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!

Stock Exchange: Finding Your Trading Sweet Spot

Our last Stock Exchange (two weeks ago) discussed diverse ideas from our experts, and also explained why I vetoed one of the recommendations. When trading using models, you can link directly to a platform if you do many trades and have a very short time frame. Otherwise you should not blindly follow the model. A human who understands the factors used by the model can identify when a situation is truly exceptional.

The current market environment is all about Trump – perhaps excessively so. Everyone worries about what companies are vulnerable to a tweet (which we will call a T-WOP, HT @corporatecommie). Each day includes more speculation about companies that might benefit from policy changes.

How should traders find a sweet spot in this environment?

This week includes both new ideas and reviews of some past highlights. Everyone can benefit from finding the trading model most relevant for your own style.

Let’s look at the ideas from our experts. As usual, I will conclude with a brief observation.

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!

This Week—Finding Your Trading Sweet Spot

Holmes

This week I’m buying good ol’ U.S.A. Macys (M). This stock probably needs no introduction, main street retail store.

This chart strikes me as a great money-making opportunity. My major concern is that this stock keeps making lower lows, but in the meantime it can have some terrific rallies. I see no reason it can’t get back to the mid-30’s. It’s a little comforting to know that there are 18 analyst holds on this stock and their target price is STILL 36. That is consistent with what the charts are telling me.

I’m buying here with tight stop, 29.25, and looking for a move back into the mid-30s. Giving me a nice risk/reward setup.

J: I agree with you about ignoring the analyst ratings. I use it as a contra-indicator. Did you read that recent WSJ article?

H: You know that I do not read! I reach great conclusions from looking at charts. You humans read, but mostly to reaffirm your existing biases.

J: I am delighted that our clients caught this at a lower price, but do you realize the stock was up over $1.50 today?

H: No. I am enjoying the beach in Mexico. I sent in my pick, but that is like working overtime.

J: Oscar’s turf accountant would call your choice “past posting.”

H: Sorry. You are the one who set the schedule for Thursdays. I made the pick earlier, and it is still a good buy.

J: There is a rumor of a possible takeover. Did you know about that?

H: No. I just know a great rebound chart when I see one.

J: Are you going to have any trouble returning from Mexico? The U.S. is taking a hard look at those returning from other countries.

H: My papers are all in order. I’ll be back in the office in a week or so.

 

Athena

I admit it. I still have no new picks. We do not have the fresh, strongly-trending stocks that I prefer. I’m still holding most of my most recent picks, and I have room for one more buy.

J: Maybe you could give us an update on one of your current holdings.

A: Fair enough. I recommended United Rentals (URI) on 12/22, after buying it myself a few days earlier.

J: Isn’t this one of your few picks where I agreed?

A: Yes, I seem to remember that you said the pick was OK, but you did not own it yourself. I have held this one through a month or so of sideways movement, but now it’s starting to pay off in a big way. We’ve seen an increase of roughly 20% in the last two weeks. That means it’s about time for me to hop off this one (as fun of a ride as it’s been).

 

J: That certainly worked well. How are you doing overall?

A: Not as well as the fussy guy and the dog, but that will change soon. I think I am Vince’s favorite.

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: The list has some interesting changes. I see that AAPL (which we own) is still in “hold” territory despite the major rally after its earnings report.

F: My ratings came before the report. How about AMZN? That did not do so well. My approach is geared to the long term, usually more than one year.

J: Fair enough. Do you have something new for us this week?

F: No.

J: What? I took a long weekend, but the rest of you were supposed to keep working. Only Holmes was on vacation.

F: I worked, but there are no new choices. Patience is called for.

J: Are you trying to get dropped from the weekly discussion?

F: You would not dare! My performance leads the group. In addition, I provide updated information to my many fans. You should be giving me a raise. I am on the job while the dog is in Mexico.

J: OK, we’ll let the readers decide whether they still want your opinions.

 

 

 

 

 

 

 

Oscar

My pick for this week is the Defense sector, shown here by the SPDR S&P Aerospace & Defense ETF (XAR). I liked this one back in early December too – but I got out before the downslide. Now that the price has had a few weeks to level out, I feel more comfortable getting back into this sector.

For my next “investment” – I’ll bet that Belichick can’t put together a defense to stop the Falcons. But that really is another subject…

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.

J: Interesting. The Tweeter-in-Chief has T-Wopped a few of the defense stocks, but most still believe in his support for higher defense spending.

O: I only follow sports tweets, but I know which sectors have legs, and which will fail down the stretch.

J: You really like the Falcons?

O: My week’s pay is on the line!

 

 

 

Background on the Stock Exchange

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

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

Questions

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

Conclusion

The current trading environment is treacherous. Many frustrated traders are bailing out. Or have blown out. Political opinions about policy have proved to be a dangerous foundation for trading and investing.

Our models provide a range of diverse ideas, all successful. Pick one that you like. Use it as a counterpoint for your own method. And keep control of position size and risk.

The Stock Exchange does not have all the answers, but it provides good ideas and a stimulus for your own trading.

Stock Exchange: Need Some Trading Room Help?

Last week’s Stock Exchange illustrated how different approaches worked to generate varied ideas. If you missed last week, you will find it to be useful background for today’s topic.

In the last two weeks the market has been relatively quiet. Dow 20K is still a gleam in the eye. Some are announcing that the “Trump Rally” is over. If you are an aggressive trader, is there any way to exploit this situation?

Our technical experts have ideas, which are also interesting for those of us emphasizing fundamentals. Anyone who has worked with a group of traders knows that there are many opinions. While you might not agree with them, it is often worth listening. Many traders use social networks for this purpose. One brokerage advertises this feature of their site. Another invites you to call one of their “experts.” The chief problem? Finding people worth following! The brokerages just want you to do a lot of trading. The more opinions the better.

Our Stock Exchange participants can provide better help for those who are not working in a trading room. Even better, the trades work pretty well! Let’s dig in with this week’s ideas. As usual, I will conclude with a brief observation.

Getting Updates

I have offered a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We will 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!

This Week—Ideas from the Trading Room

Holmes

This week I’m buying high fashion! Michael Kors (KORS), trading at 42.83.

The stock looks to be consolidating at a higher low from the previous big down move (40.70) of May 17 2016, which is higher than the move before that of 35.79 and Jan 15, 2016. All these higher lows give me the chance to buy here and watch carefully that KORS stays above the previous low. What is my upside target? Well, the highs seem to be lower too…so I’m thinking 48.60 the current 200d MA is a worthy target…but I’ll be watching carefully. If I get the rally and the stock starts to roll over I’ll be a quick seller.

Don’t need to hit homers all the times, many games are won with timely singles.

J: Homers versus singles? Have you been spending more time with Oscar?

H: He did take me to the “dog night” at “The Cell” last year.

J: It is now called “Guaranteed Rate Field.”

H: No!! Oscar still calls it Comiskey.

J: Turning to your KORS idea, have you been following retail sales reports, especially for the luxury sector?

H: As you know, I read charts, not news.

J: The stock looks good on a fundamental basis as well. Here is the basic F.A.S.T. graph.

 

H: It looks like “value” investors might have been stuck in this one for some time. My rebound strategy is clearly better!

 

Athena

My pick this week, Fifth-Third Bancorp (FITB), has started to level off since November’s rally. I like that price action. As you know by now, I’m most enthusiastic about a stock when I think it’s due for a pop. FITB is still underpriced based on my technical indicators. We were closer to fair valuation at the end of December. I might hold onto this one for three or four weeks, and hope for a small gain.

J: Once again you have a choice that fundamental investors can also embrace. I have been recommending regional bank stocks for many months. The recent increase in interest rates has helped the group. If the economy continues to improve, the Fed will raise short-term rates. The prime rate goes up instantly. Rates paid to savers go up more slowly – much more slowly. That means more profit for banks.

A: Your complex methods can sometimes lead you to a conclusion that is obvious from the chart.

J: This time my methods allowed me to enjoy that November surge.

A: Let us see if they get you out in a timely fashion as well.

Felix

I will begin this week 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: The stocks are about the same as last week.

F: The list changes, but only as the reader favorites change. I encourage my fans to submit requests.

J: The order of the ratings has changed. Are you going to resume showing us the week-over-week comparison?

F: I am thinking about that problem. Some of the stocks were not rated last week. For the moment, readers must follow their favorites each week.

J: Maybe we’ll get some good new suggestions. What is your featured stock for this week?

F: I suspect that you will not like my answer. I have nothing new this week.

J: Didn’t you just request a raise?

F: Yes. As you know I have had the best performance since you added me in September. I have been better than the dog, and a lot better than Oscar.

J: That is only five months, but I agree about your good start. That does not give you license to take the week off.

F: I worked, but there are no new ideas for my style. You told us all not to trade just to prove we are doing something. The holding period for my stocks averages five quarters. I am not going to have a fresh trade each week.

J: That makes sense. Just stay on the job and don’t reach for new positions. I don’t want to encourage you to get ideas from those high-frequency models in Chicago. They play a very different game.

 

F: So I have heard!

 

 

Oscar

Here are my ratings for the top reader interests. There are still three open slots, so keep the questions coming.

J: Interesting. What do you have for us this week?

O: I’ve talked about oil and oil refiners a lot over the past few weeks. Judging by the dip we’ve seen over the past year – and the rough patch we had in January 2016 – there was an awful lot of value to be found in this sector. I see a similar (albeit more modest) opportunity in Refiners now. Valero Energy (VLO) is a suitable example. Note the contraction so far in the month of January. Our 50-day moving average has spiked, while the 200-day moving average has barely evened out. I would be very surprised to see a correction here continue for much longer – despite the volatility in this sector.

J: Many people mistakenly trade in overall energy ETFs that include refiners. The characteristics are quite different. Crude is a raw material for refiners, so lower prices can be very good. Gasoline demand is important. Twice a year they make a switch from the summer blend to winter, and vice-versa. It is early for the summer switch, but could that be what you are seeing?

 

O: I see what the chart tells me. I just put it in the tank no matter whether it is winter or summer. Gas prices will be going higher and VLO will probably cash 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. Each week features a different expert or stock.

Questions

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

Conclusion

Our models provide an interesting “trading group”. We see many interesting ideas. We never know in advance what will be chosen, but a study of the charts is often revealing. Sometimes the trades are attractive on the fundamentals as well. That provides an assist for long-term shoppers who are looking for a good entry point.

Be receptive to methods different from your own. You are not the only expert!

 

Stock Exchange: Three Approaches Yield Three Trading Ideas

Last week’s Stock Exchange was a discussion of how to find new trading ideas. There are always plenty of names floated, but that is more about media than method. If you missed last week because of the holidays, you might find it useful to catch up.

This week I turn theory into practice. We have new ideas from three members of our panel and an informed abstention from another. We also include ratings for reader requests.

Let’s dig in with the new ideas. As usual, I will conclude with a brief observation.

Getting Updates

I have offered a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We will 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!

This Week— Three New Ideas

Holmes

This week I’m buying a company I wouldn’t be able to pronounce, Mallinckrodt (MNK) 53.10. REALLY??? 9 consonants and only 3 vowels. This specialty biopharmaceutical has fallen hard, but I’m sensing some “green shoots”.

The current low price represents a multiple bottom hit a couple of times over the last year before rallying. I don’t see a lot of upside in this unless the stock can break the most recent high of about 82. However, what I like about this is that I can run a tight stop loss, with maybe $2 of downside risk vs. $10-15 of upside profit.

J: Did you read the recent NYT article about the company? They are a possible new target in the overpriced drug crusade.

H: You know that I don’t read.

J: How did you know about the consonants and vowels?

H: I watch Vanna every night.

J: Does the drug pricing issue bother you?

H: News often creates dips. I figure out which are worth buying.

J: Last week you highlighted Palo Alto Networks (PANW). That is off to a good start.

H: I still hold it, but with a trailing stop to maintain my profits.

Athena

Cypress Semiconductor (CY) caught my eye this week. This one was in a nosedive through the month of October, but has bounced back considerably through the end of the year. Based on the shape of the 200-day moving average, I conclude that we haven’t hit the peak just yet. As usual, I would expect to hold this one only for a short time – maybe 2-4 weeks.

J: For once you have picked a stock where I can almost agree. The valuation is reasonable and the dividend of 3.8% is good. The FAST graph shows the excellent earnings growth and the underlying value.

A: Each week I explain that your earnings and ratios are not good indicators.

J: Have you ever heard of Warren Buffett?

A: There are many ways to make money in stocks. His favorite holding period is forever. I lose interest after a few weeks.

J: Are you concerned about the role of chip stocks is modern devices? The Internet of Things?

A: What I need to know is clear from the stock price and volume – and also my methods for filtering out the noise. You cannot gain my wisdom if you spend your time listening to fools.

 

Felix

I will 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: I see that the number of stocks keeps changing.

F: The list is quite dynamic. Some of those included did not get a rating last week. I encourage my fans to submit requests.

J: Is that because of your incentive bonus?

F: My principal motivation is to help.

J: Maybe we’ll get some good suggestions about what to include. What is your featured stock for this week?

F: I see promising long-term potential from Shopify (SHOP). I don’t deny there have been ups and downs; however, the stock has been able to sustain its significant gains from late summer of 2016. That kind of durability (as seen in the 50 Day Moving Average) is important to me as I look for long term holdings.

J: This is what we call a “story” stock – no earnings and no history. You are investing on faith alone.

F: As I keep explaining, you are too fussy.

J: I am fussier than you?

F: Yes – when it comes to stock picking.

 

Oscar

Here are my ratings for the top reader interests. There are still four open slots, so keep the questions coming.

J: Interesting. What do you have for us this week?

O: Nothing.

J: What? Are you spending all of your time watching football? Your fantasy league is over.

O: I am trying, but you tell me not to force it when there is nothing new.

J: True.

O: We often get caught up in the day-to-day when it comes to market moves. Many investors find themselves twisting in the wind without solid methods of their own. It is useful to step back and take a view from the cheap seats.

This article from Bloomberg is a great example. Not only are traders trying to predict what Trump will do in office – they’re shorting companies they think he might blast on Twitter! In this case, we see over $150 million invested in iShares Global Infrastructure ETF (IGF) – presumably anticipating a bipartisan bill to fix up roads and bridges. However, it quickly became clear that IGF was disproportionately composed of utility stocks. Bloomberg’s Eric Balchunas writes:

Infrastructure ETFs seem like the perfect way to play a Trump administration, but the caveat is they are loaded with utility companies, which tend to be vulnerable to rising interest rates…Don’t judge a book by its cover, and don’t judge a thematic ETF by its name.

J: Good point.

O: Over the past few weeks, I’ve written about airlines, REIT hotels, and diversified media. I’m still comfortable with these picks, and I don’t feel any pressure to shoehorn in a new recommendation. I win because I stick with my methods.

 

Background on the Stock Exchange

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

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

Questions

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

Conclusion

This week is an interesting implementation of the theory from the last few installments of Stock Exchange. The gang is having no trouble finding ideas, at a time when many others are stymied. That said, Oscar shows the discipline we need in a system. Do not reach for something that does not really fit.

There are plenty of trading ideas, and no need to “stretch” your system.

Stock Exchange: How to Find New Trading Ideas

Last week’s Stock Exchange was about the need for focus and discipline in your trading. Even with the help of systems and models, the human trader needs to maintain confidence. The inevitable rough patches present a challenge.

This week I turn to a very common trading problem – finding fresh ideas. Sometimes the muse does not appear. In a recent WTWA I used the trading section to highlight a great exchange between Brett Steenbarger and Adam H. Grimes. Both are worth checking out for ideas about getting ideas.

Another effective approach is a screen based upon important fundamental criteria. Marc Gerstein is a leader in developing and using these tools. A recent column about a screen on for “Trump stocks” provides an interesting example.

The discussion led me back to the rule-based approach of the Turtles, a famously successful group of rookie traders trained by Richard Dennis. Most of the rules still make great sense. While secret for many years, they are now in the public domain. This method had very specific rules for entering new positions. The trader did not “reach,” but instead waited for the market to provide opportunities.

Sometimes there are not any attractive trades. Does this have meaning for our models? Let’s start with a look at their current ideas, and wrap up with a conclusion on today’s theme.

Getting Updates

I have offered a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We will 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!

This Week— Finding Fresh Ideas

Holmes

By now you probably know that I love great stocks that have broken down and look to be bottoming. This week my pick is Palo Alto Networks (PANW). I love big down moves, followed by directionless ups and downs…this represents (to me) distribution from weaker hands to stronger hands. These types of moves have nicely defined risk/reward ratios. In this case, 120 is my sell stop, while I’m look for a short term rebound to 140, with possible more room to move back towards the 160 level.

J: Do you think this stock is more attractive because of the Russian cyberattacks?

H: I understand cyberattacks, but who is Russia?

J: I know, I know. You do not read news; you just look at charts. But you might be onto something here. The company is an aggressive choice and reasonable based earnings growth. You must be willing to ignore the short history and lack of a dividend. Chuck Carnevale’s F.A.S.T. Graph provides this information.

H: My choices do fine whether or not they have earnings growth. As for dividends, I will not own it long enough to worry about that.

J: It is another interesting example of how different methods can arrive at the same conclusion. Do you have a shortage of new ideas?

H: Yes, mostly because of the strong market. My strategy requires some dips to buy. I am a patient watchdog.

 

 

Athena

Zion Bancorp (ZION) caught my eye this week. I admit we’re starting to see some leveling off of the price after a big jump the last few months. At the same time, the sustained nature of the rally here is encouraging. There may still be room to jump on the bandwagon – but not for more than a few weeks.

J: I am a big fan of regional banks, but this one seems to have gone too far, too fast. The FAST graph shows the earnings growth and the underlying value.

A: I know you look at P/E ratios and such, but that is not necessary to find a great trade.

J: This was a reasonable buy before the election. Once again you seem late in getting on board.

A: What is this “election” you keep talking about? The part of the chart that you call too far and too fast, is the part I like best!

J: It seems like over-valuation.

A: I call it a breakout!

J: Any problems finding new ideas?

A: My wisdom and knowledge help me to see many opportunities.

 

Felix

I will 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: I see that you have cut down the number of stocks, but left out the prior week’s ranking.

F: The list is quite dynamic. Some of those included did not get a rating last week.

J: Maybe we’ll get some good suggestions about what to include. What is your featured stock for this week?

F: PayPal (PYPL) is almost exactly what I look for in a longer-term investment. We’ve got a mellow trending-upwards moving average, with a price very like what you might have found around the beginning of the year. Despite some ups and downs, the potential definitely exists here.

 

J: I like the PayPal business, but the company is too new to have a good basis for estimating earnings. I require at least one full business cycle.

F: You miss a lot of good picks with that requirement. Recognizing a strong business early is a great way to build value. Unlike the rest of the models, I think long-term.

J: Do you have a shortage of new opportunities?

F: No, but I do not require ten years of data to find a strong investment.

 

Oscar

Here are my ratings for the top reader interests. There are still five open slots, so keep the questions coming.

We’re off to the races this week. I’m taking a close look at the diversified media sector, best illustrated here by PBS. It’s nearing yearly highs after falling sharply at the beginning of the year, but I don’t plan on chasing the price like a greyhound at a dog track. I like the idea of buying at the current level, then looking for an exit after one or two weeks. There are enough fluctuations around the $26.50 mark to make me think there’s room for profit here.

J: How often do your ratings change? Are these listed in any particular order?

O: Any changes are strictly the result of the stock chart. If the markets change, my ratings will as well. I report the list in order of my strength ratings.

J: Why are media stocks so strong when NFL ratings are falling?

O: Everyone I know watches all of the NFL games, sometimes several at once. We all have players on each team.

J: You mean “fantasy” players? And why are you going to the dog track during football season?

O: We all have fantasy teams as well as daily and weekly leagues. You can do it from the track. It is called multi-tasking. If you would buy us a CPU upgrade, I could find even more picks.

J: Have you been adding new sectors? Any problems finding ideas?

O: My current picks are working fine. If it ain’t broke…

Background on the Stock Exchange

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

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

Questions

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

Conclusion

In any trading method, there will periods when fresh ideas are hard to find. Or you will try things, but nothing is working and you get stopped out. This is no different for our Stock Exchange models. A strength comes in how they handle these periods. Like the Turtles, they wait for the market to present opportunities, sticking with strict entry criteria.