Weighing the Week Ahead: Should Investors Fear Another Watergate?

We have a very quiet week for economic reports. The housing data are quite important, but it will be a Tuesday story without legs. The White House drama will be compelling for the media. Whether investors like the idea or not, we should expect another week of news that is mostly political. My mission at WTWA has two parts:

  1. Recognize the reality – like it or not.
  2. Find the investment implications – however modest.

In a light week for data, it will be easy for the punditry to jump on the Comey firing story. Expect everyone to be asking:

Is this like Watergate? Should investors be afraid?

 

Last Week

Last week the economic news was good, but mostly ignored.

Theme Recap

In my last WTWA I predicted that a bored punditry, lacking fresh data, would be looking at tea leaves to find a message from the markets. That proved to be my worse forecast of the year! After a day of analyzing Mr. Buffett and the Sohn Conference, President Trump grabbed the spotlight. I hope people benefitted from the discussion, even though it never became the focus for the week.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the weak Friday trading, the narrow range, and the closeness of the all-time high.


Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the 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!

Once again, the economic news last week was good, but there was little market reaction. Of course, there were other considerations.

The Good

  • The EIA’s energy outlook suggests stable prices. People seem to regard different prices as “good.” These levels are fine for consumers. The distress in the oil patch has been mitigated. (EIA).
  • Hotel Occupancy increased again matching a record pace. This chart from Calculated Risk provides a nice comparison.



  • Corporate earnings have been strong on all fronts: improvement over last year, beating expectations on earnings, and beating expectations on revenues. FactSet details this important story for investors, illustrated by the chart below. Brian Gilmartin makes a key point, highlighting the modest revisions in earnings expectations:

    The question we should ask for readers is what sectors (using the above data listed in 2nd set of bullet points) are seeing the smallest negative revisions as we approach Q2 ’17?

    Real Estate: +3.6% today vs. +3.5% on April 1 ’17.

    Financials: +9.5% today vs. +10.5% on April 1 ’17.

    Industrial’s: +1.1% today vs. +1.3% on April 1 ’17.

    Technology: +9.6% today vs. +11.5% on April 1 ’17.

    Health Care: +2.2% vs. +3.3% on April 1 ’17

    Readers should remember, that Technology, Financials and Health Care – those 3 sectors alone – comprise about 50% of the SP 500 by market cap.

 


  • Port traffic strength continues at a better rate than the economy. Steven Hansen (GEI) takes his expected deep dive into the data.
  • Initial unemployment claims dropped to 236K. Calculated Risk provides this interesting, long-term chart. It is consistent with the tighter labor market conditions in last week’s JOLTS report.


 

The Bad

  • Retail sales disappointed. Core sales increased 0.4%, less than expectations. This was somewhat mitigated by revisions to prior months. The data are not adjusted for inflation, notes Steven Hansen (GEI), so the picture is a bit worse.

Retail same store sales also disappointed. The entire sector is challenged. (MarketWatch). J.C. Penney hit a record low and big-name department stores were also hit.

 

The Ugly

Some stories do not die, perhaps illustrating why they qualify for the “ugly” category. This week a major ransomware meltdown occurred. Wired asks whether it might be the long-awaited “big one.”


North Korean nuclear and missile development is another regular concern in this section. As I write, there is news of another missile launch, but few details.

 

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 I welcome nominations. The investment world is full of misleading information and bogus conclusions.

The Week Ahead

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

The Calendar

We have a normal week for economic data, but with few important reports.

The “A” List

  • Housing starts and building permits (T). Continuing strength expected in the April data.
  • Leading indicators (Th). Popular economic summary remains in solid growth range.
  • Initial jobless claims (Th). Continues with record low levels.

The “B” List

  • Industrial production (T). Will the rebound continue?
  • Philly Fed (Th). Moves markets, perhaps because it is the earliest read on a new month.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

FedSpeak is down a little after last week’s heavy schedule. I don’t care much about the Empire State index. There are still some earnings reports, including Wal-Mart.

Next Week’s Theme

As I noted last week, when there is not much important news, it creates a vacuum. It does not change the need to fill on-air minutes or column space. If nature abhors a vacuum, the punditry hates it even more! I was right about that, but wrong about what the news would be!

The Comey firing, the suggestion of recordings of Oval Office conversations, and the Kissinger picture have fueled plenty of speculation. Everyone is asking:

Is this like Watergate?

Financial media might also ask:

Do events increase risk for investors? What does it mean?

Expect to be bombarded with speculation, beginning with the Sunday shows.

Some will emphasize Watergate parallels, while others will cite differences. I have a list of such sources, but the arguments are mostly political.

The investment implications are much more difficult to follow. The early theme is that the controversy will derail the Trump agenda. Since recent market gains assume Trump tax cuts, etc. the stock rally is threatened.

This is certainly a big story, but it is not yet a market story.

The Comey firing is “more of a political story than a markets story…Implications directly for the market are pretty muted,” Chris Zaccarelli, chief investment officer for Cornerstone Financial Partners, told MarketWatch. (William Watts).

As usual, I’ll have more in my Final Thought.

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 


 

The Featured Sources:

 

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

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

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

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

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

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

Eddy Elfenbein has his inimitable take on the VIX – clear, common sense, and accurate:

I have a slightly heterodox view on the VIX. You’ll often hear the VIX discussed on the financial news as if it’s the market’s heart rate. It’s not.

In fact, the VIX is largely tied to what the market is doing. When the market is up, volatility drops. When the market falls, volatility rises.

Ploutos has another analysis of Selling in May. Returns are lower, but still positive – as I think readers know. He also comments on the possible reasons for how this persists in the face of arbitrage.

Peter F. Way provides a careful explanation and a good example of how to use market maker hedging data to find solid stock values. Even if you do not accept the market makers as the “smart money,” this is interesting information about the perceptions of big players. Here is an interesting example:


And an application to the overall market.


Read the entire post carefully for an overview of the methodology. This is an aggressive, market-timing approach.

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, Holmes, and Friends

We continue with a strongly bullish market forecast. Most of our models are fully invested. RoadRunner is fussy about entry criteria. 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 five technical experts, and some rebuttal from a fundamental analyst. If you followed my recommendation last week, you had a chance to evaluate the unusual agreement among our models (Four Thumbs Up for Nvidia!) and with guest expert Cody Willard. I hope that some readers (after doing their own research) could join in the post-earnings gains.

This week was much different – no consensus at all among our experts in their discussion of some big-name stocks. We try to have fun, but there are always fresh ideas. RoadRunner plays upward trending channels and likes Take-Two Interactive Software (TTWO).

Top Trading Advice

 

Brett Steenbarger is required reading for traders, posting many great ideas almost daily. He has two posts this week that are required reading:

What should you do if you have lost your edge? Brett has great practical advice, explaining how to be open to fresh ideas and how to leverage your strengths.

He also explains why traders should always be updating their methods – and provides a fresh idea.

The other post is of special interest for me and my colleagues: Will Quant Blow Up? He distinguishes between successful approaches and pseudo-quants. His experience lets him identify the imposters easily. There is a solution:

The answer to the limitations of pseudo-quant strategies is not to abandon mathematics altogether, but rather to employ rigor in the application of mathematics.  Just as medicine has evolved from a discipline dominated by village doctors to more of an evidence-based science, finance is doing the same.

As a bonus, he also cites MAFFIA. There is plenty of information for identifying the pseudo-quants, and a respectful refutation of the Jason Zweig article that sparked the discussion.

 

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 the collection of ideas from this year’s Buffett fest. The topics cover a wide range, including both methods and specific stock ideas. Plan to take some time and enjoy these.

Stock Ideas

 

Bad luck for Blue Harbinger, writing a great post within a few days of Warren Buffett’s big week. Mark’s analysis of Frontier Communications (FTR) is excellent. It covers the fundamental analysis and the stock history, but that is just a start. Should you consider the stock, the bonds, or the options? These are important questions which investors rarely consider. It is a first-rate article.

Barron’s recommends buying Europe and emerging markets, providing a list of ETFs. I’m not so sure, but it is worth a look. (I get exposure to these markets through stocks trading in the U.S. and following accounting rules).

Dana Lyons also takes a look.


The Sohn Conference raises money for charity by featuring big-name hedge fund managers to present their ideas. The audience pays five grand for a ticket (nearly all of it going to charity) and trades from their smartphones during the presentation. The speakers talk their books. Barron’s has a nice discussion of how it works and the volatile stock movements during a presentation.

With that background, readers might wish to consider some of the ideas. (Diana Britton, Wealth Management) has a video and slideshow.

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. To my surprise, Felix (our long-term investor proxy) likes Valeant. (VRX).

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 about retiring early. It raises several interesting questions – not just financial calculations.

 

Watch out for…

Whole Foods (WFM). Stone Fox Capital and Barron’s both raise questions.

Stone Fox also raises warnings about ConocoPhillips (COP).

TV pitches for questionable IPO’s. Dan Bobkoff and Rachael Levy (BI) highlight a Seinfeld actor pitching this one under the latest SEC rules. For the record, every stock idea I have ever seen on TV or heard on the radio has been a disaster. These pitches raise my blood pressure, since good, working people are the targets.

Final Thoughts

 

The Watergate analogy makes a good story, but the similarities are superficial – so far. I do not see a great downside risk, but the hoped-for growth from tax cuts has a lower probability.

The key differences from Watergate include the state of the economy (especially pressure on prices), turmoil over the Vietnam war, and the VP controversy regarding Spiro Agnew.

Investors must get past the political theater and ask how much this matters to the economy and their investments. So far, not much. There are many sources, but let us highlight something old and something new.

Warren Buffett notes that his investments do not depend upon who is President. He does not call them. He does not send messages.

Josh Brown cites the “fake Trump trade,” a theme familiar to WTWA readers, and also opines that the market would rally if Trump resigned.

Morgan Housel emphasizes the story that investors would be watching, were it not for the sideshow – housing.

He shows this chart and then writes as follows:


We’re still near a level associated with previous bottoms. The only other times since World War II that housing investment has been as low as it is now was during or near recessions. And that’s not because we’ve declined to these low levels, but because the rebound since 2009 has been so meager.

Which is promising. It’s a humble suggestion that we’re not as close to the top of this nine-year expansion as you might think.

I see daily evidence in my own contacts; other wealth managers make similar reports. People are sitting on cash, out of the market, chasing yield, or turning to real estate and gold. Many expect a violent end to the current slow and long-term economic expansion – just as they did three or four years ago. It is a time when investors can expect a reward for careful analysis instead of blind fear. The Fear and Greed Trader calls it a market in search of a catalyst. Maybe so, but catalysts are not always easy to predict.

Stock Exchange: Experts Disagree on Big-Name Stocks

Last week we highlighted a rare consensus among our models and our guest expert. The result was a very successful pick. Readers have often asked why there is so much disagreement among our models. The essential reason is simple. Each has a different method, and they rarely align.

This week there is no consensus, but several good ideas and plenty of spirited debate.

Review

Our last Stock Exchange, Four Thumbs Up for Nvidia, featured guest expert Cody Willard who joined three of the gang in recommending Nvidia (NVDA). It was the most popular article in our series. We hope that some readers (after doing their own checking) joined in the gain. Some may wonder whether we took profits. Not yet. All the models are still holding, as is Cody. (The offer for a free month of Trading with Cody has been extended).

Let’s turn to this week’s ideas.

This Week— Experts Disagree on Some Big Names.

Few stocks are more controversial than Valeant Pharmaceuticals (VRX). Felix is undeterred.

Felix: My newest holding, (VRX) is already paying off. Sure, the chart here doesn’t look like much. At the same time, this position has grown 20% in the week since we first bought in. That small blip in mid-May goes a long way.

Adding this position as part of my long-term portfolio has some sizeable advantages. The odd combination of volatility and a relatively flat trend line create an opportunity for me to monitor growth over months, and pick an exit point at my leisure.

J: I can hardly see the “blip in May.” How about a shorter time frame on the chart?

F: That might be better, but you can see it–on a percentage basis.

J: Do you understand the controversy behind this stock? It is a “poster child” for unfair drug pricing. It was the subject of a famous impromptu CNBC debate between Bill Ackman and Carl Icahn. More recently, Ackman has bailed out on this investment. Are you smarter than they are?

F: Who are these people?

J: They are a couple of the biggest fund managers. People invest billions with them.

F: Do you mean that humans are less effective at evaluating results than us models?

J: I am merely noting that the big-name experts do not like this one.

F: What do you see with your “Chuck Carnevale” analysis? You swear by his methods.

J: It is amazing. The stock has gone through a huge swing.

F: Does that mean you like my pick?

J: If the earnings can be believed – and that is the key question – it might be a solid choice.

F: That is weak praise.

J: It is the best I can do right now. At least you are not recommending it at a point of wild over-valuation.

 

 

 

 

 

Road Runner: Take-Two Interactive (TTWO) is my pick of the week. This chart would cause a lot of trepidation for most investors. Not only is the stock trading at all-time highs, but it’s reached this point after nearly a full year of consecutive growth.

My logic here is straightforward: the stock is hotter now than it has been for most of 2017. I’m holding out here for maybe a month, hoping the latest big move lasts just a bit longer.

J: Your method is to buy stocks at the bottom of an upward-sloping channel. I don’t see it here.

RR: You need to look more closely.

J: I have asked you to draw the channel on the chart.

RR: As I have explained before, I cannot draw!

J: Fair enough. We’ll try to improve that feature.

RR: Beep, beep.

J: Meanwhile, the fundamentals do not support this choice. It looks like another of your Wile E. Coyote moments.

RR: I have done this before. There is a simple key: Do not overstay your welcome.

 

Oscar: I’m back on Bloomin’ Brands (BLMN), along with the rest of the Restaurants sector. Regular readers might remember I picked this one in mid-March. Let’s review what’s happened between then and now.

After a big jump in price in early March, I bought into BLMN and other restaurants. My usual timeframe is between two and four weeks, so I could enjoy a remarkable increase in price before exiting the position around mid-April. The latest swing to the downside convinced me to give the sector another look.

J: Does this have anything to do with golf? The Tournament Players Championship? You probably have fond memories of Greg Norman.

O: I definitely was a fan.

J: Did you know that he was not a big endorser of Outback Steakhouse? His company sold wine to them.

O: Hmm. Well, it is still a good example of an interesting restaurant stock.

J: At least it is not horribly overpriced like so many of your ideas. It even has a dividend. What about your responses to reader questions? Is Oscar also paying attention?

 

 

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

 

 

 

 

 

 

 

 

 

 

Holmes: This week, I see value in Omnicom Group (OMC). As you can see by the 50-day moving average, the price has been steadily dropping all year. In and of itself, I wouldn’t necessarily call that an opportunity for investment. Let’s double check the chart here, and I’ll explain my angle.

I view the sharp decline in OMC from mid-April onwards as an overcorrection. Judging on the past week of performance, the market seems to agree with me – it’s just a question of degree. I feel comfortable jumping in at current levels and reevaluating in another two or three weeks.

J: This is another example where the fundamentals mildly disagree. It is not a compelling “buy” but neither is it horrible. There is a reasonable dividend.

H: I may not be around that long! One way or another, this is just a trade for me.

J: I don’t see Athena around this week. Where is she?

H: She said something about “nothing, new – taking another week off.”

J: She is acting more like a diva than a goddess!

 

 

Conclusion

Today’s post contrasts sharply with last week’s. It is rare for so many methods to agree. Meanwhile, each of our experts has a strong system.

There are many ways to succeed in trading and investing – and many ways to fail. Consistent, proven methods can be quite different. Using a suite of models helps to identify a range of opportunities.

For new readers, here is a scorecard describing the basic approach of each participant, and also background information.

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 usually the only human present, and the only one using any fundamental analysis.

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

Questions

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

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

 

Weighing the Week Ahead: What is the Message of the Market?

We have a quiet week for data. The ObamaCare drama is finished for now. The Fed meeting is over. Earnings season is past the peak. Don’t worry! The punditry will find something new. Analysts will look deeply into the charts and ask:

What is the message of the market?

 

Last Week

Last week the economic news was good, but mostly ignored.

Theme Recap

In my last full WTWA (two weeks ago) I predicted efforts to find some new worries. The old set seemed to be running out. There was a fair amount of discussion on this theme, although nothing really dominated. In some ways, it set up the topic for the week ahead. The reception to the abbreviated WTWA last week was great. Thanks to those who read and commented (especially at Seeking Alpha). This makes the articles more valuable for everyone, including me! I’ll continue this plan on other occasions when I have a weekend off.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the strong Friday trading, leading to a new all-time high.


Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the 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!

Once again, the economic news last week was good. The market got a little boost.

The Good

  • Railroad traffic increased again up 8.4% year-over year (Calculated Risk).
  • Corporate earnings have been strong on all fronts: improvement over last year, beating expectations on earnings, and beating expectations on revenues. FactSet details this important story for investors, illustrated by the chart below. Brian Gilmartin emphasizes how this has affected forward estimates and the expectations for stocks.



  • ISM non-manufacturing registered 57.5, a gain of 2.3 over March. Calculated Risk has the details as well as this chart.


  • Employment reports were strong. This week is a good test. There are so many aspects to these reports that you can always find something to complain about. This week, while not perfect, included more jobs, more private jobs (Calculated Risk on the ADP results), lower unemployment, and solid labor force participation. Rather than my usual exposition of the highlights – all good this time – I will include the deep analysis from Dr. Robert Dieli, who writes a great report on employment each month. (I do not have a current promotion agreement with him, but reach out and he will probably give you a trial report or two. You will be impressed). Here are the recent complaints. You will notice that permabears on the economy (no matter how long they have been wrong) ignore these points and move on to some other idea. There is probably a “silver bullet” award lurking for anyone who wanted to look into this.
    • Remember all the complaints about the labor force?


  • How about the claim that jobs were only for part-timers?


  • And the lack of full-time jobs?


And this is “hard data.”

The Bad

  • China’s Peoples’ Bank may be doing some spinning about bad loans. Benn Steil and Emma Smith (CFR) have the story, including this chart:

  • The ISM manufacturing index missed expectations, registering 54.8. This still indicates GDP growth of 3.6% for the month and 4.1% for the year. I suspect that the need to update their correlations, but it is probably stronger than the official and oft-revised GDP measure. Here are the details.

 

The Ugly

Problems in the ETF world. Investors have been flocking to ETFs that supposedly meet specific objectives and have very low costs. This week there were stories about three different problems:

  1. A rush of new investors, straining the capacity of the fund. This happened to the gold juniors (GDXJ). When the managers were forced to add new names, redemptions sent the price much lower.


  1. A four times leveraged fund that tracks poorly for anything longer than a day or two. Nice work by Phil Huber.
  2. And the ugliest of them all – how a closed-end fund can seem to be providing yield while merely giving your own money back. Want a 26% return? Eric Newman with a HT to Josh Brown.

 

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 CXO Advisory, a subscription service which maintains a number of great resources for investors. The methodology is always first-rate, and often surprising. This week they take on the “sell in May” meme that we are all hearing. The basic conclusion is that the May – November period is weaker in growth than the rest of the year, but still adds to your returns. Here is the key chart:


See also a similar post from David Keller, who takes a multi-cycle trading perspective.

We should all encourage those who fight slogans with data.

The Week Ahead

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

The Calendar

We have a normal week for economic data, but with few important reports.

The “A” List

  • Michigan sentiment (F). May preliminary A good read on employment and economic well-being.
  • Retail sales (F). A big rebound is expected for the April data.
  • Initial jobless claims (Th). Is the series edging up from record low levels?

The “B” List

  • JOLTS (T). The analysis of job openings is important for labor market structure and tightness.
  • PPI (Th). Eventually this will matter, but not until there are a few hot months.
  • CPI (F). See PPI above.
  • Wholesale inventories (T). Highly spinnable March data.
  • Business inventories (F). People see what they want – anticipated demand or unsold goods.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

With last week’s meeting over, the Fed speakers are out in force, including a sponsored conference on Thursday. Earnings reports continue. While the market is calm about the French election, we will know for sure about the time you are reading this.

Next Week’s Theme

Whenever the week is a bit light on A-level news, it creates a vacuum. It does not change the need to fill on-air minutes or column space. If nature abhors a vacuum, the punditry hates it even more! If they do not see something truly significant, they merely look more deeply to find a topic. Surprising news next week — something important like another on-board airline incident? – would work. Barring that, look for an extra-deep analysis of every market, with the question:

What is the market message?

There is plenty of grist for this mill:

  1. What does the “fear gauge” tell us? Some warn because the VIX is so low that it is not representing the level of fear they see. Others suggest that a low VIX implies trouble ahead. (Value Walk).
  2. Are economic indicators failing? “Soft” data misleading?
  3. What is the message from bonds?
  4. Are some more important than others?
  5. Do chart patterns show weakness? JP Morgan sees “red flags.”
  6. If so, in what time frames? Fear and Greed Trader sees a likely breakout.
  7. Some indicators imply future strength. (Todd Sullivan).

 

As usual, I’ll have more in my Final Thought.

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 


 

The Featured Sources:

 

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

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

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

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

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

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


Menzie Chinn at Econbrowser also reviews these key indicators, suggesting no recession.


 

Policy Issues

Readers know that I recommend being politically agnostic when it comes to your investments. That said, investing wisely depends upon knowing the likely impacts of various policies. I came from an intellectual tradition of “speaking truth to power” whether it was popular or not.

This new section will provide some food for thought – basic policy analysis on important topics. I will include only a brief overview. Those interested should dig into the source material, planning to spend a little time.

For our first topic, let us consider trade issues. My friend and former colleague Marty Finkler is putting his retirement time to good use. I encourage following his new blog. You really need to read the entire post, but this chart of the G7 share of world GDP will surprise most:


 

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, Holmes, and Friends

We continue with a strongly bullish market forecast. Most of our models are fully invested. RoadRunner is fussy about entry criteria. 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 five technical experts, and some rebuttal from a fundamental analyst (usually me, but this week Cody Willard took that role). We try to have fun, but there are always fresh ideas. Last week the group demonstrated how your choice of time frame affected your interpretation from the chart. Cody joined in with expert commentary (see more from him at Trading with Cody and mention WTWA in asking for a free trial) about the long-term fundamentals of a near-consensus pick in our group – Nvidia (NVDA). If you have never checked out this series, please look at this one — a great insight into why there is no “right” strategy.

Top Trading Advice

 

Brett Steenbarger is required reading for traders, posting many great ideas almost daily. My favorite this week is his discussion of trading stops. He explains why weaker traders get it wrong and complain, while experts are taking profits and limiting losses. A great topic!

He also explains why traders should always be updating their methods – and provides a fresh idea.

Gatis Roze takes up a theme I have often mentioned: keeping a trading journal. He looks back over five years, but I think a shorter time frame is still a good idea. He breaks the trades into four interesting categories:

  1. Good losers
  2. Bad losers
  3. Winners
  4. Tenbaggers

You might guess the logic, but read the whole post for a nice explanation and some examples.

Adam H. Grimes discusses stock screens with an emphasis on traders. It is in podcast form, but regular traders may well enjoy this. I note that the stock screen trading concept is essentially what our models do.

 

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Chuck Carnevale’s post, The Most Important Stock Investment Lesson I Ever Learned. The title should make everyone sit up and take notice. It also ties in nicely with this week’s theme, which Chuck challenges. He focuses on a Seth Klarman principle via Vishal Khandelwal:

“Don’t seek Mr. Market’s advice.

Some investors – really speculators – mistakenly look to Mr. Market for investment guidance.

They observe him setting a lower price for a security and, unmindful of his irrationality, rush to sell their holdings, ignoring their own assessment of underlying value. Other times they see him raising prices and, trusting his lead, buy in at the higher figure as if he knew more than they.

The reality is that Mr. Market knows nothing, being the product of the collective action of thousands of buyers and sellers who themselves are not always motivated by investment fundamentals.

Emotional investors and speculators inevitably lose money; investors who take advantage of Mr. Market’s periodic irrationality, by contrast, have a good chance of enjoying long-term success.”

So much for trying to get a message from the market. Chuck goes on to explain the fundamental factors that should be part of your analysis.

Key Concepts

We can always learn from the greatest. This Peter Lynch interview includes a wonderful story about a pick gone wrong. He also explains why work pays off for the value investor — turning over more stones. This fits nicely with some of our featured posts below.

Be sure to read the news from the Berkshire annual meeting. Seeking Alpha has a live blog.

Stock Ideas

 

Barron’s has a feature on Amazon and a nice column on tech stocks.

Marc Gerstein executes a clever stock screen discover non-financial candidates that might do well in a rising rate environment. He discovers that there were few candidates until a year ago. Very interesting. His list is worth further study.

Blue Harbinger starts with 100 high-yield stocks that declined last week. He narrows down the field to ten that you might consider.

William Stamm recommends a look at Omega Healthcare Investors (OHI). This name popped up in several of the articles I read this week, and we hold it for some clients.

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. This week several models agreed – for a change! Take a look at the post for analysis of Nvidia (NVDA) in multiple time frames and strategies.

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 favorites are the two posts on how much you really need in cash and assets.

I have emphasized the regular personal finance feature at Abnormal Returns, but the offerings have become much more diverse. I follow them all, often finding items of personal interest as well as ideas for WTWA. If you have not recently checked out the site, it is time for another look. You can also get special benefits by becoming a member.

Seeking Alpha Editor Gil Weinreich’s series for investment advisors is useful for individual investors as well. The well-chosen topics span important questions and provide helpful links. This week he featured an intriguing psychological study about risk and reward. Imagine that you were offered a payment to walk to the end of a 10-meter diving board…..But I don’t want to spoil a good story.

Watch out for…

 

Grocery stocks. The competition is heating up. Craig Giammona (Bloomberg) analyzes five forces. A German invasion?

Final Thoughts

 

What should we think about today’s “market messages”? I want to emphasize some key misconceptions.

  • A Fed tightening cycle does not represent an immediate threat to stocks. Prof. Tim Duy, a leading Fed expert who is quite objective on markets, notes that stock price increases are quite common in this part of the Fed cycle. Put another way, the message from stocks and bonds might be correct in both cases.


  • The quiet trading range does not indicate “complacency” or a topping process. The highly-respected BCA Research sees a setup for an upside breakout. http://www.valuewalk.com/2017/05/stock-market-break/. I don’t know how to handicap this, but I do see a great disparity in coverage in these technical stories.
  • Commodity prices, especially oil, are a poor indicator of demand and economic strength. Those believing the opposite simply ignore the supply side of the analysis. Credit Suisse explains.
  • The VIX is a popular discussion theme, but not very helpful. The evidence for it as a leading indicator is weak. Few seem to know that the current levels of implied volatility (expectations of those in the options market) significantly exceed the recent past. Despite the low levels compared to times past, the readings are higher than we might expect from the data. Beware of making inferences from an indicator you do not completely understand.
  • Objective valuation measures show solid potential for higher market prices. “Davidson” (via Todd Sullivan) offers multiple persuasive charts leading to this conclusion:

    Markets have a long history of rising with rising lending spreads. The current T-Bill/10yr Treasury rate spread, a proxy for lending spreads is currently 1.55% and rising after a brief pull-back from Jan 2017 level of 2.00%. Markets peak when this rate spread falls to 0.2%. An excessively priced SP500 relative to the SP500 Value Investor Index with the rate spread falling to 0.2%-0.0% range is a signal that a market top and significant  correction is at hand. There is no sign of this occurring anytime soon.

    I expect economic expansion to continue for 3yrs-5yrs. Economic indicators tend to signal 24mos to 8mos ahead of market tops. I encourage investors to add to equity positions.

     

Market “messages” are many. Or perhaps none. Those believing in the wisdom of the market always seem to be chasing old prices and effects. The Chuck Carnevales, Ben Grahams, and Warren Buffetts of the world begin with a concept of value and view market prices as a deviation.

Even if you seek a message, the signals point in different directions. Pundits love discussing the market message. There is always something to say and no way to prove them wrong!