Stock Exchange: Time to Buy the Dip in IBM?

Each week we highlight the results from different technical trading methods. We also provide contrast from a fundamental analyst. It is always interesting when we find a pick where multiple methods agree. This week, two different approaches choose IBM.

Review

Our last Stock Exchange featured multiple stock ideas from our group. That is normal with widely varying methods. The group consensus on NVDA two weeks ago was a rare situation.

The lack of consensus is not a negative market sign; it is business as usual. Attractive trades normally vary according to your approach.

Let’s turn to this week’s ideas.

This Week— Time to Buy the Dip in IBM?

IBM has attracted a lot of recent interest. The recent earnings report was a “beat” but a miss on revenue. Analyst downgrades followed. A couple of weeks later, there was news that Warren Buffett, a major stockholder, had sold about 20% of his position. This took the stock down further. Many complain that the company earnings do not come from organic growth, but result only from “financial engineering”. Others question the business model.

This provides an interesting backdrop for Holmes, who is buying the dip.

Holmes: IBM’s two-and-a-half-month slide has brought it down to a very attractive price. We’re currently trading around pre-November levels, a remarkable bargain. Let’s check the chart:

Jeff: In today’s introduction I explained the background of the recent losses. Revenue. Financial engineering. Mr. Buffett sold 20% of his stake?

H: Who is Mr. Buffett? I just go by the charts. If he is an expert, doesn’t it make more sense to think about the 80% that he kept? I think a rebound to the 50-day moving average is quite possible.

J: Perhaps. It happens that I also hold IBM in one of our other programs – the one where we enhance yield by selling near-term calls.

H: So, you agree that the dip is worth buying?

J: Not exactly. I see the stock as safe and also paying a good dividend. My income program emphasizes safety rather than exciting growth.

H: You are hoping that the stock does nothing, then?

J: That would hit our income target (8-9% after fees), but a small upside works even better. Here is the summary chart from Chuck Carnevale’s F.A.S. T Graph program. It suggests that IBM is a solid choice, but not exciting. That is perfect for our income program.

J: No one else in the group has an opinion on IBM this week. Let’s see what they have found.

Felix: Mercadolibre (MELI) is a new position for me. It’s been on a bit of a tear since mid-April, and a steep decline just gave me a viable entry point.

F: The growth here over 6 months is steady but boring. Just how I like it! The relatively low price is appealing to buy a sizeable position and sit on it for another six months.

J: This is not what I think of as a “relatively low price.” This company is supposed to be the Latin American “Amazon.”

F: No wonder investors are so excited. I suppose you are going to show me another one of those F.A.S.T. Graph charts.

J: Yes indeed!

J: Even if the projected earnings come through, the stock is overpriced. And did you see what happened today in Brazil?

F: MELI is based in Argentina.

J: I know, but it does help to highlight the risks. What about your regular weekly ratings? Have you had reader questions?

F: Yes. Here they are.

J: Your ranking remains buy, hold, sell, depending on the color?

F: Yes, and I welcome new questions. That is how the list is built.

J: Thanks. Let us see what Road Runner has for us.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Road Runner: At a glance, RH (formerly known as Restoration Hardware) may not look like my kind of pick. My approach is to buy stocks at the bottom of a rising channel.

J: I know! I keep asking you to include the channel on your charts. This week we asked Vince (our modeling guru) to provide the chart. Maybe you can do it yourself in future weeks.

RR: Vince’s chart is perfect. I plan to hold the position for several weeks. Ideally the price will increase to the top of the channel. Whatever happens, I will sell and move on. If I had hair instead of feathers, I could say “rinse, lather, repeat.” And if I had fingers, I could draw the chart myself!

J: As a reality check, let us once again see the view from Chuck.

RR: That chart does not illustrate the channel at all!

J: No. It illustrates another of your Wile E. Coyote moments. You had better not overstay your welcome in this one. Retail stocks are widely hated right now.

Oscar: I do not have any sector shifts to report.

J: OK. Holding your positions is fine, if that is the result of your ratings. Do you still hold the restaurant group? Does it include Jack-in-the-Box (JACK)?

O: Yes. I am still holding that group, and it includes JACK.

J: Many ETFs also hold JACK. Here is the list.

O: The holding in these funds is too low to move the needle. My typical holding in a single stock is 5-6%. Each is chosen to trade tightly with the others in a sector.

J: That also means more individual stock risk.

O: True, but you cannot get the payoff without a bit more risk. I still have plenty of diversification.

J: Do you have your regular sector rating list, or have you been too focused on whether the Cubs and White Sox should make a trade?

O: Yes. Here is the sector rating list for my fans.

J: I do not see a report from that diva goddess, Athena. Where is she?

O: Still on vacation. She said that she would return when something showed some short-term momentum.

J: Did she report any sales?

O: No. She is still fully invested, but with no new choices. She quoted your instructions about “not reaching” when nothing fit.

J: Am I supposed to pay her for this?

O: We all think so. You often say that we should take what the market is giving us. That is a mixed picture right now.

 

Conclusion

Today’s post is interesting on several fronts. First, there is the absence of attention to the Washington sideshow. That dog is not barking in our model results. This is a strong endorsement of trading that seizes opportunity and avoids emotion.

Second, the models are reacting as we would expect. The trading models see opportunity on the dips. The short-term momentum models (despite my scoffing) are more cautious. This is just as we would expect.

If you do not see attractive trades in the current market, that is just fine. There are opportunities, but make sure they fit your own system. Just take what the market is giving!

 

Here is a summary of the cast of characters. Find your own favorite!

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.

Getting Updates

We have a (free) service for subscribers of 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: 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.


  • Company comments have been solid. Avondale does a first-rate job of identifying and reporting trends in conference calls. Look for yourself, but it seems to support the modest growth that we see in economic indicators and earnings. There is special strength in industrial sectors.
  • High-frequency indicators are positive. New Deal Democrat’s excellent weekly post monitors data you would otherwise miss. It is a valuable addition to the major reports.
  • Tax revenues are surging. Jed Graham (IBD) has the story.


  • 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!

 

 

 

 

Weighing the Week Ahead: Time to Rebuild the Wall of Worry?

As some market worries have been put to rest, there is a growing appetite for new ones. Pundits who say that things look OK are not very exciting. Last week we saw a shift in attention. Despite healthy earnings and good economic data, I expect pundits to be asking:

What should investors be worried about?

Personal Note

No WTWA next weekend. If something major happens, I’ll post some thoughts. Would readers find it helpful to have an update of the indicators even when I am away?

Last Week

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

Theme Recap

In my last WTWA I predicted a week focused on geopolitical risks. Despite some attention to earnings, economic data, and the latest Trump Administration pronouncements, that proved to be a reasonable guess.

The Story in One Chart

I always start my personal review of the week by looking at a chart of market performance for the week. There was little change for the week. The Thursday rebound was attributed to comments suggesting quicker movement on a tax reform package. If we measure the gain from the prior week’s close it is about 0.80%.


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

The News

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

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

The Good

  • Trucking data is improving despite the mixed headline data. Steven Hansen (GEI) explains.
  • Mortgage delinquencies declined to an 11-year low. (Calculated Risk).
  • Industrial production rose 0.5%. Eddy Elfenbein notes the weakness in factories and the strength in utilities.
    Tim Duy also takes a closer look, noting the weakness in autos and the strength in utilities. He also cites the American interest in larger cars.


  • Q1 Earnings.
    FactSet notes that reports are beating the historical metrics. Brian Gilmartin calls attention to the lag in energy stocks. Here is the key quote from John Butters:

    To date, 6% of the companies in the S&P 500 have reported actual results for Q1 2017. In terms of earnings, more companies (76%) are reporting actual EPS above estimates compared to the 5-year average. In aggregate, companies are reporting earnings that are 6.7% above the estimates, which is also above the 5-year average. In terms of sales, more companies (59%) are reporting actual sales above estimates compared to the 5-year average. In aggregate, companies are reporting sales that are 0.2% above estimates, which is also above the 5-year average.

And fewer companies are citing President Trump as a factor. It is a small sample so far, but interesting to watch.

  • Philly Fed remained strong with a reading of 22. This is especially good for a diffusion index, which measures month-over month changes. We cannot expect the pace of increases to be maintained. Few understand this and fewer mention it.
  • Initial jobless claims rose to 244K, which some may see as bad. Most follow this noisy series via the four-week moving average, which moved lower.
  • Existing home sales were up 4.4%. Calculated Risk notes that warmer weather was a factor. Bill also expects increasing inventory, which will help future sales.
  • Chinese economic growth was 6.9%, beating expectations. (FT)

 

The Bad

  • Hotel occupancy rates declined by 4.6%. Calculated Risk reports and notes the possible effect of a shift in Easter from March in 2016 to April in 2017.
  • Housing starts declined from February, but increased 9.2% over last year’s easy comparison. Overall, starts are up 8.1% YTD. Calculated Risk is sticking with a forecast of a 3% to 7% gain for the year. Check out the post for a solid discussion of this difficult series.

The Ugly

Following up on an item from last year, cell phone use by drivers is nearly universal. Sensor data show that the phones are used in 88% of trips.

Blowing up a soccer team’s bus to make money on the team’s stock options is also ugly.

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 nominations are always welcome. There are many bogus claims and charts out there!

This week I was especially disappointed with coverage – even by mainstream media – of the IMF report on world financial risk. From most of the stories you would never know that risk had decreased. One major source even reposted a typical ZH piece – no links, poor writing, extensive quotes without citations, etc. Sadly, many more people read this than the original report or any unbiased accounts.

The Week Ahead

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

The Calendar

We have a normal week for economic data.

The “A” List

  • Consumer confidence (T). Expect some decline from record levels.
  • Michigan sentiment (F). A good read on employment and economic well-being.
  • New home sales (T). Continuing strength needed in this important sector.
  • Q1 GDP (F). This first estimate will be revised (perhaps heavily) but will still grab attention.
  • Initial jobless claims (Th). Is the series edging up from record low levels?

The “B” List

  • Pending home sales (Th). Not as important for economic expansion is new sales, but still a good market read.
  • Durable goods (Th). March data, but still important.
  • Employment cost index (F). A sign of labor market tightening?
  • Chicago PMI (F). Most important of the regional indexes, especially when the national report is in following week.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

The schedule is light on FedSpeak, but there will be plenty of earnings news.

Next Week’s Theme

In a normal week, the Q1 earnings season would continue as our theme. While dramatic moves in some stocks grab attention, the overall market interest emphasizes what to worry about. Since some of the recent problems do not seem as threatening, it is time for a fresh supply. Expect many to be asking:

What should investors be worried about?

There are four leading candidates:

  1. A government shutdown. Action is needed by the end of the week. Ever-changing rumors suggest that the vote will be linked to an ObamaCare repeal or some other topic. Expect this to get plenty of attention all week, since these issues are never resolved until the deadline.
  2. The French election. It’s a revolution no matter which front-runner wins, says a French political scientist and adviser to a former Prime Minister. (Interesting post). It could lead to rioting. (The Telegraph).
  3. The Trump agenda is in jeopardy. The President and his team have a business approach, but often do not recognize legal and political limitations. Some were disturbed by the recent account of the Trump/Merkel meeting, where the President did not understand the laws related to trade agreements – despite an explanation repeated ten times. (The British version).
  4. Market valuation. This multi-year topic got a fresh boost this week. The concept of an expensive market is now conventional wisdom. It implies that long-term investors are stupid, dumb money, and facing excessive risk. Just as they have been for years. Investors are worried about a crash, according to Goldman.

These are very important questions. Understanding a “wall of worry” is a fundamental concept for investors. Many think that a list of worries is bad. That is wrong. Well-documented concerns are reflected in current pricing. I tried to explain this concept in 2009:

Many observers express surprise that the market can rally in spite of “the fundamentals.”

This is the wrong question.  The best time to invest is when things look terrible and prices reflect the poor current conditions.  I wrote an article on this topic in mid-April of 2009 that I thought was one of my best.  A commenter, probably reflecting many others, offered a skeptical “Good luck with that.”  It is difficult, unpopular, and profitable to have a bullish market viewpoint when the general news flow is so negative…

…How can stocks rally with so much to worry about?  To answer this question you need to consider what these lists would have been like a month ago.  Some of the worries have been crossed off!  Others have been reduced.

The crash of the Euro, the sovereign debt crisis, and the “cockroach theory” have not come to pass.

Corporate earnings have remained strong — both current and prospective — despite skepticism.

None of the extreme “technical” forecasts — Hindenburg Omen, head-and-shoulders top, Death Cross, or Dow Theory signals came to pass.  Some are now reversing.

If you watch the lists of worries as they change over time, you can see that some important concerns drop off.  This climbing of the “wall of worry” best explains both the current market action, and also the week ahead.

This concept, along with our market indicators, helped in achieving my 2010 prediction of Dow 20K. The actual forecast was important. The underlying reasoning and method even more so.

As usual, I’ll have more about the new worries 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.

Focus Economics did an interesting post on why productivity growth is so low. I was one of the 23 “experts” who commented. The answers are a bit uneven, but interesting. Take a look.

 

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. 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 five technical experts, and some rebuttal from a fundamental analyst (usually me, but sometimes a guest expert). We try to have fun, but there are always fresh ideas. Last week the group contrasted long and short-term themes.

Top Trading Advice

 

Brett Steenbarger is required reading for traders. My favorite this week is his discussion of Cyclically Adaptive Trading. You must read the entire post to understand this approach, but we should expect more on this theme. Does this sound familiar?

When traders refer to the difficult trading environment, they often make reference to “choppy” or “noisy” markets.  Usually their next sentences lament the “algos” and their impact upon markets.  I find these to be expressions of frustration, not constructive formulations of trading challenges.  Invariably, those lamenting choppy markets dominated by algos that “manipulate” markets engage in their venting–and then go back to trading as they’ve always traded…and continue to lose money.  

Gatis Roze has ideas about to deal with losses – and how not to!

Adam H. Grimes has an interesting post on the difference between developing skills and our perceptions of success. While it fits the normal trading themes, this has much broader interest.

 

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 excellent analysis of Penske Automotive Group (PAG). Chuck always has great stock ideas, but he often includes a lesson about how to find the best opportunities. This is a great example – well worth studying by DIY investors. His research uses information from the company, like this chart:

This is crucial if you want to understand the profit drivers, but it is only a start. Among many other points, he also includes one of the most important summary charts from his excellent resource. (I never invest in a stock without checking it out at F.A.S.T. Graphs, and that helped us to find PAG more than a year ago).

Stock Ideas

 

Corbin Perception’s Industrial Sentiment Survey is loaded with great information from big-time buy-side investors and analysts. Here is a sample – something I found interesting.


 

Barron’s has some interesting ideas this week. Big banks, Sarepta (SRPT), and O’Reilly (ORLY) all get strong mentions. There is also a nice feature on Bespoke Investment after ten years. It includes some of their picks and pans – interesting lists!

Brad Thomas suggests some “battle-tested” REITs.

Peter F. Way uses an interesting approach – hedging by market-makers doing big-volume trades. These actions reflect their expectations about risk and reward. He reports the results on the Dow stocks.


The entire article will help your interpretation, but Goldman Sachs (GS), Microsoft (MSFT), and United Health Care (UNH) are the most attractive.

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. This week Felix emphasizes energy while Holmes likes Discover Financial Services (DFS).

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 analysis of annuities. Here is how a variable annuity works (without the regular sales pitch). Here is how to create one yourself.

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. I loved this week’s post on the value of time. Here is a key quote:

Sadly, many people who reach “retirement” (I confess, I do not like that word) experience depression because they don’t know what to do with themselves. My two cents: Whatever your ideal vision of retirement may be, start enjoying it now to ensure that you will enjoy it even more then.

How true! In my research this week, I learned that the average daily use of mobile devices for Americans is…..Make your guess and see the answer at the end of the post. Also, Netflix reports that members have spent 500 million hours watching Adam Sandler movies.

Market Outlook

Schwab has an excellent discussion of reflation – a key market theme. The term is frequently used, but many do not understand it.

Reflation is the process of getting economic growth and price broadly back to pre-recession levels. While progress has been made, growth is still not accelerating. First quarter real gross domestic product (GDP) is forecasted to come in around a 1% annualized level according to Bloomberg. Add in disappointment with the political developments—the hoped for stimulus coming from Washington is at least delayed; the Federal Reserve is talking about reducing its balance sheet; and geopolitical tensions are rising—and you have a good mix for investors to pare back some risk. Stocks have trended modestly downward, while more cyclical areas of the stock market have struggled at the expense of more defensive areas. We’ve also seen yields reverse course after surging on hoped for fiscal stimulus and rising economic growth.

Their overall conclusions are constructive. They address many key concerns – examining and charting the data.

Watch out for…

 

Value traps. Simply Safe Dividends does a typically fine analysis of Cardinal Health (CAH). Even though it is a dividend aristocrat, there are warning signs.

Final Thoughts

 

What should we think about today’s key questions?

  1. Government shutdown. I expect this to be avoided. The ideal solution would be an element of bipartisan compromise. The danger? Too many “extras” tacked on.
  2. French election. I have no special insight into the outcome. (FiveThirtyEight says it is way too close to call). By the time you read this, we may have the result for this round. One safe prediction is that this story, whatever the initial outcome, will be with us for a couple of months as the runoff occurs, followed by legislative elections. There are plenty of stories with dire predictions. Historically, the press (especially the financial press) has dramatically over-estimated these effects. We shall see. (Some other opinions).
  3. Trump agenda. There has been a challenging learning curve in the first 100 days. For those who think the post-election rally was all about Trump, this is a problem. For those of us who expected this rebound, regardless of the election outcome, market-friendly policy changes remain as potential upside. Charlie Bilello has a nice, chart-packed analysis of the market’s “false narratives.” He has a great analysis of the “Trump stocks” and themes.
  4. Market valuations. The table pounding continues. I have written on this topic in detail, including analyses of all the “favorite” valuation indicators – none of which are currently used by the inventors. “Skin in the game” is usually an important test for market cynics. Why do they think that others (like Paul Tudor Jones) can interpret the Buffett indicator better than Mr. B? Check out his reasoning here in his Dow 100K comment.

I am going to attempt a simple and brief explanation of the current valuation issue. It involves a “thought experiment” like Einstein’s in developing the Theory of Relativity. (I love and recommend Walter Isaacson’s biography).

Suppose you are given the chance to purchase an asset for $100,000 with an annual payment of $10,800, a rate of 10.80%. Your personal rate of inflation is 13.5%.

Suppose instead that you are given the chance to purchase an asset for $100,000 with an annual payment of $2224, a rate of 2.24%. Your personal rate of inflation is 1.8%.

Which is the better buy? Which should cost more? When inflation is high, both assets look cheap. When it is low, both look dear. BTW, the examples use actual data from 1980 and 2017.

If you understand this example, you see why prospective inflation and interest rates are important for valuing both stocks and bonds. Sources that discusses stock valuation, using only historical data, are telling only part of the story. Ignore them.

Valuation for all assets is relative. If Einstein were with us, he would agree with Mr. Buffett.

[Answer to mobile device question: Five hours per day. That includes streaming Adam Sandler movies.]

 

 

 

 

Stock Exchange: Long-term (Energy) and Short-term (Finance and Software)

Every trader has a method linked to a time frame. Our group has some new ideas, but the members are sticking to their guns on some positions.

Long-term viewpoints emphasize an economic rebound, with materials and energy stocks leading.

Short-term methods show opportunities in financial stocks and software.

Review

Our last Stock Exchange discussed contrarian trading – why it is admired and how to do it intelligently. The group suggested three ideas. If you missed it, you will enjoy the topic and the ideas.

Market Tech Take

I hope to do something along the lines of a weekly review of important technical indicators. Our own key indicator, the Market Health Index (MHI), remains positive. Watch this space! Suggestions about your own favorite indicators are most welcome. If you have something good, we will run it on our special universe. You will get a result that you cannot see elsewhere.

Let’s turn to this week’s ideas.

This Week—Best Ideas Vary with the Time Frame

 

Holmes

This week I’m buying Discover Financial Services (DFS) a Credit Service company in the U.S. (65.30).

This one looks a little tricky. This stock languished in mid to high 50’s for a long time before establishing a new range in the mid 60’s to low 70’s. I’ve been watching this name pull back for a while and when I sense it is bottoming I jump in. I admit this pick make me nervous. I would be inclined to bail out if drops below 63.50, but I’m hoping it can revisit the recent highs of 73.


My biggest worry is whether that rally in that stock from 57 to 73 was real buying, establishing a new range to accumulate and not some low-volume short covering based on who knows what information that isn’t in the charts. My best protection is a tight leash on this puppy, and a willingness to bail on any new weakness.

J: Tight leash on the puppy? I thought you favored dog emancipation!

H: I do. It is just an expression that humans use.

J: You have some support on this idea. The fundamental valuation is solid, as the FastGraphs chart shows.


J: I especially like your ideas when there is good, fundamental support as well. But aren’t you worried about the upcoming earnings announcement?

H: That could well be a source of opportunity. The chart is sending a message.

J: To my eyes, it looks like a mixed message. Meanwhile, you are the source of our overall market status indicator. How do things look?

H: Still very positive—breadth, momentum, and risk. It is not quite as strong as a couple of months ago, but still OK.

Oscar

My newest holding is software. While I have my own basket, you can get the idea from considering the software SPDR (XSW).

If you’re following the market closely, which I do right after checking out the sports section, you don’t need me to tell you things have been a little flat lately. That doesn’t mean I’m gonna just give up and go to cash. I’d only do that if I thought a significant downturn were imminent. Let’s take a closer look at software:


You wouldn’t know it based on the moving averages, but the average price for this ETF has been trending down slightly over the past month. There have been a couple blips up above $58.50, but I’m comfortable with that. I still think there’s opportunity for significant growth here, very much like what we saw back in February. This is particularly true with individual holdings, like Microsoft (MSFT):


 

Slight decreases have brought the stock down from 2017 highs, creating a potential buying opportunity for savvy investors. If you shop around a bit, you might just find some other bargains in this sector.

J: MSFT earned the reputation as a “cash cow” that did not innovate. Gradually that changed, and the annual fees for software have helped to create an earnings base. That said, the valuation is not exciting.


 

J: As you can see, the stock is richly valued. You are picking up the recent momentum.

O: True. I hope it continues for a bit longer. Then I will be on to the next trade!

J: Are you following the Trump effect?

O: You are not going to fool me again! I know that the “Trump trade” is not about baseball! I am now checking out the front page after reading the scores, the racing form, and the stock page.

J: That is an improvement. What do you have to offer to our readers?

H: Here is my list of favored sectors – buy/hold/sell. Keep the questions coming!

 

 

 

 

RoadRunner

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

RR: I have no new ideas and few positions.

J: What? I just upgraded your diet. Do you want to go back to birdseed?

RR: You already discussed this with Vince (the Father of all our models).

J: I love your method. Find a stock in an uptrend which also has a clear trading range. Then buy when it is at the bottom of the range.

RR: I have a good method, but sometimes the market does not cooperate.

V: Yes. RR is usually fully invested, but the entry requirements are stringent. We never reach for new positions. That is why we keep risk low.

J: OK. Does that imply some overall market risk?

V: No. It just means a shortage of stocks that fit the three specific requirements.

J: That makes sense. And thanks for joining in, Vince. We’ll keep RR on the lizard diet.

RR: Thanks, Vince!

Felix

Once again, I do not have a new pick. My choices are long-term, and that perspective has not changed.

J: Again? Readers want new ideas.

F: Is there anything I can do to earn a few extra bucks?

J: What about reader questions?

 

F: I always appreciate reader questions. I check them all.

J: Are you responding to every request?

F: I am making a list of top choices from the “reader universe.”

J: What if a reader request is not on the list?

F: Then I do not see it as an attractive long-term choice. I respond to email with more specific questions.

J: And where would that be?

F: ETF at NewArc dot com. At least until you give me my own personal email address!

J: That is another expense. We’ll do it when you earn it. Any other ideas for us? You started out with a heavy weighting in basic materials and energy. Do you still like stocks in those sectors?

F: Yes. I made some great early gains.

J: And recently?

F: Those groups have pulled back with the resumption of economic skepticism.

J: You know about that?

F: Yes. I read more news – and more relevant news – than Oscar. My time frame, unlike the rest of the group, is not a quick trade. I am playing for the long run.

J: Thanks for explaining. By the way — Where is Athena?

F: Chuck Carnevale gave her last weekend off.

J: Chuck wouldn’t say that! And besides, that was a week ago.

F: That’s what she told me to say. She has nothing new this week.

 

Conclusion

Your time frame matters. The issues for the economy and market in the long run are quite different from a trading perspective of a few weeks. Day traders have a more extreme problem.

As we have frequently seen in this series, there is no “right” answer in trading. Your time frame and method determine what is right. Your results are measured in the long run, not by a single trade.

 

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!

 

Weighing the Week Ahead: How Should Investors Cope with Geopolitical Risk?

Last week I suggested that the market might be ready for some real news—corporate earnings. That is still a key topic, but attention is focused on world events. Pundits will be asking:

How Should Investors Respond to Geopolitical Risks?

Last Week

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

Theme Recap

In my last WTWA I predicted that attention would shift to corporate earnings reports. Little did I know that a passenger dragged from a United Airlines flight would dominate the news cycle for the week. Just as that was losing interest, the Trump military actions grabbed the spotlight. So much for my expectation (and hope) of returning to news focused on financial markets.

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 small daily moves and the 1.13% loss for the week.


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

There was not much economic news last week, but it was pretty good.

The Good

  • Port Traffic showed strength in March. Steven Hansen (GEI) helps us sort through a very noisy data series.
  • Foreclosures are down, now below pre-recession levels. (MarketWatch).
  • Mortgage delinquencies are at a 10-year low. (24/7).
  • Small business optimism registered a strong 104.8.
  • Inflation tame. PPI and CPI both declined. Some see this as negative news since it is not hitting the Fed’s target. That makes little sense. If the Fed can continue stimulative policy without increasing inflation, so much the better.
  • Weekly jobless claims remained low at 234K. This half of the picture remains solid. We also need new hires.
  • Michigan sentiment remained strong at 98. The best chart of this indicator is the Doug Short design, now updated by Jill Mislinski. It shows the indicator, recession periods, and GDP. You can easily see the current level versus past records. If only everyone was so clear!


 

The Bad

  • Retail spending declined 0.2%. (Calculated Risk reports). Steven Hansen has a different take, with multiple historical charts and comparisons. Retail sales are an important sector, so this is worth watching closely.

The Ugly

Fraudulent LIBOR trading went far beyond those on the front line. This story should have gotten more attention because so many swaps and variable interest rates (perhaps your own mortgage?) were linked to this rate. Perhaps that is not a good idea.

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 nominations are always welcome. There are many bogus claims and charts out there!

I am disappointed that so many of my blogging colleagues agree with this concept – on a theoretical basis – but do not join me in highlighting these posts. While I do not compete for my own award, I had a post this week that illustrates what I am looking for. There are plenty of “mystery charts” that are unclear, poorly sourced, or cannot be replicated. Sadly, these optical illusions fool many readers.

The Week Ahead

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

The Calendar

We have a normal week for economic data.

The “A” List

  • Housing starts and building permits (M). An advance look at an important sector.
  • Leading indicators (Th). Last month won’t be matched but overall strength expected.
  • Existing home sales (F). Less important for immediate economic effects, but a good market read.
  • Beige book (W). Anecdotal data, but the punditry hungers for any Fed-related news.
  • Initial jobless claims (Th). Is the series edging up from record low levels?

The “B” List

  • Industrial production (T). March data, but an important sector.
  • Philly Fed (Th). Earliest read on April is expected to be strong, but can’t match last month.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

The schedule is back to normal on FedSpeak, with something every day. Earnings season ramps up. World events may well grab attention. Friday is options expiration, which can have the effect of exacerbating big moves.

I would say “fasten your seat belts,” but enough of that already!

Next Week’s Theme

In a normal week, the Q1 earnings season would be the theme. The geopolitical stories are more dramatic, better both for TV clips and online posts. That is certainly an important story, but at WTWA we focus on financial markets. At least some of the punditry will be doing the same. The key question?

How Should Investors Respond to Geopolitical Risks?

There is not a lot of complexity in this week’s theme.

The facts:

Fear is back in the market.

Credit Suisse updates their fear gauge.


CNN shows an even more dramatic result.


  1. The fear team advises exiting the market, if you have not already done so based upon prior advice.
  2. The passive investing team thinks you should “stay the course.” Scott Grannis has a good chart pack and remains “cautiously optimistic.”
  3. Some see a buying opportunity. (Davidson, via Todd Sullivan).

Earnings expert Brian Gilmartin notes that whatever is bothering the market, it is not earnings!

FactSet’s John Butters agrees.

Those conclusions are important. The data helps us to isolate the market concern: geopolitics, not earnings.

Can investors do better than these three alternatives? As usual, I’ll have a few ideas of my own in today’s “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. (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.

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.

The Quarterly JP Morgan Guide to the Markets is available. This is a key resource for data-driven investors. Among the many great charts, investors should compare their take on valuation with those most popular in the blogosphere. Unlike those, there is some recognition taken of inflation and interest rates, especially the bond indicator.


Another key chart looks at what happens when interest rates move higher.


Why? Ultra-low rates are typically associated with deflation fears and massive skepticism about earnings. As the economy improves, both rates and earning move higher. So do stocks.

Bill McBride
updates his recession analysis. While his excellent record is not as long as our sources, he has the right idea. It is worth reading his current take (no problem in the foreseeable future) and the comparison to his past calls.

 

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. 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 five technical experts, and some rebuttal from a fundamental analyst (usually me, but sometimes a guest expert). We try to have fun, but there are always fresh ideas. Last week the group discussed three contrarian ideas.

Top Trading Advice

 

Brett Steenbarger is required reading for traders. My favorite this week is, How Tough Has Trading Been?
Brett collects data from various sources, demonstrating the recent rough patch for many strategies. Then he follows with key advice on how to negotiate these times:

It’s not enough to learn how to trade; it’s critical to trade uniquely.  It’s not enough to trade with rules and discipline; one must also find opportunity creatively.  The firms achieving the results depicted above are trading trends in liquid markets in a disciplined fashion.  A great approach to success would be to research strategies that made money during months when those other participants were performing worst.  There is no guarantee that future returns will mirror backtested ones, but digging for gold in well-mined fields is a poor risk/reward proposition.

This is an important lesson. This post is a close winner over the discussion of overtrading.

Mark Hulbert
provides an update on the “oldest market timing system.” Hulbert notes concern among most market timers, and then contrasts with Dow Theory. “All three of the Dow Theorists who I monitor on a regular basis believe the major trend remains up”. Read the entire article to see what might change their minds.

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be this article from Charles Schwab’s Liz Ann Sonders. Sometimes the most important investment advice relates to your perspective – the reasons you have in mind for recent market behavior. In particular, if you buy the incessant media chorus of the “Trump Rally,” you will be worried every time a Trump program is stalled. Sonders cleverly shows why you need a deeper look. I cannot quote it without spoiling the story, so please read this excellent piece.

Stock Ideas

 

Barron’s looks at drug stocks that could thrive in an era of lower prices. Also underwear! Especially Hanes Brands (HBI) which is cheaper than competitors.

Deutsche Bank (via 24/7) recommends aerospace and defense stocks.

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. Road Runner finds rising channels and picks stocks trading at the bottom – Targa Resources (TRGP) this week. Warning to investors: Road Runner does not hold positions for more than a month.

Simply Safe Dividends looks closely at Verizon (VZ).

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 Ben Carlson’s discussion of how much you need for retirement. The answer is different for everyone, of course, and Ben helps you figure it out. Here is a key tool:


 

 

Watch out for…

 

The original “Trump Stocks.” This is what happens when analysts on deadline jump the gun without complete information.


 

 

Final Thoughts

 

World events provide one of the biggest challenges for investors. A sense that something bad might happen triggers a very human response. Caution seems warranted.

Before offering some criteria, here are a couple of examples that will be unfamiliar to most current readers.

  • In the 1980’s the cold war raged. Polls asked a variety of questions. One was whether people thought they would die in a nuclear exchange. About 80% said yes. Later in the poll, people were asked whether they expected a nuclear exchange in their lifetime. About 70% said yes. Putting these two results together showed that most people did not expect to die of old age, an accident or something else. More than half of the US population seemed to expect death from nuclear war. Had that question been asked directly, the answer would probably have been different, but you get the idea.
  • Art Cashin, the clever, witty, and wise NYSE veteran has a story about his days as a trainee. You may infer his age, since the incident occurred during the 1962 Cuban Missile Crisis. This was the closest the world has come to a nuclear war. Art’s instructor asked the trainee class how they should respond to the threat of war. Their answers ranged from sell to going short. Wrong! The instructor explained that if we got through this, the market would rally. If not, it wouldn’t matter!!

Naturally, it is not that easy. We need to be realistic about threats and risk. In doing so we must – as always – separate our citizen role from our investor role.

There are several aspects to this question.

  • The risk must have a link to financial markets. Ben Carlson has a good history of important events. The results are mixed, which illustrates the key point.
  • It is not enough to sell. You must know when to get back in the market. This can be very difficult to do, especially when there is a surprise positive reaction.
  • Which risks require action? How much before the possible event? There are always threatening geopolitical situations. There is an active market in fear. My personal conclusion is that risks are much, much lower than they were thirty years ago.
  • If you act, what should you do? Sell everything? Go short? Few examine the effect of a modest hedge. It requires careful analysis and may not achieve what you want.

Investing Conclusion

It is important to recognize risk. It is the top priority for my accounts. I am committed to avoiding the next big downturn, which we all know will happen eventually.

You can do that by a perpetual bearish attitude, but most people need some investment returns. It is better to have tools that evaluate market risk. That is a regular mission in WTWA.

Going beyond the numbers you see here, I apply my experience. In 2012, for example, there was risk from the “fiscal cliff” issues. While I expected it to work out at the eleventh hour – and I was right – I reduced position sizes to reflect increased risk. This sacrificed some return, but it was aligned with my mission and our clients’ needs.

Selling your positions because there is a threat is not a good solution. Being a “buy and hold” investor would be better, but not best. Recognizing which geopolitical risks have market relevance is a key skill.

Stock Exchange: Three Contrarian Ideas

Every trader wants to be a contrarian. You get to be the “smart money.” You buy low and sell high. Buy the dips and sell the rips. Contrarians may not always be right, but they certainly get attention.

Brett Steenbarger, everyone’s favorite expert on trading, did a study of this in 2006. He compared two hypothetical traders. One bought the market after a down day; the other bought after an up day. Remarkably, since the market usually goes up, the former trader did better. A lot better. It would be interesting to see an update on this study.

Dr. Brett, whose website is a treasure trove of ideas for trading ideas, discusses how this applies to emotions and trading:

It occurred to me after writing the post that, when I’ve developed quant models of market behavior than anticipated a move, I’ve often heard kudos from others about my “good call.”  When I’m a psychologist and listening to my clients, helping them make changes in their lives by accessing strengths they didn’t realize they had, no one compliments me on good calls.

Our Stock Exchange gang does what Brett recommends–not prediction, but getting in tune with the market opportunities and avoiding emotion.

The fact that two members of the group do not have fresh ideas this week sends a message – one that I will discuss further in today’s conclusion.

Review

Our last Stock Exchange considered how to find trades in a low-volatility market. That topic worked like magic! Volatility picked up dramatically in the ensuing week. Maybe it was the power of guest expert Chuck Carnevale. Special thanks to him for his astute comments and good nature in joining in our conversation. If you missed it, please check back.

Market Tech Take

I hope to do something along the lines of a weekly review of important technical indicators. Our own key indicator, the Market Health Index (MHI), remains positive. Watch this space! Suggestions about your own favorite indicators are most welcome. If you have something good, we will run it on our special universe. You will get a result that you cannot see elsewhere.

Let’s turn to this week’s ideas.

This Week—Finding Contrarian Ideas

RoadRunner

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

Targa Resources (TRGP) was on a real tear between the start of November and the end of January. Beyond this three-month streak, the price has mostly leveled off. I take that as an opportunity.

Based on the shape of these moving averages and the trends over this past year, this could be a promising holding. My general approach is to hold positions for about 20 business days. We’ve got a relatively slim shot at a pop here, but I’m still willing to make this one of my short-term holdings.


J: As you can easily see from the F.A.S.T. Graph chart, this is a very poor buy for investors – at least on an earnings basis. The current price might not be justified for years.

RR: The market sees something else, as the recent price action shows.

J: Your method is to look for rising channels, buying at the bottom?

RR: Yes.

J: The price seems to have violated the bottom of the channel.

RR: Not quite. It is at a key point. It would help if you started drawing the channels.

J: I am the boss!

RR: Then assign someone with fingers. I have done my part. Time for my lizards – and thanks for the diet upgrade!

Holmes

This week I’m buying Brixmor Property Group (BRX) an owner operator of grocery-anchored community shopping centers in the U.S.

Here’s a stock that has been bouncing between 23.5 and 25 until Feb 27th when it tumbled down to 20.80. It has bounced a little since then trading in a tight range 22 and 20.90. I’m looking for rebound to 23.50 level with a tight stop at the 20.75. Hopefully that February move down has resulted in a wash out of sellers and now the stock is in stronger hands.

J: This is a typical chart pattern for you. Sometimes you wait for more of a rebound.

H: It has worked well in thousands of test cases over many years. You just need care in spotting it.

J: Shopping centers have not been doing well. Amazon (AMZN) is beating them on price and service. People would rather order from home.

H: Is that also true of grocery-centered properties?

J: I don’t know. Amazon is doing some groceries as well.

H: That sounds like a long-term effect. I will be out of this stock before that happens.

Oscar

I might have said this before, but here’s a holding that looks like a home run. The 50-day moving average on the Consumer Cyclicals ETF (XLY) is heading way past the outfield and into the cheap seats.


 

As you likely know, my M.O. is to find a momentum pick for a short term holding. There are enough attractive stocks within this area of the market that I’m not concerned about an imminent dip. I’ll keep an eye on this one for 4-6 weeks, and try to let it go for a small gain.

 

J: Good luck with that. All of the current news warns about retail and consumers. The word is out: The “Trump Trade” is off.

O: Trump? Who is he? Who is trading for him? Are you talking about the guy who was scouted by the Phillies? He is too old to be a player.

J: You need to read more than the sports section and Baseball Reference. This Trump is the current President.

O: Oh. Yes. That one. I thought that consumer sentiment was strong.

J: It is, but that is the key question for these cyclical stocks. What about the reader questions?

O: Like Felix, I am emphasizing the top choices from readers.

J: So they are not necessarily your own favorites?

O: No, but there is plenty of overlap.

J: How did you do in March Madness?

H: Not well. I don’t take the chalk – no edge. Time for baseball and fantasy golf.

Felix

I don’t have a new pick this week, so I’d like to look back to one of my recent choices. Continental Resources (CLR) was at a nice price point when I recommended it in early March. Over the course of the month, it continued to decline past February’s trading range.


This is part of the reason why I like to hold positions a bit longer than my friends. Some might be tempted to stop out this position at the $43 mark. I’ve kept this in my portfolio, and it’s currently a small gainer. My goals are to hold out until the stock starts trading near its levels from the beginning of the year, above $50.

J: To be clear, you have a system of limiting losses – something like a stop?

H: Yes, but it has a wider range than the traders.

J: What about questions from your fans.

F: I always appreciate reader questions. The extra work helps my pay.

J: Are you responding to every request?

F: I am making a list of top choices from the “reader universe.”

J: What if a reader request is not on the list?

F: Then I do not see it as an attractive long-term choice. I respond to email with more specific questions.

J: And where would that be?

F: ETF at NewArc dot com. At least until you give me my own personal email address!

 

 

 

 

 

 

 

 

 

 

 

 

 

J: Where is Athena?

F: Chuck Carnevale told her that if you could take a long weekend, she could also.

J: Chuck wouldn’t say that!

F: That’s what she told me to say. She has nothing new this week.

 

Conclusion

Sometimes you learn from what is not happening. Just as Sherlock Holmes (no relation to our own Holmes, despite his attire) noted when the dog did not bark in the night, the absence of expected action had meaning. The flat market, followed by the recent pullback, is not an environment for momentum driven strategies. The result is a lack of action from our momentum strategies. This fact encouraged me to adopt our theme for the week – Contrarian Trading.

As we have frequently seen in this series, there is a time for each method. The market is offering some rebound trades, while momentum is out of favor. Respect what the market is giving you.

 

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: The Role of Valuation in Trading

 

Investors who use valuation do it in an absolute sense — the way we do in our Great Stocks program — but what about traders. When the market sets a price that is much different, it reflects broad-based opinion that the typical valuation method is not accurate. Our models sometimes pick that up. Our trading model picks are based upon technical factors, but these often reflect valuation versus the past or versus other stocks/sectors.

Our guest expert this week is Robert Marcin, the founder and general partner of Defiance Asset Management. Formerly, Marcin was a partner at Miller, Anderson & Sherrerd and a managing director at Morgan Stanley, where he managed the MAS Value fund  (currently Morgan Stanley Institutional Value). We invite our readers to follow him on Scutify.

This
Week—Oscar Eats Out

This week’s picks are especially interesting from a value perspective. Our technical models often sense a change in valuation – which they find attractive. Robert has a different take.

 

Oscar

Oscar: This week, I like the restaurants sector. We’ll use Bloomin’ Brands (BLMN) as an example:

Price has been highly variable, though its current price matches up almost exactly with its 200 day moving average. That’s part of the reason why I would move to make this part of a restaurants sector holding for the next month. I predict modest gains, likely near the $20 level.

Robert: Bloomin Brands is an inexpensive stock but with little fundamental catalyst to drive shares higher unless it’s simply broad restaurant exposure one is looking for.

Oscar: I am shooting for the broad exposure, but I like the price here too.

Robert: The stock is cheap at 12.5x’s earnings and 7x’s ev/ebitda, but with little growth in revenues or earnings forecasted, there’s not a lot of conceptual appeal here for a sustained move higher.

Oscar: How about my $20 target? What are my risks here?

Robert: The stock is still down a bunch and can bounce back toward the old highs of mid $20s, but a holding company for Outback, Carabbas, Bonefish and Flemings doesn’t sizzle like the latter’s steaks. Risk here includes high debt and restaurant industry overcapacity which seems to have hit entire category with price discounting.

Oscar: Ouch. The stock may not sizzle, but that was quite a burn.

 

Felix

Felix:

I’m comfortable with my current holdings, so I’d like to look back at my first pick of the year. On 1/5/17, I got into Shopify (SHOP) around the $50 range. Since then, the returns have far exceeded expectations. Let’s take a look:

We’re currently sitting around $64.84 after only two short months. The 50 day moving average, of course, has spiked accordingly. While I generally try to hold positions for months (if not years), I might reevaluate here in light of recent gains.

Robert: This is the pure play growth company in the group with its business model of cloud based multi channel commerce platform services still expanding rapidly. Some 400,000 small and mid sized businesses/startups who want access to ecommerce and retail get their services for modest monthly fees and sell sell sell to the world on most major internet platforms.

Felix: Sounds like a glowing review! Jeff is usually a bit tougher on us.

Robert: Well, now that you mention it…Revenue growth has been 100% per annum but is now slowing down to 50% as the company hit $400ish mm in sales last year and are projected to hit $600 mm this. The stock is expensive at 10x’s sales with the company at break even levels as it spends/invests to grow.

Felix: Expensive? I’ve been sensing a lot of growth in this sector. Don’t you think this one has a little room to run?

Robert: As a pure play, beat and raise growth company, the stock clearly has the hearts and minds of growth and momentum investors. IF one is bullish on stocks, there’s no reason this standout should stop here if their growth continues at such a torrid pace. Primary risk here is very high valuation.

 

Holmes

Holmes: After searching more than 700 stocks for the last 5 trading days…I have not found a single stock that fits in my risk/reward schema. So, this week I’m sitting on the sidelines hoping some of my previous picks will carry the load.

I don’t attach any meaning to not finding a name this week. But I do think this might be hint for me to head out for a long overdue vacation.

J:  I thought you just came back from vacation.

H:  And I thought you were off this week.

Athena

Athena: My momentum play this week is Citigroup (C). Here’s the chart:

As usual, I’m buying after a recent pop, with hopes of another spike over the next couple weeks. February was a good month, and the 200 day moving average suggests a continued rate of steady growth.

Robert: Citi is my favorite of the bunch. Its’ a cheap stock 10x’s eps and .9x’s book value) with improving fundamentals and a chart that seems ready to break out. The bank has a wonderful, global franchise as well as strong domestic businesses also, yet has been under earning vs peers so there’s profit margin expansion potential here.

Athena: Well alright! Anything I’m not seeing here?

Robert: This company should benefit from Trump Administration regulatory reforms and Fed’s rate hiking process as well. Also, legal expense seems to have peaked and should decline adding more to bottom line. It’s at the high end of a range, but I would expect it to break above $60 convincingly and run from here.

Athena: What kind of risks might I have here?

Robert: Risks include a low dividend yield vs peers and negative impact from trade wars/restrictions as its most internationally exposed.

Athena: I can deal with that – for two weeks.

 

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 Robert, although our feelings will not be hurt very much if you prefer one of the models).

Conclusion

Finding value stocks is difficult work. By definition, you’re looking at positions that are currently unloved. It can take time before the market catches up with the potential you see in the stock. The key question is whether you can afford to ride it out until the market agrees with your assessment.

It often seems that short-term traders are ignoring a stock’s fundamentals.  This week’s examples illustrate that value is sometimes reflected in the charts.

Weighing the Week Ahead: Possible Stimulus and How to Pay

It is a short week without much new data. Even FedSpeak is on holiday. The big story will continue to be the Trump transition. I expect the punditry to be asking a dual question:

How much economic stimulus and how to pay?

Last Week

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

Theme Recap

In my last WTWA, I predicted that it would be “all Trump, all of the time”. And so it was. Speculation about the effect of Trump policies is rampant, usually wrong, and revised daily. This is profitable for media sources and the punditry, so we can expect it to continue.

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 as well as the late-week weakness (despite options expiration).

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. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Jobless claims decreased to 235K, the lowest since 1973 despite a larger labor force. (Eddy Elfenbein) Amazingly, some are looking for any modest uptick in this series to be some sign of disaster.
  • Heavy truck sales slump over? (Calculated Risk)
  • OPEC might be on track for a deal on production limits. The market is skeptical, so this would be a real plus for oil prices. Daniel Dicker at OilPrice.com explains the rationale. MarketWatch also notes the possibilities. (See also OPEC news below under “bad”)
  • Earnings continued to show the strength we have been reporting for several weeks. The earnings recession is over.
  • Small business optimism is higher. Since uncertainty and weak confidence has been cited as a drag on business investment, it will be interesting if this indicator starts to show more strength.

  • Housing starts beat expectations with a shift from multi-family to single-family. Calculated Risk has been right on target with this trend, as well as the overall growth rate.
  • Retail sales were strong up 0.8% on top of upward revisions for the prior month. The reports handily beat expectations. See Doug Short’s Big Four update in the Quant Corner.

 

The Bad

  • Industrial production continues to lag with a flat report instead of the small expected increase.
  • Pre-OPEC actions. The market still seems to appreciate higher oil prices. Iran and Iraq continue to increase production in front of the meeting. (But see OPEC above).

The Ugly

Fake News – and the reaction. The bogus news sites had more traffic than legitimate ones during the election campaign. This led Google and Facebook to change policies, prohibiting sites that traffic in lies to make money.

Do we need social media sites as editors, deciding what is fake and what is not? Izabella Kaminska explains the consequences:

The rot at the core of media has little to do with the propagation of fake news on the fringes. Alternative news sites and underground press with questionable journalistic practices have been a phenomenon since forever. In free societies, the public sphere tolerates single-issue publishers, special interest groups or anti-establishment newsletters, because we know that for every outlet which propagates nonsense there’s another that might be ahead of the curve on a topic of great cultural, commercial or political significance.

Accepting the fringes — which includes fake news — is what liberty and a free press is about. It’s our greatest strength, especially when positioned within the constructs of a fair and reasonable slander, libel and defamation framework. Suppressing marginal views is not the answer.

Tyler Cowen observes that this is little different from misleading forwarded emails.

There is no easy answer, but we must start by asking whether it is really a problem. We expect consumers of information to discriminate.

The investment world has seen an avalanche of lies and deceptive information from the most popular sites. The lesson from losing money does not seem to have much effect. This is a bad omen for issues where there are less direct financial consequences.

 

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.
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, with most of the reports concentrated on two days before the holiday.

The “A” List

  • New home sales (W). Important sector for improved economic growth.
  • Michigan sentiment (W). Strength continuing after the election?
  • FOMC minutes (W). Probably no surprise. Confirmation of a tilt to a hike in December?
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Existing home sales (T). Not as important as new homes, but still a good read on the market.
  • Durable goods (W). Volatile series. Any signs of strength in a sluggish sector?
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Earnings season is ending. The limited Fedspeak is early in the week.

Next Week’s Theme

 

This should be a very quiet week. There is little data. Most of the A-Teamers will be taking some time off. (Not me. A competitor used to suggest “Talk to Chuck.” He must have been hard to get on the line, but you can still “Talk to Jeff.”) We can expect more Trump speculation from the B-Team. It can’t be worse than we have already seen.

Analyzing the Trump effects requires a good analytic framework and a non-political approach. I hope these concepts will be familiar to regular readers. I was delighted to read a great piece from Prof. Aswath Damodaran, covering both themes. He produces this excellent diagram:

That is a lot on the plate for the punditry. It is all requiring some digestion. (Sorry, I can’t help it. At least I took it out of the title!)

I expect the initial focus to be on taxing and spending.

How large will the stimulus be, and how will it be financed?

I am always delighted when a theme I am working on is delivered to me in Barron’s on Saturday morning. Their cover story is Taming Federal Debt: The Case for 100-Year Bonds. The argument is very good and this chart is especially helpful:

Barry Ritholtz joins in, suggesting what he calls “The Last Best Chance for Fixing Roads and Refinancing Debt.” He offers many points supporting the desirability and probability of a major debt refinancing.

There is a lot of complexity facing investors. Right now, the stimulus plan is probably the most important. 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.

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.

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). It is time for another look at Doug’s Big Four, the most important indicators for recession dating. The NBER looks for a significant drop from a peak. All but one are still rising, with industrial production the laggard.

New Deal Democrat provides more reassurance. His long-leading indicators have now filtered into the shorter-term measures, especially the most recent housing results. Like our other sources, he now sees no recession for 9-12 months.

 

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 holds several aggressive sectors. The more cautious Holmes also remains fully invested, but has done a lot of profit-taking and position switching. Now joined by Athena, the group has a regular Thursday night discussion which they call the “Stock Exchange.” This week’s question was about how to spot a good chart. You might be surprised at the answer. You can see that discussion as well as the most recent ideas for consideration – and you can ask questions!

Top Trading Advice

 

Brett Steenbarger is on the verge of retiring our award for best trading advice. Every trader should be reading him daily, as well as his books. Readers will not agree with every conclusion, but it will get them thinking about the right issues. It is a challenge to pick the best post each week, but I’ll try once again.

His analysis is right on target for this week’s issues. He notes the short-term effect of the election as well as the long-term concerns. As a trader, he is aware, but flexible. You could also check out posts on how to react to a big winning day and how to align with market cycles.

Adam H. Grimes has a nice post on losses – not the normal expected losses, but the big ones. He suggests five reasons, which are worth your consideration. The one that I see most often is #3, taking trades of the wrong size.

 

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 Bill McBride’s cold-water splash in the face for those who have been spending too much time on the wrong sites: The Cupboard is Full. It is a nice, objective summary of overall conditions. His summary hits the high spots, citing the relevant data and providing his customary charts. Here is his conclusion:

Sure, there are problems. Not everyone has participated in the current expansion. Wealth and income inequality are record extremes. There is too much student debt. And climate change is posing a real threat to the economy in the future. I could offer proposals to address those issues without negatively impacting the current expansion, and we will see if those issues are addressed in the coming years.

However, the bottom line is the cupboard is full. The expansion should continue for some time. What could possibly go wrong?

Here is an example of the several helpful charts, how population will drive housing expansion:

Meanwhile, plenty of financial, cyclical, technology, and homebuilding stocks are trading at recession pricing.

Backing up this conclusion is (yet another) great entry by “Davidson” via Todd Sullivan. He emphasizes the significance of single-family housing for the overall economy. Here is a key quote:

Housing Starts and financing go hand-in-hand. The T-Bill/10yr Treas spread used by banks in mtg lending decisions narrowed to 1.2% in July 2016 indicating a potential slowing in housing which this data reflects. This morning this spread has widened rapidly since the election to 1.8% and the trend looks higher. 10yr rates should continue to rise faster than T-Bills and this will confound many forecasters.

The election of Trump has not yet been factored into housing. I would buy TOL and LEN at current levels with their excellent CEOs. Single-Family Housing starts should be higher by June 2017 after Trump strips away some of the impediments to mtg lending.

 

Stock Ideas

 

Time for energy investments? Brian Gilmartin makes the case with his objective, earnings-driven analysis. He also cautions:

What we hear from the new Administration will matter.

There is a lot of angst over the sector now, with the choppiness of crude trading, what the new Administration does with solar credits, etc.

Give it more time.

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 revisits a pick from about a month ago, DexCom (DXCM). On the last round Holmes stopped out for a small loss, avoiding a bigger decline. With a new bottom Holmes is trying again. 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.

Time for biotech? Bret Jensen makes the case for several stocks, including one of our favorites, Cara Therapeutics (CARA).

And an evaluation of the “bump from Trump” from VanEck.

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 very practical discussion of what burglars are looking for in finding a house to rob.

Stickers do not help much, but big dogs do. Your hiding places are not helpful. They know all of them. This surprised me the most:

“NRA sticker on car bumper = Lots of guns to steal,” wrote one burglar.

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. That is especially true this week as he highlights key questions, among others, about what advisors do and their effect on performance. I especially his post with analysis and links you can use to see whether you would benefit from an advisor. Here is a key quote:

A true leader educates clients on what are the key principles that should define their financial decision-making: how does one invest, how one can increase his savings rate; spending restraint, etc. The best advisors do this. The worst follow the same trends as Johnny-come-lately investors. I still recall Wall Street Journal articles in the aftermath of the dot-bomb detailing how many brokers made it big promising the moon and stars to all-too-eager clients.

This is very true. In my first interview with clients I try to align expectations with reality, especially in keeping risk under control. One woman had $2 million to invest and needed to turn it into $6 million in three years. I suppose she found someone who told her that he would do that.

Here is another test. If you can deal with the challenges in my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them, 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

Plenty of sources, mostly of the permabear variety, cited low interest rates as bad news for stocks. Now that rates are moving higher, that is also supposed to be a negative. Scott Grannis effectively explains this relationship –A bond bear market is bullish for stocks.

I’ve been arguing for years that higher interest rates won’t be a problem, since they would be symptomatic of stronger growth. Higher rates won’t lead to an exploding deficit, because the stronger growth that pushes interest rates higher will also work to reduce the deficit by boosting tax revenues. Interest rates have been low because the market has had a very pessimistic view of the future growth potential of the U.S. economy.

I agree!

Watch out for…

“Cheap” put protection. The oft-cited advice to buy puts when markets are calm is misguided.

Mixing up your politics and your evaluation of the business cycle. (The Capital Spectator).

Coal stocks. The President-elect may not be able to deliver on this front as along as natural gas prices are so low. (MIT Technology Review)

Final Thoughts

 

The stimulus/infrastructure theme is getting a lot of attention. PBS had a pretty objective analysis of the needs, labor shortages, and implementation problems.

My conclusion is that something major on infrastructure needs will be approved. Here are three key reasons:

  1. Congress loves to spend money and point to the effects in specific districts.
  2. It is easy to imagine a bipartisan coalition. This week showed support from the GOP side via Barron’s and the Dem side via Barry Ritholtz. The philosophies are in alignment.
  3. It is the right thing to do. There are important needs. The exact term of new bonds is up for debate, but locking in low rates seems pretty obvious.

Time Frames encourage a wide range of conclusions. Many are predicting that Trump policies will all end badly – eventually.

Moody’s Mark Zandi has downgraded economic forecasts.

The firm’s “outlook for the U.S. and global economies has been shaken up by the shocking election of Donald Trump as president of the United States,” writes Zandi in the firm’s latest monthly economic outlook. “Based on our analysis to date, the economy under President Trump will likely perform a bit better in the near term but ultimately it will be diminished.”

Zandi is projecting that GDP growth under four years of President Trump will be less than 2% per year, below the 2.2% he had been forecasting before the election. “That is not a big difference in any given year, but it is meaningful over a four-year period,” writes Zandi.

Ed Yardeni, in a thoughtful analysis, asks, “Is Trumponomics Inflationary?” His analysis does not have an easy conclusion, but deserves some thought about each point.

David Rosenberg sees increasing inequality, paving the road to ruin. He sees skewed tax effects and a shortage of skilled tradespeople for proposed programs.

My own perspective for investors is about one year ahead. None of the key issues permit longer forecasts. The immediate stimulus effects will be positive. Investors should do a regular reassessment of progress.

Digestion. There is plenty to do. Here are the key issue areas in my planning for the Trump administration. Each requires study of political dynamics as well as overall impact. Most of the punditry is still reaching far beyond what they know, writing on deadline, driving too fast for the reach of their headlights.

I am starting with the most general and important themes. I welcome suggestions about interesting topics or themes I have omitted. In each case I am evaluating probabilities, impacts, and stocks affected.

  • Stimulus
    • Infrastructure
    • Tax cuts
    • Financing
  • Sectors
    • Health stocks – biotechs, pharma, insurance, hospitals — all different
    • Energy
    • Construction
  • Trade policy
    • Exporters
    • Importers – corporate and consumers
  • Immigration
  • Law and Order
  • Defense

And finally, Happy Thanksgiving to readers of WTWA. I hope that my work has given you a little more to be thankful and happy about.