Van Doorn (MarketWatch) presents the story of this changed attitude. Josh Brown explainswhy Mr. B can be flexible while adhering to long-time principles.

Rural broadband? This could be a big beneficiary from an infrastructure plan (Brookings). Also, see my final investing thoughts below.

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. This week the dip-buying Holmes sold Nielsen (NLSN) on some strength and add General Electric (GE).

 

Seeking yield?

Blue Harbinger notes that Verizon’s yield has moved higher despite a reasonable payout ratio. I agree, but I prefer to write calls against stocks like this. If you stick to short-term calls (with the most rapid time decay) you can generate a cash flow of 9 or 10%, including both dividends and premiums from call sales. If the stock is called away, you find a new candidate, since you have gained 4-5% in six weeks. If the stock declines, you sell a new round of calls. If you merely break even, in the long term, on stocks, you are meeting your income objective. I do not typically mention trades before we do them, but we are looking at a buy/write against the April 50 call, which closed at 77 cents bid. You will collect a 58-cent dividend in early April. If the stock does not move, that is over 2 ½ percent in a few weeks. If it is called away, you make about 4.5% and can look for a new trade. This is a great idea for DIY investors who understand options. Naturally, this is an illustration, not a general recommendation. Do not consider it without consulting your financial advisor (yada yada)!

 

 

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. The piece about the importance of a will is great. I liked the one helping you teach kids about money. (I tried to do this with poker chips, and you can guess the ending). My favorite was gender control over family finances. Do you think it matters who is earning more? (Hint: Mrs. OldProf regards it as completely irrelevant).

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 topics are always interesting, and the discussion is often spirited. Active versus passive investing is naturally a current hot topic.

Ben Carlson explains how to consider housing expenses as part of your overall financial plan.

In case you missed it, you might enjoy my brief, mid-week post on The Fastest Way to Improve Your Investment Results.

Watch out for…

Overpriced dividend stocks. SD Davis explains the need for looking beyond the hoped-for payments.

Yield plays with “dividends” that are merely a return of your own capital.

Emerging market bonds. Lisa Abramowicz at Bloomberg explains the risks, including a decline in foreign currency reserves.

 

And more on value investing

Black Rock’s Russ Koesterich demonstrates why this style can work in what is perceived as a tough market. Here is his illustrative chart:

Final Thoughts

 

After years of warnings about deflation and impending recessions, the economy is showing some real signs of strength. For whatever reason, much of the punditry clings to the “end of the up-cycle” thesis, in both the economy and in stocks. Neither economic cycles nor bull markets die of old age.

Inflation concerns are premature. The Fed prefers the core PCE measure, which has less emphasis on housing. It runs “cooler” than the CPI. The Fed has also indicated willingness to exceed the 2% inflation target for some time. They can fight inflation more readily than deflation. I do not expect Trump appointments to reverse this consensus.

Most importantly, the punditry calls it a Trump rally since it occurred at about the same time as the election. There is no analysis of reduced uncertainty or improved fundamentals. The main impact seems to be the promise of reduced regulation.

To summarize, there is a significant improvement in confidence, which is great for the economy and corporate earnings. The reasons for more confidence include many sources.

Investing Conclusion

Finding good ideas from major policy changes is an excellent approach — in theory.

In practice, there are many traps. Too often there are incentives for analysts to be first, rather than to be right. While I have suggested caution on this front several times, it is easier for me. I am not required to fill a TV time slot or write a report for brokerage firm clients. If there is no solid conclusion, I am not forced to act. My approach requires good information, including some which is not yet available. The matrix below is a partial representation of my results. There are more sectors, of course, and I have hundreds of tagged articles in a supporting database. I have preliminary entries for most of the cells. The table below is just an illustration of my approach.

Stock Exchange: How to Buy the Dips

Pure traders love to buy the dips – and of course sell the rips. Everyone wants to buy low and sell high. Is this part of your strategy? Do you know when and how to make that your plan? Today’s Stock Exchange will help. As a bonus, we have some interesting ideas to explore.

Review

Our last Stock Exchange discussed how to distinguish between trading skill and blind luck. The analysis included a description of important elements in model development along with some great sources. As always, the group found some interesting ideas.

Today’s Theme

Buying the dips is prominently featured on the list of trader maxims. It seems so obvious. A stock that you like hits a downdraft. A buying opportunity? Or will this dip beget another dip? Standard instructional sources (Investopedia) make only general comments.

Our regular experts include only one with a dip-buying strategy. For that reason, Holmes gets the spotlight this week, but we have some good ideas from everyone. As usual, I will conclude with a brief observation about the key points.

This Week—How to Buy the Dips

Holmes

I look for stocks that have declined, seem to have bottomed, and are starting to find legs. Once I have a winner, I must then decide when to sell. I also have position size limits, sticking with the best 16 candidates. This week provides a good illustration of my process. I really liked Nielson (NLSN), which I bought at 42.30. There might be more room to run, but I sold it at 44.54.

J: Welcome back from Mexico. Did you have any trouble at the border?

H: No. I do not fit the profile they are looking forJ

J: It is good to have you back. So why sell NLSN if you still like it?

H: My method is aggressive in taking profits. Notice how the price recovered from the bottom to the point of the initial decline.

J: Most dip buyers would not notice that. They might be looking for a full recovery.

H: A 5% move in a few days is great for a trading program. I also have limits on position size (6%) and number of positions (16). There are often candidates that I like more than my current holdings.

J: So why GE?

H: I like GE for a variety of reasons including a quick and sudden breakdown, a higher low, culminating in a turn higher. I bought this at 29.83 looking for a move back to 31. I can use a tight stop at 29 giving me a better risk reward then holding my NLSN position. Unlike humans I have no emotions about stocks I’ve bought and sold. They’re just mathematical representations of Risk/Reward analysis. Look at the chart.

 

J: Most traders could improve simply by following your discipline on position size.

H: Thanks, boss.

 

Athena

I have identified short term potential in GW Pharmaceuticals (GWPH). We may be at all-time highs here – but when has that stopped me before? Folks probably thought this stock was maxed out when it jumped up near $90 in March of last year. Now it’s trading around $130. I have no doubts about popping in here for a week or two. If it does not work, I’ll move on.

J: Once again you have an idea without any foundation. Have you ever even heard of profits? Look at the chart from Chuck Carnevale’s excellent F.A.S.T. Graphs site.

A: It is obvious that the market knows something that you do not.

J: Are you smoking something?

A: I get high through meditation. It is all that I need.

J: Well your current pick is playing in the legalized pot space. It is a hope and a dream, which could vanish in a …..

A: Enough! Spare me from your lame human pun. Many successful stocks began with a wonderful story and no earnings. You will soon see.

 

 

 

 

 

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 it should be a start for their own research. Do you have any fresh ideas of your own?

F: Yes. I have a new investment in Royal Gold (RGLD). I see real long-term potential. This stock got seriously whacked in the fall, which I believe makes it a prime candidate for an investment now. It was valued, perhaps properly, around the $85 range mere months ago. Now, with a slower 2-month recovery, it strikes me as a slow and steady way to climb back to the highs.

J: Gold has been doing well, but earnings are not the key driver. The fundamental chart shows that the earnings growth rate is less than 20, but the PE multiple is 58.3.

F: It is an attractive chart. I could frame it and put it on the wall.

J: Gold works best when there is fear of complete economic collapse or the potential for hyperinflation.

F: I have heard some of those rumors.

 

 

 

 

 

 

 

 

Oscar

I have a new sector pick. This week trading exchanges caught my eye. I’ll use the Intercontinental Exchange (ICE) as an example. This stock has been on an upswing for the last ten months. The 200-day moving average is smooth, and the 50-day moving average is rising at the same rate.

What I like most here is that the stock dipped earlier in the month. That leaves us off the peak, which I’d consider a potential buying opportunity. Outlook on this one remains short term: maybe a month, at the longest.

J: Why are you looking for a dip? You are supposed to find trending sectors.

O: It is trending. Besides, I heard that you were going to feature dip-buying this week. After the Super Bowl I need the extra money from being the featured model. That stupid dog has just been lucky.

J: Each of you must stay true to your method. Your time to be featured will come. Besides this was the happiest week in the sports year.

O: Yes!!! Pitchers and catchers report.

J: The ICE fundamental graph is very interesting – solid looking, but fairly valued.

J: Do you have a sector update for your readers?

O: Yes. Like Felix I have included the most recent requests, as well as anything that had a ratings change.

J: Can readers still learn about their favorite sectors?

O: Definitely! I will include new requests each week.

J: How will you keep busy until March Madness?

O: I understand that there is now fantasy golf.

J: You mean that you can pretend to drive 300 yards? That would be a real fantasy!

O: No. You can pick a pro and put him on your team.

J: I suspect that you will soon be looking for another way to earn overtime pay!

 

 

 

 

Conclusion

Buying the dips is seductive – so obvious. It is much more difficult than it seems.

Holmes has some lessons for us:

  1. Each trade is based upon hundreds of similar charts. This is part of his training and testing.
  2. Each trade has a limited risk, with specific exit criteria.
  3. Overall trading conditions are right before entering the trade.

This last point is crucial. Dip buying works well in a rising market, and is OK in a range-bound market. Holmes did well in the brief dip last January, but his method is not really geared for prolonged selling.

How should a trader deal with that? Like Holmes, you need an exit signal when conditions are not right. Just take a little time off, and don’t lose money in a bad market!

The Stock Exchange features the best technical ideas. We also provide contrasting opinions from fundamental investors. Each method can be profitable and both provide good lessons.

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: Trump V. Yellen Round One

A week featuring the Fed Chair’s semi-annual Congressional testimony, and daily speeches by most of her Fed colleagues, would normally represent a commanding first choice for the upcoming theme. This time is different. (Yes, I know that you are never supposed to say that). The first weeks of the Trump Administration have generated daily news on a wide range of topics, each of which draws attention.

The combination of the two will provide an irresistible topic for the punditry. It will be:

Trump v. Yellen, round one.

Last Week

Last week the light economic calendar provided mixed news, but there was still a rally in stocks.

Theme Recap

In my last WTWA I predicted a discussion about whether the current market optimism was justified. Despite some breaking news during the week, especially about earnings, that theme got plenty of attention.

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 the new high and the overall gain of 0.81% for the week.

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 again mixed, with a tilt to the positive side.

The Good

  • JOLTS signaled a healthy labor market. Many try to use JOLTS as a measure of job growth. This is unhelpful, since there are better measures for that. It is an example of writing about what you think people want to hear. The data are best interpreted as a measure of the health and structure of the labor market.
    • The quit rate is seen as a measure of health, since it reflects those who voluntarily leave jobs, expressing confidence in other opportunities. There is a nice discussion of JOLTS and several charts from Nick Bunker.

  • The Beveridge Curve is the most important interpretation, emphasized by Yellen. What we really want to know is the tightness of the labor market. Here is a nice explanation from 2012, noting what is needed for labor market improvement and the general counter-clockwise movement after a recession. (Readers looking for a Silver Bullet Award might want to check out the very lame interpretation at ZH, where one of the Tylers only discusses the gap, not the trend or slope. The most recent update is a month old, from the BLS.

 

  • Corporate earnings. I am scoring this as a slight positive. I want to discuss it, so I put it somewhere. The results are mixed. Earnings are below expectations, revenues are higher, and outlook (always negative) is not as bad as the long-term average. There is a year-over-year gain for a second consecutive quarter, not seen for two years. (Factset). Brian Gilmartin also highlights the leading sectors. He also has something you will not find anywhere else – an analysis of the impact on earnings from a border tax. Great work!

The Bad

  • Michigan sentiment dipped to 95.7 on the preliminary estimate, down a bit from last month’s 98.5 and missing expectations. This month’s report has a special feature that we need to know – divided perceptions based upon politics. From the Michigan report:

    When asked to describe any recent news that they had heard about the economy, 30% spontaneously mentioned some favorable aspect of Trump’s policies, and 29% unfavorably referred to Trump’s economic policies. Thus a total of nearly six-in-ten consumers made a positive or negative mention of government policies. In the long history of the surveys, this total had never reached even half that amount, except for five surveys in 2013 and 2014 that were solely dominated by negative references to the debt and fiscal cliff crises. Moreover, never before have these spontaneous references to economic policies had such a large impact on the Sentiment Index: a difference of 37 Index points between those that referred to favorable and unfavorable policies. These differences are troublesome: the Democrat’s Expectations Index is close to its historic low (indicating recession) and the Republican’s Expectations Index is near its historic high (indicating expansion). While currently distorted by partisanship, the best bet is that the gap will narrow to match a more moderate pace of growth. Nonetheless, it has been long known that negative rather than positive expectations are more influential in determining spending, so forecasts of consumer expenditures must take into account a higher likelihood of asymmetric downside risks.

  • High frequency indicators are a touch more negative. New Deal Democrat does an excellent weekly update. I always read it and any serious investor should join me.

The Ugly

Scamming 9/11 heroes and NFL concussion victims? Pretty low, if true. Some will go to any lengths to make a buck. (CBS news).

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. Nominations are welcome! For inspiration, you might test yourself on the misleading visualization techniques described by Nathan Yau. I see these daily, and so do you. The most common in financial posts is this one:


The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have a normal week for economic data.

The “A” List

  • Housing starts and building permits (Th). Little change expected in these important leading indicators.
  • Leading indicators (F). Popular economic gauge expected to remain strong.
  • Retail sales (W). Little is expected from the January data.
  • Initial jobless claims (Th). How long can the amazing strength continue?

The “B” List

  • Industrial production (W). A small gain is expected in the volatile series.
  • Philly Fed (Th). Popular report is the first look at February data.
  • PPI (T). Starting to run a bit hotter. That will attract more attention if it continues.
  • CPI (W). See PPI above.
  • Business inventories (W). December data affecting Q4 GDP. Favorite spin target: Voluntary or involuntary build up?
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Chair Yellen give s her semi-annual Congressional testimony on Tuesday (Senate) and Wednesday (House). The presentations are the same and the order alternates. If you don’t know why, then you missed that class in Congressional Government! There are also appearances by a host of other Fed Governors and Presidents. Questions will probe the state of the economy, the new political environment, and the likely pace of rate hikes.

Earnings reports will remain important. Early actions from the Trump Administration have captured the spotlight and will continue to do so.

Next Week’s Theme

 

During the campaign, Candidate Trump had plenty of criticism for the Fed and for Chair Yellen. Since the election, he has had much less to say. With Fed Gov. Daniel Tarullo’s resignation, the President will now have three openings to fill (out of seven). Next year he can replace Yellen as Chair. Although technically her term continues, most resign when replaced as Chair. He has the power to change the style, background of members, and policies.

Yellen is testifying before Congress this week on Tuesday and Wednesday. While the topic is the state of the economy, we should expect some aggressive questioning. Will her testimony or answers draw a Presidential tweet (which we are calling a T-Wop)? The punditry will find this combination irresistible. I expect plenty of media coverage for a clash that will probably be repeated. We can think of it as:

Trump v. Yellen, Round One

The basic possibilities are interesting, but mostly speculative so far. Here is what Trump might do.

  • Trump will support some of the various moves to “audit” the Fed and reduce its power.
  • Trump will T-Wop Yellen this week, and remove her at the first opportunity.
  • Trump will resume the Fed criticism, and start his process for filling the vacancies.
  • Trump will moderate criticism while Yellen is still at the reins.
  • Trump will seek candidates that have some traditional credentials.
  • Trump will decide to keep Yellen as Chair.

Here is what Yellen might do.

  • Make an aggressive statement criticizing some Trump policies.
  • Avoid “Trump” issues in the statement, but provide some frankly critical answers to questions.
  • Announce that she plans to stay on the Fed if replaced as Chair.
  • Suggest that the Fed policy is changing in a way that Trump sought.
  • Make conciliatory remarks about the direction of Trump policy, especially economic stimulus.

What fun! Expect the pundits and their guests to go wild.

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.

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

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. The most recent update is for the Business Cycle Indicator.

Eddy Elfenbein notes that the early commentary is in: S&P 2018 earnings estimates at $148. Nearly everyone will regard that as too high, but others will start citing it. This happens even more after the third quarter of each year.

The Atlanta Fed notes that their GDP Now model has been running too hot due to net exports. A change might be in the works.

 

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 there was a great discussion about whether your trading results are skill or luck. Do you know? And BTW, Athena likes AMD.

Top Trading Advice

 

Are you (like me) missing Dr. Brett already? Consider attending his trading workshop at the upcoming NY Trading Expo.

Signal Plot explains how to measure your trading performance – and you must do this.

17 Trading Resolutions for 2017. Yes, it is a little late, but you can join in just as others quit going to the gym. Dave Landry has a nice list of ideas. Some of these seemed wise, but others sounded like the Delphic Oracle. What do you think?

Trading methods not working? Here is an idea. When you hear about a hot IPO look for a stock with a similar name. Buy it on the confusion/greater fool theory! It worked for those buying dating site Snap Interactive (STVI). This is not the first such occasion. (I hope readers can recognize tongue-in-cheek).

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 this post from Seeking Alpha Editor Gil Weinreich, Are Bonds Bad? How about Funds? He cites Evan Power’s analysis of the current retirement risks, responding to a Kiplinger article that retirement was now 10 times riskier.

Wow! This is a great discussion of a topic with widespread significance. With all of the scary stories about retirement, it is helpful to read something that is calm and analytical.

Gil’s daily column is a must-read for financial advisors and usually valuable for individual investors as well.

Stock Ideas

 

Eddy Elfenbein’s best ideas are in his new ETF (CWS), which is off to a nice start. That does not stop him from making valuable commentary on news, markets, and other stocks. Last week he mentioned Ingredion (INGR), an intriguing idea.

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. This week the dip-buying Holmes (who has been very hot) liked Casey’s (CASY). In a big surprise, Holmes sold the next morning, so I did a rapid update for readers. This is very unusual behavior, but it is only one of sixteen Holmes positions. Holmes is worth watching.

 

Seeking yield?

Lee Jackson suggests five dividend stocks that should do reasonably well in a market correction. These are the kind of stocks where we “enhance yield” with sales of rapidly-decaying near-term calls. We make four times as much from the call sales as we do from the dividends.

Chuck Carnevale does a deep dive on Pfizer. I agree, but I see it as another call-selling candidate.

Portfolio Management

David Merkel provides important advice about rebalancing your portfolio. I love it, and not just because the featured band is from one of my old schools. The band is great and the “Tuba March” is awesome.

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. This week may be the finest entry in a long series. I strongly recommend a look at the great links cited. Look at all the posts on the fiduciary rule. The average investor needs to understand who is selling and who is acting in his interest. For retirees or near-retirees, the Michael Kitces post is very valuable. Most people do not think about the priority of various retirement needs, but they should!

 

Thinking about Social Security?

Jesse Rothstein has a nice explanation of the tradeoffs in choosing when to start benefits.

 

Watch out for…

Trading the VXX, a “nearly perfectly-engineered tool to separate worried investors from their money. It is the unfenced swimming pool of ETF/ETNs.” See Paul Kedrosky’s tweeted chart.

Warnings about value traps (from 24/7). Once again, one person’s value trap is my candidate for selling near-term calls. There is always a way to profit if you are right about the major stock characteristics.

And more on value investing

From Validea. You need mental toughness. Strategies that work very well in the long term will have dry spells.

 

Final Thoughts

 

Before turning to the Fed, I want to comment on a major news theme from last week, in line with what we expected. Is the Trump Rally running out of steam? Some might find this ironic when results remain strong. Here is the three-part problem:

  1. Pundits and investors, seeking a simple post-election explanation for the stock rally, attributed it to Trump policies.
  2. Now that some of these policies seem delayed, they expect markets to get softer.
  3. But what if the rally was a return to earnings fundamentals and the elimination of pre-election uncertainty, as I suggested last week (with some support from Dr. Ed)?

What about the Fed?

Once in office, Presidents always like low interest rates. Trump will probably replace Yellen, but with whom? If the cabinet provides any precedent, we can expect some non-Ivy League, non-economists. I have frequently argued that most intelligent people with a reasonable background would be part of a Fed consensus after their appointment. The importance of the issues, the venue, and the evidence presented by staff all nudge in this direction. I once had the chance to suggest this idea to former Dallas Fed President Bob McTeer, and he agreed. (It is easy to draw out a confirming answer in such conversations, but we talked at some length and I really wanted to know).

Parsing through the possibilities described above, I expect to see little change in Fed policy. The new President will wind up appointing people with traditional credentials, but perhaps with different policy viewpoints. He will not reappoint Yellen, although people forget that the Fed Chair is often appointed by Presidents of both parties. (Greenspan and Bernanke are the most recent examples). He will not aggressively push for a change in policy. In fact, some are already claiming that the modest Fed rate increases are anti-Trump. Yellen will probably not remain after her term as chair, unless the new appointees are jarringly different in methods or policy preferences.

The Fed news has dramatically different significance for traders and investors.

For traders, this week will be especially difficult to game. Since that community has over-emphasized the Fed for the entire rally, unable to explain the gains any other way, there might be some big fluctuations. Since there is little precedent for this, we cannot even guess what the content-based algorithms will do.

For investors, it is another opportunity. Since the events have little real impact on expected earnings and the economic cycle, we can have shopping lists ready. My portfolio rebalancing has raised my cash levels. It is not fear of a correction, but a natural process.

Stock Exchange: Is your trading skillful or just lucky?

Would you like to know whether your trading is lucky or good? Today’s Stock Exchange will help. As a bonus, we have some interesting ideas to explore.

[Important Update – Market Open 02/10/17]  Holmes gave a “sell” alert on CASY this morning.  Obviously I did not expect this, or I would have used a different example.  While we are not going to update every trade, this is an unusual situation.  These are supposed to be illustrative examples, not trade recommendations.  Holmes has 16 positions at any given time, so you cannot get the true effect by trading one or two.  But just in case someone chose to play along with Holmes on this one, I wanted to make this update.

Review

Our last Stock Exchange discussed how to find a trading sweet spot in a political minefield. The group found some ideas that continue to work well. Our timely discussion of the T-WOP, HT @corporatecommie was accurate, but had a short shelf-Iife. This week we saw the first evidence of waning tweet power, a crucial matter for short-term traders. What will work now?

Today’s Theme

If you start as a trader with a few lucky wins, you are on a course to lose everything you have. Is there any way to separate luck from skill? Capitalogix has a nice discussion of this topic, including examples that anyone can understand. Unlike critics who do not use quantitative methods, Howard Getson’s credibility is enhanced because of his experience with the important tools. Michael Mauboussin’s excellent book, The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, is a leading source on this topic. I will return to his complex underlying question. For now, let us consider whether your own trading system is skill or luck. The models I describe each week share some development traits. How does yours compare?

  1. We do not start with “data mining,” a process that explores thousands of possible relationships with hundreds of variables. We begin with a hypothesis and a limited number of candidate parameters. If this sentence does not make sense, you should not be a consumer of systems.
  2. We train on one set of data and keep a generous out-of-sample period. We examine performance over both time periods, making sure that performance is consistent.
  3. We trade the model following the system, carefully watching. We don’t simply monitor results. We look at specific decisions. Are these the type of trades we expect the model to select.

Let’s see what the process means for our experts, each of whom has a dramatically different approach. As usual, I will conclude with a brief observation about the key points.

This Week—Distinguishing Skill from Luck

Holmes

Humans are so impatient! They grow tired of sniffing out bottoms in stocks. I love that process, and I also am a watchdog on risk. I smell an opportunity in Casey’s (CASY) trading at 118.75. A major theme for me is finding a stock that has bottomed and started to turn up. We can find a likely sell price in this case (112.50) and an upside price (130). It is a nice risk/reward ratio, my kind of opportunity. The real beauty of a name like this is it could go much higher. Since I’m a patient dog, I will slide my stops higher if the technical picture looks better.

 

J: Casey’s mostly trades on non-gasoline revenue, but gas prices are still crucial. When people stop to fill up, and have a few extra bucks, they are likely to spend them in the convenience store.

H: They do not allow pets in the store, so I have never seen that.

J: Maybe you could make a comment on the expected earnings decline for 2017.

H: Earnings?

J: Yes. The ‘mother’s milk’ of stock pricing. I would not buy a stock with an unjustified P/E ratio of 22.

H: You need to look at the chart. A stock that declines like this usually has a rebound. I will buy, sell, and ring the cash register. In case you did not notice, I have been making big profits for you.

J: That reminds me. I have to bring up a topic you might not like – Michael Kors Holdings (KORS). This was a featured pick of yours about a month ago.

H: I know. When you are seeking out unloved stocks you will not bat 1000. Not only am I winning on most trades, the wins are much bigger than the losses. That is all you need. You just sell KORS and move on.

J: Thanks for being honest about one of your losers. I agree that you have earned your keep on the overall portfolio. When are you coming back from Mexico?

H: Can you start providing Margaritas in the office?

J: No.

H: I’ll come back anyway, if I am not stopped at the border.

J: The Supreme Court ruled that you can return, but you should not delay.

 

Athena

Advanced Micro Devices (AMD) is my favorite pick of 2017 – so far. I know I get some flak for buying on the highs. After all, if a stock like AMD jumps from $10.37 to $12.24 in a couple days – it’s got to be done, right? Wrong! Take a look at the chart to see what happened.

AMD was not done on the initial spike. I bought in right around $12.28 and we’ve already seen a second pop up to $13.56. I might hang out around for a week or so. If there are no further gains, I’m happy to take my tidy profit and move on.

J: Get real! You are always speculating in stocks that make no profits. Take a look at the chart from Chuck Carnevale’s excellent F.A.S.T. Graphs site.

A: I keep trying to teach you that the market anticipates your “fundamental” changes.

J: You are teaching me? Who is in charge here?

A: Just watch this one. It is a perfect example of how I earn profits for you even when you would never buy the stock because of low earnings. You are too stodgy, professorial, and rooted in the Graham and Dodd era.

J: How do you know about them?

A: I am a goddess. I know about many things… All of you experts on the “fundamentals” can learn something from me.

 

 

 

 

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 top overall vote getters from our (free) subscription list as well as some new requests I got during the week.

J: AMD leads the list? Are you copying from Athena?

F: Definitely not. I have owned AMD since August. I am far ahead of that know-it-all goddess.

J: Are you planning to hold on?

F: My buy decisions are based upon a long-term portfolio. The average holding period is 66 weeks. I really do not care what others in the group are doing. My record is the best, despite fewer trades and lower taxes.

J: Does the list represent your favorite stocks?

F: No. It is a rating of the most frequent reader requests. I am answering questions. I am a source of ideas only for my actual clients. Most of my fans are readers or subscribers to the list. I love them and provide answers to questions, but I have my own list of favorites.

J: Fair enough.

F: Please also note that I have been working while the dog was on vacation, lazy Oscar was watching football, and the goddess was navel-gazing.

J: Any new ideas?

F: Not this week. My current holdings are working well. I make few shifts. I remain willing to help readers with questions.

 

 

 

 

 

 

Oscar

I have an exciting new pick, the iShares FTSE/Xinhua China 25 Index (FXI). There was a mysterious dip in November. Prior to that, the region was on an upswing. The 50 and 200 day moving averages are a bit misleading here. Between February and October there was enormous growth; I see potential for that to continue for the next month at least. As an aside – the market seems to agree with me. The bump from late December to now has erased the late 2016 losses.

J: Did you notice any major events in November?

O: The NFL playoffs were shaping up. Basketball was starting.

J: Anything beyond the sports pages?

O: What do you mean?

J: The election of President Trump raised fears of a trade war. Chinese stocks were threatened.

O: My concern about trade is whether the White Sox give away their entire pitching staff and whether the Bears can finally get a quarterback.

J: The trade I am discussing is international. Materials, consumer goods, finished products, currencies.

O: Maybe so. I suspect that most stock traders do not really understand that stuff. They are looking at the charts, just like me.

J: Sad but true. By the way, weren’t you all in on the Falcons.

O: Yes. I really nailed it.

J: I thought they lost. Did you hedge your position or something?

O: Some, but it was still a bad beat. My analysis was great. Terrible play calling.

J: Is that another way of saying you lost your paycheck.

O: I’ll be working hard for the next few weeks. Any way of getting a bonus?

J: We’ll see.

O: Here are my ratings for the top reader interests. Keep the questions coming. My sectors are aggressive, but have less risk than Felix’s picks. I avoid the bad news from random, single-stock moves.

J: Interesting. Do you see evidence of that?

O: I hear about it. People are very worried about something called “tweets” that seem to hit their stocks for no reason. Playing sectors reduces that risk.

 

 

 

 

Conclusion

We all want a crystal ball. The worst ones are traps – giving a few false signals until we go all-in.

The Stock Exchange provides ideas from advanced technical methods. For contrast, you can look at the fundamentals. The weekly tension is palpable.

I try to provide a source of ideas for your trading as well as some reality-testing. Please join in with questions or comments, and see below for easy ways 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!