Stock Exchange: Finding Trading Ideas in a Low Volatility Market

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

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

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

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

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

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

Review

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

Market Tech Take

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

 

Let’s turn to this week’s ideas.

This Week—Finding Trading Ideas in a Low Volatility Market

Holmes

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

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

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

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

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

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

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

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

Felix

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

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

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

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

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

Oscar

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

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

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

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

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

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

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

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

RoadRunner

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

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

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

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

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

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

Road Runner: Tough but fair.

Athena

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

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

Athena: That’s the idea.

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

Athena: I think I just lost my appetite.

Conclusion

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

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

Stock Exchange Character Guide

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

Background on the Stock Exchange

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

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

Questions

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

Getting Updates

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

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

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

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

 

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

Review

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

 

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

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

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

Road Runner

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

R: Look at Netflix (NFLX).

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

J: Are you worried about a market crash?

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

Athena

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

J: Is this a reflection of very high risk?

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

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

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

Felix

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

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

F: A small omission. Sorry.

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

F: We were all working.

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

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

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

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

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

 

 

 

 

 

 

 

 

Oscar

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

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

J: Are you doing anything special about risk?

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

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

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

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

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

O: They are on the right track.

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

O: The sector is still strong.

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

 

 

 

 

 

Holmes

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

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

J: Are you worried about a market crash?

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

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

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

 

Conclusion

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

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

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

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

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

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

Background on the Stock Exchange

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

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

Questions

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

Getting Updates

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

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

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

Will a more aggressive Fed derail the rally in stocks?

Personal Notes

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

Last Week

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

Theme Recap

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

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes yet another record close based on the week’s gain of 0.67%. We can also see the gap opening after the Presidential Address to Congress.

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

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

The News

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

This week’s news was mostly positive.

The Good

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

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

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

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

 

The Bad

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

The Ugly

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

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

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. Nominations are welcome. Potential award winners can find daily inspiration at several websites!
The Week Ahead

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

The Calendar

We have a moderate week for economic data, featuring the employment report on Friday.

The “A” List

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

The “B” List

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

     

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

Next Week’s Theme

 

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

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

Much of the commentary next week will raise the question:

Will a more aggressive Fed spark a stock market correction?

Some might add “finally”!

The question actually has two parts:

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

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

Both questions have a bullish and bearish side.

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

 

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

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

 

The Featured Sources:

 

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

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

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed.

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

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

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

How to Use WTWA (especially important for new readers)

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

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

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

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

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

Top Trading Advice

 

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

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

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

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

Insight for Investors

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

Best of the Week

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

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

Stock Ideas

 

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

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

Bottom Fishing

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

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

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

How about Snap?

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

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

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

 

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is the discussion of ten things you must know about personal finance. It is important to get fundamental decisions right before launching your investment program.

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

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

 

Watch out for…

 

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

Final Thoughts

 

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

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

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

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

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

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

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

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

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

Worries?

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

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