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.

Is Forecasting Always A Folly?

Forecasting season is upon us. Anyone who gets to be quoted in print or speak to a reporter is asked an opinion. Expertise not required! It is paradise for pundits.

Many have decried the “folly of forecasting.” People love to laugh at supposed experts, looking back at old forecasts. Since most forecasts are based upon a model, modelers are thrown under the bus as well.

Barry Ritholtz wrote on this topic in his excellent Apprenticed Investor series. There are now over 200,000 blog hits on this phrase.

Background

But please consider this: Most models and forecasts are bad – very bad – but not all. The trick is to figure out which is which. Barry notes the possible exceptions:

There are only two kinds of predictions that have some value to investors: One is probability-based, and the other is risk-based. If you apply the same rules — no one knows the future, they are subject to revision and should not be taken as gospel — then these are sometimes worth considering.

Here are a few examples.

  • Millions of people attempt to paint, but only a handful are successful. Could you pick the winners?
  • Millions attempt to write, but there are few best-sellers. Could you guess them in advance?
  • Worldwide wine consumption is over 30 billion bottles. How many are really good?
  • In the U.S., 11 million people are playing baseball in a given year. Fewer than 900 are in the major leagues. There is so little difference that only an expert could identify the best players by watching them bat.

Finding the best in any large field is a real challenge!

The issue is especially important for financial analysis. I have been pondering this question for weeks. How can I best explain an important but unpopular viewpoint? I recently began this theme with by citing a bogus analysis in the New York Times. In simple fashion, I showed that if you only had the long-term average – that the market returned a positive result 2/3 of the time – you would do much better to predict “Up” every year rather than guessing 2/3 up and 1/3 down. This counter-intuitive result should be cause for thought, since it is an expensive and common investor mistake.

Ben Carlson inspired another approach. He publishes consistently strong work at his blog, A Wealth of Common Sense, which I always read and frequently cite. He discusses the difficulty of selecting the best stocks and sectors. This is the updated sector asset quilt he created, followed by his principal conclusion.

Like any asset quilt, there’s no rhyme or reason from one year to the next. I’m sure you could torture the data here using a momentum or value-based strategy to improve upon the results of the S&P 500, but unless you’re using a rules-based approach, you’re really just guessing when attempting to figure out which sectors will perform best over any given time frame.

That conclusion seems persuasive to a very intelligent observer using annual ranking changes. Can a first-rate forecaster add any value?

 

Finding the Real Experts

Ben is quite correct in noting that most contrived explanations will torture the data. Is this true of every approach? Here are some things I look for in evaluating a model:

  • It does not use too many variables compared to the available data
  • It has a good record using “out of sample” data as well as in real time
  • The underlying method is logical, proceeding from a theory
  • The modeler has both experience and expertise

Two sharply contrasting success stories reflect the two most common model types, trend following and mean reversion.

Dr. Robert Shiller is a leading economist at a top university, a Nobel Laureate, author of many papers and books of value to investors, and a popular media guest. Among investors, he is probably best known for his Cyclically Adjusted Price to Earnings ratio (CAPE) method. One of the methods that he endorses is the Barclays ETN, CAPE. Barclays implements CAPE in a mean reversion method. They look at the historical CAPE for each sector choosing the sectors most under-valued by this comparison (throwing out the bottom one). This is a mean-reversion method based upon fundamental data. At the introduction over four years ago, Barclays had promising backtest data. This did not attract many investors, most of whom cite CAPE as a method for timing the overall market – which Dr. Shiller himself does not do. After four years, the fund remains very small (under $34 million).

How has it done in real time?

Probably riskier than buy and hold the market, but much stronger returns. Those choosing to use CAPE as a reason to exit the market (not Dr. Shiller’s recommendation) would have done better to buy the ETN.

Dr. Vincent Castelli is not a professor at a top university, but he could have been. He will not win a Nobel prize, because his best work was top secret. He spent a career making U.S. armed forces safer and more effective, heading a group of other scientists from various disciplines. His modeling is known in quant circles, where he demonstrates, advises, and coaches. He is probably not going to become famous on CNBC.

His approach to sector analysis begins with the time-tested method of trend following. The tricks are in separating signal from noise, recognizing trends in a timely fashion, and exiting while you can protect profits. As an expert in modeling, Vince touches all the bases for sound work — ruthlessly pruning variables, a generous out-of-sample test, and real-time comparisons.

These two brilliant men took quite different approaches to life and later to analyzing stock sectors. Each found a profitable approach where most of us would see nothing.

Conclusion

There are many paths to successful investing. Remain open to profit opportunities by giving open-minded consideration to other approaches. Finding the best experts is just as important as finding the best stocks or sectors.

Stock Exchange: Great Trading has a Foundation of Focus and Discipline

Last week’s Stock Exchange was about how emotion and symbols affected technical analysis. Could our charts help us when the picture displayed involved some psychological event like Dow 20K?

This week I turn from the charts themselves to the trader who must interpret them. Successful trading requires focus and the discipline to stick with successful methods – even through a bout of bad luck.

Dr. Brett Steenbarger, the leading expert in trading psychology, puts it this way:

A topic that has arisen in recent conversations with traders is the importance of focusing on what has been making you money and sizing up those trades, rather than taking many kinds of trades throughout the day or week and watering down your edge.  So often, the difference between profitability and unprofitability is eliminating marginal trades and trading more confidently with our core strengths.  Perhaps most damaging in taking those marginal trades is that we don’t accumulate those small wins that allow us to go after larger ones.  It’s difficult to build confidence when oscillating between winning on good trades and throwing money away on so-so ones.

Dr. Brett writes almost every day about helping human traders achieve their best results? Does this have meaning for our models? Let’s start with a look at their current ideas.

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— Focus and Discipline in Trading Systems

Holmes

I love chances to buy on a dip, and this is quite a dip. United Health Services, Inc. (UHS) is down 8% in the last month alone – more than likely an overcorrection. While I like it for short term turnaround potential, I’m not just going to buy and hold. If things keep going south, my active approach to trading stops will get me out of this position before I take too big of a hit.

J: Do you realize that the new President is going to repeal ObamaCare?

H: We have a new President? What is ObamaCare?

J: I know, I know. You do not read news; you just look at charts. But you might have a point here. The original repeal will be rich in symbolism, but is not likely to end insurance for millions of people. There is a lot of selling in this stock based upon fear – not actual knowledge of what will happen. You could have a winner.

H: I usually do.

Athena:  I generally go for stocks that are already popping upwards. This week’s pick, United Rentals, Inc. (URI) is no exception. A substantial jump over the past two months really put this one on my radar, and I like the potential for future growth in the next 4-6 weeks. The rankings on the Relative Strength Index don’t particularly scare me. A high-volume event could push the stock well above the current price, yielding a tidy profit.

J: This idea also has some support from the fundamentals. The FAST graph shows the strong 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: Shouldn’t you have bought this one in 2015? It has doubled from the bottom?

A: I did not exist in 2015.

J: You were just a glimmer in Vince’s eye.

A: You must learn to look forward. We can all wonder why we did not take some action in the past. That is a waste of time. It is more important to make good decisions in the future.

Felix

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

As you can see from my presentation, which is neater and more informative than Oscar’s, I show the answers for last week as well as now. I also provide rankings within each category so that you can see which stocks are moving from one group to another.

Bristol Myers (BMY), for example, became a marginal “buy” while Apple (AAPL) dropped into the “hold” group.

J: You have nearly twice as many stocks listed as we agreed upon.

F: I am giving my readers more information. Do I get paid more for that?

J: No. And you must start reducing the list. Just go with the top vote-getters. What is your featured stock for this week?

F: I like Rice Energy, Inc. (RICE) as a long-term investment. A couple sharp declines in the past quarter put the 50-day moving average on a downward trend, but we’re still up on the 200-day moving average. My bet is we’ve bottomed out on this one, and it should be a solid holding looking 10-12 months ahead. That said, a few additional drops wouldn’t surprise me. This is a solid pick if you don’t panic, and keep your timeframe in mind.

J: Isn’t selling losers a part of trading discipline? The other models all do it with trading stops or a similar technique.

F: It is also part of my method. I am just not so quick on the trigger. My performance is similar to that of the others, but has a longer holding period. Some people must pay taxes, and prefer long-term gains. Oscar does not think about that.

J: What about Holmes and Athena?

F: Dogs and goddesses do not pay taxes.

 

Oscar

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

While no one asked about it, I’m big into trucking this week – think of your power running backs from Alabama. For our purposes the IYT Transport ETF will do. This area has experienced broad-based gains through the last quarter. I’m of the opinion we have some time before we peak. When you come across a 200-day moving average this flat, it’s hard to believe you’ve hit the ceiling.

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: Are those like the ratings you use for your fantasy football team? I see that you switched to college football for this week’s column.

O: My fantasy teams depend upon a different algorithm, but it is also a good one.

J: Is that available to our readers?

O: Not unless you give me a raise!

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

Human traders are constantly at war with their own emotions. Losing streaks are inevitable – just part of the job.

Our models do not know, of course, when they are in a bad performance streak. Using models is a great way to maintain focus and discipline. That is not, however, the final word. As long as humans remain in control, there will be psychological issues. Is your model still “working?”

Maintaining confidence in your model or trading system is just as important as confidence in your own trading skill.

Weighing the Week Ahead: New Year, New Highs, and a New List of Worries

There is a normal dose of economic data this week, but we are entering a quiet, pre-holiday period. As the rally faltered a bit, the Dow 20K talk yielded to a discussion of what could go wrong. I expect this discussion to continue in the coming week, and perhaps the next one as well. The punditry will be asking:

What can derail the rally?

Last Week

In a reversal from the last month, most of the economic news was soft. There was little apparent market effect.

Theme Recap

In my last WTWA, I predicted a week-long fixation on the Dow 20K story. That was very accurate, with the closest call coming just as I arrived at Chicago’s NBC tower for a CNBC interview on my 2010 forecast. I think it represents a delay rather than a jinx. Some might attribute the selling to the Fed and Chair Yellen’s press conference, an “effect” that was reversed the next day. It must have been meJ I’ll stay at the office for the rest of the year!

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally and the move to new highs.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

Personal

I will have several year-end posts planned for the next two weeks, but will probably skip WTWA next weekend. I am planning a Weighing the Year Ahead installment, probably in two weeks.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

This week’s news was quite good—almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Framing lumber prices are higher, year-over-year. Calculated Risk sees this as an important leading indicator for housing, so we should, too.
  • Initial jobless claims edged lower, to 254K.
  • Hotels are close to an occupancy record. (Calculated Risk).
  • The Fed provided the expected increase in rates with almost no market reaction. (That is the good part). Tim Duy provides some insight. See also “Davidson” via Todd Sullivan.
  • The Philly Fed showed a big gain to 21.5 (7.6 prior) and trouncing expectations. I am not very interested in the Empire State survey, but it mirrored the Philly result. Business and consumer confidence have both strengthened since the election. Confidence is essential for spending, investment, and economic strength.
  • Inflation is still tame, even as it creeps toward the Fed’s target.
  • Household balance sheets are much stronger. Scott Grannis regularly produces this chart. It is far more valuable than material from those focusing exclusively on debt, and ignoring assets.

  • Homebuilder confidence hits the highest level since 2005. (Calculated Risk).

 

The Bad

  • Industrial production declined by 0.4% from October to November.
  • The rail contraction continues. Steven Hansen continues his coverage with multiple takes and time frames. Check it out!
  • China/drone incident. The drone seizure coincided with Friday selling, a hint of market reaction to sensitive international issues. China will return the drone and claims that the story was “hyped up.”
  • High frequency indicators edge lower. NDD’s useful weekly compilation shows continuing strength in short leading indicators, neutral in the coincident group, and some weakness in the long term. He is downplaying the effects due to seasonality, but it bears watching.
  • Housing starts dropped by 18.7%. This was a very bad headline number. Various sources suggest that it emphasizes multi-family while single-family is strong. This is a shift that is quite acceptable, so we should follow it closely. Calculated Risk, our go-to source on all things housing, has a great analysis and this chart.

The Ugly

The Young. Colleges are profiting from helping credit card companies. The choices are frequently worse than the student could find otherwise.

The Old. Brett Arends opines that cost-of-living adjustments may soon end. Already the inflation rate for seniors, mostly because of medical costs, exceeds the standard CPI calculation.

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, but opportunities abound and nominations are welcome!
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 data, loaded into the latter part of the week. Things will get very quiet after Friday’s opening.

The “A” List

  • Michigan sentiment (F). Confidence is important right now. Will the mid-month preliminary high hold up?
  • New home sales (F). Not much change expected in this important sector.
  • Leading indicators (Th). This widely followed measure is likely to be flat.
  • Personal income and spending (Th). This important read on the economy is expected to show solid growth.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Existing home sales (W). A small decline is expected. Less important than new construction, but still relevant.
  • PCE price index (Th). The Fed’s favorite inflation indicator – still very tame at a touch over 1%.
  • Q3 GDP third estimate (Th). Little change expected in what is now viewed as “old news.”
  • Durable goods orders (Th). This volatile series is expected to be much weaker than the October data.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Despite the end of the FOMC quiet period, we have little FedSpeak. Chair Yellen makes an early-week appearance, and that is all I see.

Next Week’s Theme

 

Last week attention focused on Dow 20K. This was true even though it is a rather meaningless round number in a flawed index. It shows the power of symbolism to attract attention. When the rally fizzled out, the story swiftly turned. Everyone questions rapid, short-term moves, so it is a natural for the punditry.

I expect it to carry over into a quiet week, with plenty of focus on 2017. The popular question will be about what could stop the rally. What should we worry about? It is time to rebuild the wall or worry.

What could go wrong?

Pundits were already hard at work last week:

You should ignore the lists or 2017 winners.

Trump’s policies might not get enacted, disappointing markets. S&P businesses are in line for $87.1 billion.

Trump’s policies might be enacted, hurting the economy and markets. (Think trade matters).

Trump might make a bad decision in a crisis. An ill-timed tweet?

Valuations are still excessive. Stocks are too pricey to buy.

The Fed and a strong dollar might hurt earnings.

Stocks might get too expensive for dividend reinvestment. (You can’t make this up).

Bonds are sending a warning.

Or maybe we should look at the bright side?

A nice reversal from the negativity of last January, the worst start to a year ever. (Josh Brown).

The rally is real. Brian Wesbury’s valuation model showed stocks as 30% under-valued on election day.

20% upside for next year? Brian Gilmartin sticks to the facts. This is an earnings-based conclusion.

 

What should investors conclude from these sharply conflicting ideas? As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

We follow some regular great sources and the best insights from each week.

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

The increased yield on the ten-year note has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The Featured Sources:

 

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.

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

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

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed. His most recent research update suggests some “mixed signals” from labor markets.

Georg Vrba: The Business Cycle Indicator and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

Doug Short: The World Markets Weekend Update (and much more). Jill Mislinski updates the ECRI coverage, noting that their public leading index is at the highest point since 2010. Surprisingly, the ECRI public statements remain bearish on the U.S. economy, the global economy, and stocks. It is as if they never recovered from the bad recession call in 2011. They have been out of step ever since.

James Picerno highlights an important, oft-ignored relationship. Many worry about higher interest rates. He notes the relationship between higher rates and stronger economic growth.

 

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 six different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

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

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you now?)

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar is fully invested in aggressive sectors. The more cautious Holmes also remains fully invested, but with continued profit-taking and position switching. The group meets weekly for a discussion they call the “Stock Exchange.” This week we had a great topic – whether the focus on Dow20K had an effect on technical analysis. The prior two segments were on limiting risk and maximizing returns. (We report exits from announced Holmes positions if you ask to be on that list. Write to holmes at newarc dot com).

Top Trading Advice

 

Brett Steenbarger continues to provide almost daily insights for traders. Sometimes the ideas draw upon his expertise in psychology. Sometimes they emphasize his skills in training traders. Sometimes there are specific trading themes. They all deserve reading. This week I especially liked the following:

Adam H. Grimes has an excellent piece on finding ideas. You must be experienced, but also avoid confirmation bias. Dr. Brett gives a HT and follows up.

Brendan Mullooly takes one of my favorite approaches – drawing a lesson from outside trading, especially from sports. This approach helps rid us of confirmation bias, providing a fresh look. Check out the full post for data on the impact from overtrading. And the sports analogy? Teams that keep switching quarterbacks!

[This chart was approved by Mrs. OldProf, a native of Green Bay and a knowledgeable football fan.]

 

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 advice from legendary investor Peter Lynch. Instead of finding something from the last week, I wanted to find the best choice for current conditions. Ben Carlson did the Peter Lynch report about two years ago, starting with this very relevant quotation:

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.

And also….

Now no one seems to know when they are gonna happen. At least if they know about ’em, they’re not telling anybody about ’em. I don’t remember anybody predicting the market right more than once, and they predict a lot. So they’re gonna happen. If you’re in the market, you have to know there’s going to be declines. And they’re going to cap and every couple of years you’re going to get a 10 percent correction. That’s a euphemism for losing a lot of money rapidly. That’s what a “correction” is called. And a bear market is 20-25-30 percent decline.

They’re gonna happen. When they’re gonna start, no one knows. If you’re not ready for that, you shouldn’t be in the stock market. I mean the stomach is the key organ here. It’s not the brain. Do you have the stomach for these kinds of declines? And what’s your timing like? Is your horizon one year? Is your horizon ten years or 20 years?

What the market’s going to do in one or two years, you don’t know. Time is on your side in the stock market.

 

Stock Ideas

Lee Jackson has an interesting screen that produced 5 Dividend Stocks that You Can Still Buy With Market at Record Highs. “We screened the Merrill Lynch research data base for stocks that are rated Buy, pay a dividend and haven’t gone parabolic this year. We found five that make good sense for investors”.

Wind energy stocks have been left behind in the “Trump rally.” Buying opportunity or victim of policy changes?

But keep in mind that solar is now cheaper than wind energy. Tom Randall (Bloomberg Technology) has a helpful analysis of how much and why.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, including four or five specific ideas that we are buying. This week Holmes likes Amgen (AMGN). Check out the post for my own reaction, and more information about the trading models.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Some Merrill Lynch top picks for 2017 (via 24/7 Wall Street).

Ben Levisohn (Barron’s) sees 23% upside for FedEx.

Interested in REITs? Try health care.

Get ready for Eddy Elfenbein’s new buy list. This annual event is a great source of ideas for investors who like to think in a time frame of at least a year. You can also join in the whole list via Eddy’s new ETF (CWS). It is both convenient and inexpensive.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the important article by Jonathan Clements on your personal risk-free rate. It is not the T-Bill or T-Note from financial analysis, but your own most costly loan. This may seem obvious, but many people fail to consider it in their financial calculations.

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest is a must-read for financial professionals. The topics are frequently important for active individual investors, so the series is worth following regularly. This week I especially liked the discussion of financial literacy. Even active investors are unable to answer basic questions. WTWA readers would get them all right, so it may seem very surprising.

Watch out for…

Bonds cratering while stocks rally. Eddy Elfenbein presents a telling chart.

Final Thoughts

 

My biggest reason for the 2010 Dow20K post was to alert investors to the idea of “upside risk.” There is always – always – a list of plausible worries. These dominate the news and the financial discussions. The other side is difficult. It is boring to say repeatedly that things are normal and promising. Talking about some new development seems smart – attracting viewers, page views, more gigs to make you famous, and even investors who seek confirmation.

The natural process leads to a focus on problems. These are easy to see, while solutions are not. Therefore, most investors do not understand the ill-named concept of the wall of worry.

The new list of worries, all well-known and reflected in current market prices, is a replacement for those listed on my current “investor fears” page, which replaced those from the 2010 era. It seems smart to study world events and use that knowledge to guide your investment decisions. But it is not!

You cannot make these calls as well as the market does. You are almost certain to over-react.

The investor mistakes I highlighted in 2010 are still with us:

  1. Excessive attention to headline events;
  2. Reliance on poor forecasts of the economy, especially recessions; (James Picerno has a great list of typical forecasts)
  3. Too much reliance on backward-looking earnings, reflective of unusual events and times.
  4. Ignoring the long-term economic forces putting idle assets to work. (Mark Hulbert on 24K)
  5. Emphasizing politics instead of investing. In 2008 many investors hated the prospects and principles of the Obama administration. They sat out the start, and never found an entry point.

It is more profitable to accept a measure of uncertainty, rely upon the best recession and earnings indicators, and remain agnostic about politics.

 

This is a good time to ask yourself about how have you done? If you are wondering whether you might do better with a financial advisor, check out my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo! That is true for 99% of my readers, whom I am trying to help. Some readers might well benefit from our help. Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

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

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

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

Getting Updates

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

favorites-table-121616

 

This Week— Coping with the symbolism of Dow 20K

Holmes

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

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

H: What campaign?

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

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

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

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

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

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

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

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

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

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

A: There is a limitless supply of fools!

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

Felix

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

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

F: Who is Trump and where is China?

J: Those are important fundamental considerations.

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

Oscar

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

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

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

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

O: Well, there are some better charts.

J: Don’t hold out on us.

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

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

 

Background on the Stock Exchange

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

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

Questions

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

Conclusion

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

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

Weighing the Week Ahead: Dow 20K?

The post-election market run has been accompanied by improving economic data and increasing confidence. The result has the punditry asking a question that seemed crazy in January:

Will the Dow hit 20K?

Before reading this week’s installment, “Sherman, set the WABAC machine to” mid-year, 2010. The Dow was at 10K and many famous pundits were predicting a fall to 5000. In order to appreciate the psychology of the time, please read my post and especially the comments at Seeking Alpha. You will see some very colorful criticisms of my work! You will enjoy a few good laughs. I’ll comment more on this below, but it is a great place to start.

Last Week

Once again, last week’s calendar of economic news was nearly all good, supporting the market gains.

Theme Recap

In my last WTWA (two weeks ago), I predicted a period of stronger economic news and the possibility of a more positive market reaction. This is what has happened, but most commentators still are not emphasizing the main theme. It is not all about the Fed.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally and the move to new highs.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

 

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

This week’s news was quite good—almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Rail traffic finally scores a slight positive. Steven Hansen provides the current data, as well as the more negative long-term perspective.
  • Senate passes stopgap funding. This is not getting a lot of attention, but it is a big shift from the past eight years, especially 2011, when the last correction came for this very reason. (The Hill).
  • OPEC reached a production limit agreement. Whether this will attract cooperation from non-OPEC countries is open to question. We might also ask whether a floor under energy prices is a positive. That said, the oil price/stock correlation has been a factor since the energy collapse. Months ago, I suggested that we were entering a sweet spot for oil pricing. The OPEC participants see a cap of about $60/barrel, which makes sense.
  • Jobless claims down ticked, and remain near all-time lows. See Calculated Risk for the story and charts.
  • Productivity rose over 3%.
  • Michigan sentiment spiked to 98 on the preliminary estimate. LPL shows why this is important.

  • Borrowers continue to move out of negative equity on their homes. 384K in Q3 (Calculated Risk).
  • ISM non-manufacturing strengthened to 57.2. Doug Short has the story and this chart:

 

The Bad

  • Gas prices rose over five cents. (GEI).

  • Interest rate components of long leading indicators are weakening. (New Deal Democrat). This is mostly a positive story, but the long-term interest effects are worth watching. NDD’s report of high frequency indicators is a regular read for me, and should be for other frequent traders.

 

The Ugly

Secret outside influence on U.S. elections. Foreign countries frequently have an interest in the most important elections. There is nothing new or unusual about that. Voters can weigh the opinions and arguments in the same way they use other information. Actions that are secret are another matter, especially when following the “dirty tricks” approach.

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, but opportunities abound and nominations are welcome!
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 big week for data.

The “A” List

  • FOMC rate decision (W). An increase is widely expected. The statement and Yellen’s press conference may yield hints about next year.
  • Housing starts and building permits (F). Softening pace expected in this important sector.
  • Retail sales (W). November data following a very strong October.
  • Industrial production (W). Any improvement in this economic weak spot?
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • PPI (W). Interest in inflation measures is increasing, but prices are not.
  • CPI (Th). See PPI above. Eventually these will be important.
  • Philly Fed (Th). The first look at December data is expected to be positive.
  • Business inventories (W). Significant for Q4 GDP, but little change is expected.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

With the FOMC meeting at mid-week, FedSpeak is on mute. Expect plenty more news on possible Trump policies.

Next Week’s Theme

 

The strong data continues, as does the market rise. We still do not see a reflection in forward earnings, but the earnings recession has ended. The Fed is about to raise rates, and no one cares. It is not all about the Fed, and more are learning that. As the market hits new highs, including a big round number on the DOW, the focus this week will be on DOW 20K.

In my 2010 articles I tried to emphasize the right focus for investors. Too many were paralyzed by fear from the frequent disaster predictions. Their upside risk was huge. This section was crucial:

Asking the Right Questions

The bias is inherent in the situation. The problems are known. If you write for a major publication, you are rewarded for analyzing the negativity. If you go on TV, you are expected to parrot the analysis of problems. This makes you seem smart.

By contrast, the solutions are vague and unknown. If you even talk about them, all the “hot shots” are skeptical.

That should be your clue to pay attention. Repeating the known news does not make you money. Try asking these questions:

What if unemployment falls to 8%?

What if the annual budget deficit is reduced?

What if housing prices and sales show a clear bottom?

What if mortgage rates remain low?

What if politicians negotiate a compromise on tax increases?

What if Europe stabilizes?

What if China and other emerging countries resume a solid growth path?

What if earnings for US companies continue to surge, leaving the 10-year trailing earnings in the dust?

What if the US rationalizes immigration?

If you have not thought about these possibilities, you have a fixation on negativity. My Dow 20K concept is designed to set you free — to get you thinking about the long sweep of history and the potential for success. If even a few of these things happen, what would be the market reaction?

This list of worries seems so old….

Two years later the New York Times ran a story with the analysis from a big firm. The reasoning was like mine, but missing the first 30% of the move.

Josh Brown takes note of the Barron’s cover. Since magazine covers are often viewed as contrary indicators, he adroitly includes a few others that might have been viewed as signals of a top. Great insight, and great fun.

Scott Grannis shows the wall of worry climb (but I still like my own version better!)

Eddy Elfenbein highlights the sharp contrast between now and January as well as the impact of the banking sector.

Remember how the start of 2016 was one of the worst market starts in Wall Street history? Howard Silverblatt noted this stat: At the market’s February, low, the S&P 500 was down 10.5% YTD, yet the Financials were down 17.7%. Since then, the S&P 500 has rallied 21.5%, while the Financials are up 45.6%. It’s as if the entire market were the dog being wagged by the banking sector’s tail.

None of this really answers the DOW 20K question, but the information is great. As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

We follow some regular great sources and the best insights from each week.

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

The increased yield on the ten-year note has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The Featured Sources:

 

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.

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

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

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed. His most recent research update suggests some “mixed signals” from labor markets.

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

Georg Vrba: The Business Cycle Indicator and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

There is a Correlation Nosedive says Nick Colas (via Josh Brown). This signals an opportunity for those who can identify the best stocks and sectors. The phrase “stock-picker’s market” is oft-repeated. Now it makes some sense.

Dr. Brett analyzes the divergences and the implications.

Brian Gilmartin reports on the recent Chicago CFA luncheon where “Dan Clifton of Strategas Partners gave a great presentation on the coming fiscal stimulus and what it might look like and what it might mean for the US economy in 2017”. This means plenty of money for share buybacks and earnings increases. Brian (who has been very good on both earnings and the market) reaches this conclusion:

In year-end meetings with clients, I’m telling clients from both sides of the aisle that the SP 500 could be up 20% next year. Prior to the election and since last Spring ’16, the SP 500 was already looking at its best year of expected earnings growth in 5 years. The proposed President-elect and Congressional fiscal policy could be another level of earnings growth above what was already built into the numbers, before November 8th.

Personally, the $1 trillion repatriation estimate that Dan Clifton threw out seemed on the lighter side to me. Apple alone has $250 billion sitting on its own balance sheet, which is 1/4 of the expected total.

This is something we all should be monitoring.

 

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 six different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

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

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you now?)

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar is fully invested in aggressive sectors. The more cautious Holmes also remains fully invested, but with continued profit-taking and position switching. The group meets weekly for a discussion they call the “Stock Exchange.” This week we talked about maximizing gains. Last week the topic was minimizing risk. (We report exits from announced Holmes positions if you ask to be on that list. Write to holmes at newarc dot com).

Special thanks to our guest expert, Blue Harbinger, who provided first-rate fundamental analysis, providing counterpoint for our technical models.

Top Trading Advice

 

Brett Steenbarger continues to provide almost daily insights for traders. Sometimes the ideas draw upon his expertise in psychology. Sometimes they emphasize his skills in training traders. Sometimes there are specific trading themes. They all deserve reading. This week I especially liked the following, each reflecting one of the main themes:

 

Insight for Investors

Investors have a longer time horizon. The best moves frequently involve taking advantage of trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Morgan Housel’s post on The Art and Science of Investing. I am delighted that he is keeping his promise to keep writing, leading the effort at a new, multi-contributor blog. This entry, as is the case with much of the best investing work, does not emphasize immediately “actionable” advice, designed to attract plenty of page view. The concept is great, and the post is worth a careful read. Here is the thesis:

This drives people crazy, because the more important a field is, the more scientific and predictable we want it to be. People take scientists seriously because they can count of them. Art is taken less seriously because it comes and goes.

But most fields outside academia are both science and art.

Including investing.

An example?

There is scientific data showing the best way to invest is to buy the cheapest set of companies you can find. There’s equally persuasive data showing the best way to invest is to buy the fastest-growing set of companies, which tend to be expensive. Some investors obsess over brand and intangibles. Others say ignore those and only look at fundamentals. Neither is right or wrong. You just have to appreciate that each strategy lives in its own context, and that market trends come and go. It’s an art.

I love this concept! There are many ways to profit from trading and investing. Arguments about approach may either distract or enlighten.

 

Stock Ideas

 

Brad Thomas suggests two REITs for the new Commander-in-Chief. Besides the recommendations, Brad analyzes some potential losers.

Still wondering about winners from the election? Marc Gerstein’s stock screening methods generate a great list of stocks and sectors.

Looking for safe yield? Who isn’t!! Blue Harbinger provides a first-rate analysis of Saratoga Investment Corp. (SAR). There are plenty of traps in the Business Development Company (BDC) universe. Mark’s analysis shows how carefully you must consider the data in finding sound choices. He carefully considers the implications from higher rates.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, with four or five specific ideas that we are also buying. This week Holmes likes Molson Coors (TAP). Check out the post for my own reaction, and more information about the trading models.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

But Tom Armistead warns that there is too much enthusiasm about Deere.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the Bloomberg analysis of when it is right to wait before claiming Social Security benefits. While it is an individual choice and calculation, delay is good for many. (See also “Watch out for” below.)

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest is a must-read for financial professionals. The topics are frequently important for active individual investors. Gil is on a well-deserved vacation, but his last post is very helpful. He takes a nice look at the current risks and rewards from the market rotation away from bonds.

Watch out for…

Structured products. Larry Swedroe (ETF.com) provides a careful analysis of what the investor is really getting. Most have inflated notions about the returns and are not properly informed about risks. In many cases, a simple fixed-income security would be better. This is a complicated story, but it is worth reading carefully if you, like so many, are considering these investments.

 

Final Thoughts

 

Will we reach DOW 20K? And stay there? I expect us to touch that level soon. When the market gets close to such numbers there is a magnetic attraction. Sellers see it as inevitable, so they back away. It becomes a self-fulfilling prophecy. Whether the level holds will be a trickier question. It will, but perhaps not right away. No one really knows.

My purpose in the DOW 20K project, including buying the domain name, was to help individual investors to focus on the right problem: Missing the upside because of the paralysis of fear. Consider the following:

  • For many years, anyone forecasting more than an 8% gain in the market was tagged as super-bullish.
  • Since 2010 there have been incessant warnings of another market crash, a decline of 50% or more.
  • A market doubling in 6 ½ years represents 11% compounded growth.

It was not a prediction of rush to 20,000, but an emphasis on taking the right perspective. There are always market worries. The big negative predictions always get the attention. It is always difficult to stay the course.

Is DOW20K the end? Definitely not. The fundamentals are all better than in 2010, and the worries are different. I’ll write soon about the methods behind the original call and the current implications. For now, I’ll just say that the upside/downside risk is still attractive.

Investors need not just “buy and hold.” Recessions are the biggest risk, so I watch that closely. The right allocation among asset classes deserves a regular review.

This is a good time to ask yourself about how have you done? If you are wondering whether you might do better with a financial advisor, check out my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo! Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Weighing the Week Ahead: Are Stocks Ready for Stronger Economic News?

It is (ahem) a very big week for new data. The A-teams are back from their mini-vacations, ready to take a fresh look at the new world. While some will continue to work the Trump Administration/stock theme, it remains mostly guesswork. There is a new theme, which markets and pundits will get around to, perhaps as soon as this week. With a tone change on the economy and deficits, I expect the punditry to be asking:

Can the market embrace some good news?

Last Week

Once again, last week’s light calendar of economic news was nearly all good, but not the focus of discussion.

Theme Recap

In my last WTWA, I predicted special attention to the Trump stimulus plan and how it might be financed. Must of the week’s discussion was about possible cabinet appointments and the policy implications, but spending and taxation got plenty of attention. It was a s good a guess as any.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally and the move to new highs.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

Personal Note

I am taking a few days off, so there will be no WTWA next week. I hope that the Stock Exchange group does not play hooky.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

This week’s news was quite good. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Rail traffic is improving reports Steven Hansen at GEI. The story is even better if you remove coal and grain.
  • Technical indicators are strong. Our own technical models remain strongly bullish. Noted technician John Murphy (via Charles Kirk) has this comment:

    “There is little doubt that the market’s trend is still higher. The fact that it’s being led higher by economically-sensitive stock groups like energy, materials, industrials, small caps, and transports is a sign of strength. The fact that tech stocks are starting to strengthen is also a positive sign.”

  • Chemical activity shows continuing strength. Calculated Risk monitors this indicator, which seems to lead industrial production.
  • Durable goods rebounded nicely to an increase of 4.8%.
  • Existing home sales were strong at 5.6M SAAR, beating expectations. Calculated Risk cautiously notes that the results do not reflect the recent higher mortgage rates.
  • Michigan sentiment beat expectations moving to 93.8. Doug Short has a comprehensive review.

The Bad

  • New home sales fell on an annualized basis. The decline included both multi and single-family residences. Calculated Risk offers perspective. Please compare the measured response here and above on existing home sales.
  • Mortgage rates moved above 4%. (MarketWatch).
  • Trucking is still declining, but the rate seems lower. Steven Hansen at GEI reviews the mixed picture.

 

The Ugly Beautiful

At some point, I need to do an update on last week’s “Fake News” ugly award. There is a good cyberspace discussion, but that can wait.

As I occasionally do, I want to focus on the positive for a change. Bill McBride of Calculated Risk had an encouraging Thanksgiving post, Five Economic Reasons to be Thankful. Read the whole post, but here is one that might surprise you – household debt levels.

 

 

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 Jon Krinsky of MKM Partners, with a big assist from Josh Brown. There is a consensus that countries are racing to debase currencies in “beggar thy neighbor” policies. The stronger dollar certainly reduces earnings for some companies, especially if they do not do any currency hedging. The flip-side gets no attention. Josh writes, There is zero evidence of a long-term correlation between stocks and the dollar. Take a look.


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 the data avalanche that we often see when the first two days of the new month are at the end of the week. This quirk of the calendar makes this the biggest week of the year for data.

The “A” List

  • Employment report (F). Expectations are a little lower for the data markets see as most important.
  • Consumer confidence (T). A good concurrent read on spending and employment.
  • ISM index (Th). Still modest growth in this widely-followed measure?
  • Auto sales (Th). Important sector, private data, and not a survey. What more could you want?
  • ADP private employment (W). Deserves more respect as an alternative to the “official” data.
  • Personal income and spending (W). Important economic growth indicator. Will strength continue?
  • Beige book (W). Provides descriptive color for FOMC participants, and occasionally some policy insight.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Construction spending (Th). Rebound expected in this important sector.
  • GDP second estimate (T). Somewhat “old news” but still the base for the ultimate measure of economic growth.
  • Chicago PMI (W). Most important of the regional surveys, with some predictive power for ISM.
  • Pending home sales (W). Less direct impact than new construction, but a good read on the housing market.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

For those who missed it during the holiday-shortened week, Fedspeak is back! We could also get big news out of the oil production talks between OPEC and non-OPEC members.

Next Week’s Theme

 

This will be a big week for news, and it might also be for stocks and bonds. For a long time, the market reaction has been entirely Fed-focused. If the economy looked better, the Fed would start raising rates. If it looked worse, the Fed was expected to help. Whatever the reason, the tone has now changed. Economic data have been better, and there is more optimism. There is growing acceptance of higher interest rates. The market seems untroubled (so far) by the rate move and the strength in the dollar.

While few remarked on the tone change last week, I expect it to get more attention in the week ahead, especially if economic data remains strong. It will leave us wondering – Can the market finally celebrate good news?

This is a multi-part theme prediction. We do not know that the data strength will continue. We do not know what the FedSpeak comments will be. And finally, we do not know how markets will react. We have a clue about how the political world will react (via Charles Kirk).

“I’m getting a real kick out of how so many Republicans have gone from bear to bull on US economy overnight and how many Democrats have done the opposite.”- Patrick Chovanec

This change will be reflected in comments from the punditry this week.

As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

We follow some regular great sources and the best insights from each week.

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

The increased yield on the ten-year note has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The Featured Sources:

 

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.

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

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

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed. His most recent research update suggests some “mixed signals” from labor markets.

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

Georg Vrba: The Business Cycle Indicator, (latest edition below) and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

Urban Camel at The Fat Pitch analyzes recession forecasts based upon the Presidential Cycle, a popular current theme. This is a great article. (A Silver Bullet candidate at least). Here is a key quote:

More to the point, there are better ways to forecast the next recession than counting months on a calendar or focusing on changes in the presidency. How?

By monitoring changes in the macro data. A persistent slow down in retail sales, housing consumption, employment growth and other macro indicators will likely be a better method for indicating when a recession is becoming more likely. This is the stuff that matters most; the calendar and presidential terms are demonstrably inadequate on their own. Our regular commentary on the macro environment can be found here.

This is very good advice to the recession worrywarts.

If (like me) you are a quant who is always hungry for more data, you will love FocusEconomics. You get a compendium of information from around the world, with cogent analysis. To take one example, here is their update on the Trump effects:

There are so many interesting topics that it is difficult to describe in one example.

 

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 six different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

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

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you now?)

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar is fully invested in aggressive sectors. The more cautious Holmes also remains fully invested, but with continued profit-taking and position switching. The group did not meet on Thanksgiving Day, but you can expect reports to resume in this Thursday’s “Stock Exchange.” Out of the many Holmes picks this week, I can report one that seemed to capture a theme, Fomento Economico Mexicano SAB, (FMX). This Mexican holding company, trading via the ADR, includes several retail holdings. (Think Coke and Heineken). Holmes likes to play rebounds on a technical basis, so this is an interesting play on Trump policy from a source who knows nothing about the election or the news. (We report exits from announced Holmes positions if you ask to be on that list. Write to holmes at newarc dot com).

Top Trading Advice

 

Brett Steenbarger keeps on bringing it, day after day. His posts are a must-read for traders, but often have broader scope. If you are trying to perform well at anything, Dr. Brett can help you. My favorite piece this week was about a movie featuring young drummers. It is often helpful to go outside of your own world, take an objective perspective, and then look for the lessons.

Adam H. Grimes has a good explanation of how to calculate volatility in Excel. I find that most people consistently over-estimate volatility, perhaps goaded by the CNBC reports of “triple digit moves” and a 50-point bounce since the lows. These are both basically meaningless unless you are trading a very large short-term position.

Bill Luby discusses common misperceptions about the VIX. This is a great example of those who need to use Adam Grimes’ spreadsheet!

You can always tell when the crowd gets long the VIX and ends up on the wrong side of the trade.  “The VIX is broken!” becomes an oft-repeated refrain, as does “The markets are rigged!” and the usual list of exhortations from those who are in denial.  The current line of thinking is that the world must be much more dangerous, risky and uncertain as a result of a Trump victory, yet the VIX is actually down 31.4% since the election – ipso facto the VIX is broken.

The VIX is a market measure, not something readily rigged. If you disagree, you are simply on the wrong side of the market.

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 Michael Batnick’s post, This is Not Bearish. The question is the new all-time highs in stocks. I know from experience that the average investor sees this as some sort of warning. Instead of interpreting prices in context, they see a chart or a range and expect mean reversion.

Michael looks at data since 1928. How many new market highs do you suppose have been made since then? How many this year? The answers are 1134 and 11. I suspect that few would come close in their guesses. 18% of all months have closed at all-time highs. Here is what happens after a new high:

The time after a new high is nothing special – and nothing to worry about.

This post was frequently cited, but I enjoyed the color provided by Brian Gilmartin. His story about how a Chicago TV producer uses psychological tests to find the most stressful stories is priceless!

Stock Ideas

 

Brian Gilmartin has a mixed take on health care (seems right to me). Policy is changing. Defensive stocks are in question. More aggressive picks might do well. Check out his objective, earnings-based take for some ideas.

Tiernan Ray (Barron’s) has a helpful article on deal stocks. While value investors always look for cheap stocks, these are also often good takeover targets. It is helpful to keep an eye on the candidates.

Mexico a screaming buy? MarketWatch analyzes the trade rhetoric and prospects. (And note Holmes above).

Freeport McMoran? (FCX). Stone Fox Capital analyzes the relationship between copper prices and the stock price. Not much of a boost is needed, and the copper market has been strong.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is Jonathan Clements’ piece on the two financial numbers you need to know. Hint: You might have a clue about this, but are probably measuring incorrectly.

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest is a must-read for financial professionals. The topics are frequently important for active individual investors. I especially liked this post on dividends. Why do so many insist on regular cash payments?

Gil nails it with his answer – the security of regular payments.

If you are wondering whether you might do better with a financial advisor, check out my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo. Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Market Outlook

Eddy Elfenbein provides several interesting facts about the economy, helping us all to keep perspective. You will enjoy the mixture of surprises and items you might guess. Did you know that nearly half of mutual fund managers do not own their own fund?

Eddy’s ETF (CWS), based upon his successful annual list, is getting a lot of deserved attention. It is off to a good start.

Bill Kort reviews the most recent predictions of the end of the world.

Value Investing

The rebound of the value approach continues. Dana Lyons provides the most recent evidence.

Watch out for…

The bond market. The Brooklyn Investor compares bonds and stocks over a long period. The analysis reveals the shortcoming in measures like the Shiller P/E, which consider neither interest rates nor inflation. There are many helpful charts, but here are some examples.

I am always baffled at comments like, “The market has averaged a P/E ratio of 14x for the last 100 years so the stock market is 40% overvalued at 20x…”.

How can you compare 14x P/E to the current level without discussing interest rates?  And if you think stocks should trade at 14x P/E today, then you should also think that interest rates should be much higher than they are now. For example, the 10-year bond rate averaged 4.6% since 1871 and 5.8% since 1950. But these periods include a time when interest rates were not set by the market.

And also this:

 

1955-2014:

            Interest rate range           average P/E

                   4 – 6%                             23.3x
6 – 8%                             19.6x

I looked at the data from 1955-2014 (adding one more year to update this isn’t going to change much) to see what the average P/E ratios were when interest rates were in certain ranges.

From the above, we see that the market traded at an average P/E of 23.3x when interest rates were between 4% and 6%.  The 10-year now is at 2.3%. So we have a long, long way to go for interest rates to threaten the stock market, at least in terms of the bond-yield/earnings-yield model.

Final Thoughts

 

If you want to analyze a change, you need to know when it starts. Here is part of an example from my causal modeling classes.

When does change start?

  • When the new Captain orders a change in course?
  • When the crew knows the new Captain will order a change?
  • When the crew knows the new Captain, but not whether he will order a change?
  • When the crew knows there will be new Captain who might order a change?
  • When the crew knows there might be a new Captain?

I am sure you get the idea. The methods that track the market under various Presidents have many problems, but the starting and ending points are especially important. There are no new Trump policies. We are all still guessing about what they might be.

And yet – there has been a definite change in tone. Economic strength has a lot to do with confidence – the willingness to invest and to spend. A divided government had many dysfunctional consequences, especially repeated issues about the debt limit and spending on crucial programs. We can expect less of that. There will also be a very different reaction to economic data; the political rhetoric that blinded investors will be reduced.

The generalized Fed theory will have less traction. Those who have been wrong about the market for years have used the Fed as a fig leaf. With interest rates rising and the economy improving, that story must change.

The emphasis on commodity prices as an economic indicator, most prominently by the ECRI, is also proving wrong, as is the impact of a stronger dollar.

This is not an endorsement of specific Trump policies. It is the reality of moving out of the election environment – at least for a year or so! This week’s data avalanche could be the first real test of this new attitude.