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!

Are You Fooled by this Chart?

Throughout the big rally investors have been bombarded for reasons not to join in.  It is very profitable to play upon fears.  You then sell page views and advertising, conferences, gold, annuities, or fancy structured products.

I have taken a much less popular path – trying to educate investors.  Even though the issues at hand are the most important, much more significant that individual stock selection, it is not “actionable investor advice.”

I disagree!  Investors should act, and they should fight fear.

As an example, one of many I see each week, let’s take a look at this chart:

Let us start with a few simple questions:

  1. What is the red line? Presumably the blue line is the S&P 500, although the chart does not have a legend.  It is apparently some measure of equity risk premium, but there is no description of how it is calculated.
  2. What is the meaning of the gap between the lines, highlighted by the dotted lines? Is a big gap bad?  A warning?  That is clearly the message of the article.
  3. Aswath Damodaran, NYU professor and valuation authority, is cited as the source. Does this chart actually appear in his work, or did the author massage it?  What is Professor Damodaran’s current viewpoint on market valuation?

These questions should have been answered in the article.  The article, warning about the market, is using the technical term “equity risk premium” to frighten people.

Conclusion

I will do the best I can with the incomplete information in the post.

The last time the gap was this wide was in 2008-09, the best time in decades to buy stocks.  Why is it now bad news?

It is definitely NOT Prof. Damodaran’s conclusion.  Concerning Prof Shiller, he writes:

Of all of his creations, I find CAPE to be not only the least compelling but also potentially the most dangerous, in terms of how often it can lead investors astray. So, at the risk of angering those of you who are CAPE followers, here is my case against putting too much faith in this measure, with much of it representing updates of my post from two years ago.

He also provides his own version of our subject chart, described by Alex Barrow.

The following chart is from NYU finance professor Aswath Damodaran. In this, he charts the P/E of bonds (blue line), the Shiller P/E for stocks (purple line) and the ratio or spread between the two (orange bars). The lower the orange bars, the greater the risk-premium spread between bonds and stocks meaning the more attractive (cheap) stocks are relative to bonds or cash.

If you think of the orange bars as the equivalent of the dotted lines in the original chart, you will see that they are the same.  This chart, of course, has a legend explaining each of the lines and bars.  The interpretation – high equity risk premium makes stocks more attractive – is clearly stated.

This is a disturbing example of how writers “on a mission” see whatever they want in charts, provide only partial information, and prey upon the unsuspecting.  The original article is from a very popular source and is republished widely.

Weighing the Week Ahead: Will an Earnings Surge Revive the Stock Rally?

Are you ready for some real news? How about corporate earnings? While there is some economic data on tap, the Q1 earnings season starts in earnest this week. With questions about economic strength, the dollar and the Fed in mind, pundits will be looking for fresh data. They will be asking:

Can resurgent corporate earnings revive the stock rally?

Last Week

Last week the news was heavy but generally neutral. Strong economic data caused celebration. The Fed minutes and concerns about tax reform were the biggest negatives.

Theme Recap

In my last WTWA I predicted special attention to the Trump-Xi meeting. That was a good call, with plenty of discussion all week. The talks did not yield much news, but there might be a lesson from that as well.

The Story in One Chart

I always start my personal review by looking at a weekly chart. While there was not much of an overall change this week, Wednesday was the exception. Stocks moved sharply higher after the ADP number and sold off sharply in the afternoon, perhaps because of reaction to the Fed minutes, perhaps because of tax reform prospects.

 

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 neutral.

The Good

  • Construction spending rose 0.8%. Steven Hansen (GEI) is not convinced.
  • Rail traffic in March increased 7.3% (AAR).
  • ISM manufacturing maintained recent strength at 57.2. Scott Grannis offers this chart.

  • ADP private employment registered a change of 263K, handily beating expectations.

  • Weekly jobless claims dropped to 234K

 

The Bad

  • Tax reform prospects seemed to get worse at least that was the market take on Speaker Ryan’s press conference.
  • The Fed may be reducing its balance sheet. (Reuters). Fed expert Tim Duy thinks that balance sheet reduction will be gradual.
  • Auto sales were surprisingly weak. Calculated Risk concludes:

    This isn’t a huge concern – most likely vehicle sales will move sideways at near record levels. But the economic boost from increasing auto sales is probably over.

  • ISM services dropped to 55.2. This is still a strong level, of course, but any dip from a peak is drawing attention.
  • Non-farm payrolls registered a net increase of 98K, well below expectations. Doug Short has a nice chart pack, including this rolling average interpretation of non-farm payrolls.

 

The Ugly

Rising global threats including Syrian gas attacks, North Korean challenges, and more terrorist attacks.

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!

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, including releases on Friday when financial markets are closed.

The “A” List

  • Michigan Sentiment (T). Continued high readings and debate over “soft” data.
  • Retail sales (F). Will negative consumer news be confirmed?
  • Initial jobless claims (Th). Is the series edging up from record low levels?

The “B” List

  • JOLTS (T). February data. This is about labor market structure, not job growth!
  • PPI (Th). Still tame, with more of the same expected.
  • CPI (F). See PPI. The core increase is starting to approach the Fed’s target level.
  • Business inventories (F). Not much expected from this February data.
  • 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 and many markets around the world are closed on Friday.

Next Week’s Theme

In a normal week for economic data the start of the Q1 earnings season will command attention. Geopolitics will grab some headlines, but market participants are eager to see if the recent stock market strength is supported by corporate earnings. The key question?

Will resurgent earnings revive the rally in stocks?

Each earnings season sees a revival of a familiar theme: Companies guide expectations lower. The final report is a “beat” compared to this lowered bar.

More objectively, observers can compare earnings to the prior year. The weak energy sector has been a drag on these comparisons, leading to an “earnings recession.” This name was attached to two consecutive quarters of decline. This quarter seems more promising. Earnings expert Brian Gilmartin does a sector-by-sector analysis, concluding that this quarter might see S&P 500 growth of 12-14%.

John Butters of FactSet notes that current expectations are an increase of 8.9%, but that “double-digit” growth is more likely. He looks at the history of “beat rates.”

 

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

Quant Corner

We follow some regular 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. His most recent post notes that the expected growth rate in S&P earnings is now 8.41% — the highest level since October, 2014.

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

 

 

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 how to find trading ideas in a quiet market. We were delighted to have expert commentary from Chuck Carnevale, founder of F.A.S.T. Graphs and a frequent source for WTWA. Check out the five stock ideas from our regular group, and especially Chuck’s reactions.

Top Trading Advice

 

Brett Steenbarger continues his stream of great posts. My favorite this week is his explanation of the real reason traders lose money. That should certainly attract universal interest! Here is a key takeaway:

There is only one source of making money in markets, and that is identifying recurring patterns in market behavior and exploiting those in a manner that provides solid reward relative to risk.  We marshal and attenuate various personality traits to identify and exploit those patterns.  Success comes, not from indulging our personalities, but from knowing which traits to draw upon and which to work around.  That is called wisdom.

Peter Coy has great advice for system traders: Beware of excessive back fitting of your data. If this seems too nerdy, you are probably making serious errors in developing your trading system.

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 Gary Belsky’s, Why We Think We’re Better Investors Than We Are. Here is a sample, comparing an unhappy lawyer with a disappointed investor:

Both people are highly likely to obsess over their sunk cost — law school tuition and time served for the lawyer, the original investment amount for the stock picker — in a nonconscious desire to justify their earlier decisions. Both are also very likely to fall prey to “loss aversion,” a key tenet of Prospect Theory, which tells us that humans typically respond to the loss of resources — be it time, effort, emotion, material goods or their proxy, i.e., money — more strongly than they react to a similar gain.

What differentiates the typical lawyer and average investor, however, is their justification for engaging in their activity. Lawyers are trained to do what they do, while the majority of investors are not. Ask a random player in a law firm’s basketball league whether he or she could compete with LeBron James, and the most common response will be laughter. Yet many of those lawyers would willingly compete with the billionaire investor Warren E. Buffett.

 

Stock Ideas

 

Barron’s has some undervalued energy stocks for consideration.

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. Felix, who is most aligned with long-term traders, likes Sprint (S). You will enjoy the careful response of our guest expert, Chuck Carnevale, to that idea! The entire post has a good discussion.

Blue Harbinger has ten attractive ideas with 10% yields. It is a thorough analysis, and read the cautions carefully.

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 Jane Hwangbo’s 6 Things You Don’t Know About Money. The six points are interesting, as is this conclusion:

The point of money is to magnify you.

If you care about something, you get the opportunity to make more impact. If you love someone, you can give them more of what they need. You can share more. You can contribute more. You can invest in your future more.

You get more options.

In his regular column, Seeking Alpha Editor Gil Weinreich takes up an intriguing question – whether boomer retirements will cause a market crash. There is also a good discussion as well as links to other sources.

Value versus Growth

It is always interesting to see whether market sentiment is favoring value or growth. Blue Harbinger provides this interesting table.

Watch out for…

 

Kinder Morgan (KMI) and other pipelines. The operations are amazingly extensive.

The “toll road” analogy is also seductive for the pipeline companies. But that is only part of the story. Simply Safe Dividends has an excellent and thorough examination of the underlying finances, cost of capital, safety of the dividend, and the effect of changing energy prices.

 

Final Thoughts

 

There are several developing themes that require more elaboration than I can provide in WTWA. In such cases I often state my conclusions in advance – with more to come. Here are a few such ideas.

  • There are some lessons from the Trump-Xi meeting. Nothing bad happened. That may not seem newsworthy, but it is useful intelligence.
  • President Trump had his first test as Commander-in-Chief. He consulted experts and took their advice. Whether or not you agree with the decision, the process is better than we might have expected a few weeks ago.
  • The hard data, soft data meme is the latest way to find a source of market worry. The definition of the categories is not objective, nor is the analysis of the sources carefully done. This is definitely an agenda item.
  • The employment report is a single important example. The headline payroll report change was only about 100K. Despite repeated warnings that sampling error alone is +/- over 100K jobs, discussing smaller changes is great sport. The ADP report is a good independent source. Jobless claims are excellent. Wages are rising. The unemployment rate is declining. There is no reason to look for excuses (like the weather) for a weak number. But pundits must earn their pay!

Each earnings season I offer a challenge. I am still waiting for an answer. Those who do not trust earnings say that the estimates are too optimistic. They also say that (at the time of the report) they are too low. If both are true, there must be some point in time when the estimates are pretty accurate. John Butters provides this interesting table, looking only at the last-quarter effect.

 

If earnings growth continues this pattern it can do the following:

  1. Increase confidence in earnings estimates;
  2. Increase confidence in an improving economy;
  3. Provide the basis higher forward earnings;
  4. Support the idea of a higher PE multiple.

Eventually, whatever the other worries, it is all about earnings.

Stock Exchange: Finding Trading Ideas in a Low Volatility Market

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

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

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

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

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

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

Review

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

Market Tech Take

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

 

Let’s turn to this week’s ideas.

This Week—Finding Trading Ideas in a Low Volatility Market

Holmes

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

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

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

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

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

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

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

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

Felix

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

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

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

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

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

Oscar

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

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

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

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

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

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

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

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

RoadRunner

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

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

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

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

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

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

Road Runner: Tough but fair.

Athena

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

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

Athena: That’s the idea.

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

Athena: I think I just lost my appetite.

Conclusion

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

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

Stock Exchange Character Guide

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

Background on the Stock Exchange

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

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

Questions

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

Getting Updates

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

Weighing the Week Ahead: What Can We Learn from the Trump-Xi Meeting?

We have a big economic calendar and potential Fed news. Those stories will take a back burner this week. My safest prediction is that we are about to see a new rash of China experts both in print media and on CNBC! These freshly-minted pundits will be asking:

What will the Trump-Xi meeting mean for the economy, and for stocks?

Last Week

Last week the news was mostly positive, but light. Markets continued the attention to the Trump Administration’s next policy steps – especially the chances for tax reform.

Theme Recap

In my last WTWA I predicted a discussion about the aftermath of the ACA repeal decision. That was a good call, as assorted pundits explained what the next policy moves might be. The more adventurous speculated about whether the Freedom caucus would block changes in the debt ceiling or tax reform. Some of that discussion will continue in the early part of next 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 overall weekly gain of 0.80% and the quarter one increase of 5.5%. The biggest takeaway might be the general rebound from last week’s market reaction to the failure of the ACA repeal.

 

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

The News

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

This week’s news was slightly positive.

The Good

  • Hotel occupancy is strong. Calculated Risk reports interesting hard data from private sources. These are items you might not see elsewhere.

  • Household finances are on “solid ground” as explained by Scott Grannis. Debt levels as a percentage of disposable income are at 30-year lows. He provides an interesting chart of household leverage.

  • Serious delinquencies have declined to 1.19% (Fannie Mae via Calculated Risk). This is the lowest level in nine years.
  • Corporate profits remain strong, increasing 9.3% year-over-year in Q416. New Deal Democrat has a good account of the trends, why National Income and Profit Accounts (NIPA) come so late, and how he estimates this series in advance. Scott Grannis has a similar report which also shows the relationship between NIPA profits and stocks. It is dramatically different from the popular valuation charts.

  • Michigan consumer sentiment remained strong, increasing to 96.9. Jill Mislinski has the update. It includes an interesting excerpt from the Survey of Consumers chief economist, Richard Curtin. He notes that expectations and partisanship are influencing the outlook. This bears watching. Jill also has this fine chart.

  • Q4 GDP revisions edged a little higher than expected to 2.1%
  • Pending home sales increased 5.5%. CNBC’s Diana Olick has an interesting report, noting that sales would be much higher if there were more inventory. She has an interesting interview from Denver, where construction is 50% behind the pace needed. Builders blame the lack of labor, especially illegal immigrants frightened by recent policy changes. The builder interviewed stated that the jobs were not desirable for most U.S. workers.

    This report, if accurate and typical, has implications for homebuilders, Fed policy (labor market tightness), and immigration policy. You need to watch the video to see the key points.

 

The Bad

  • Personal consumption spending missed expectations. The increase was only 0.1% despite an income increase meeting expectations of 0.4% growth. Steven Hansen (GEI) has a thorough analysis with excellent tables and charts.
  • Jobless claims moved slightly lower, to 258K, but the four-week moving average moved higher. I am scoring this as “bad” because the series has moved a bit higher from the best levels. Scott Grannis helps us to keep this in perspective with this interesting chart of claims compared to the labor force.

The Ugly

U.S. Bridges. (No, not the recent North American Bridge Championship, where Bill Gates had a nice win. While that particular event was limited to players with fewer than 10,000 masterpoints, it still included many experts. It was a nice victory, and his best career result). Turning back to actual structures, the American Society of Civil Engineers (ASCE) notes that 40% of bridges are more than fifty years old. Over the next twenty-five years the U.S. is short of needed spending by about $3 trillion.

 

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 wrote about headline spinning last week, and the misleading recession forecasts that resulted. We should all encourage astute analysts to help on this front!

The Week Ahead

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

The Calendar

We have a very big week for economic data, featuring the most important reports.

The “A” List

  • Employment report (F). Expectations are in the 180K range, down from last month’s 235K
  • ISM index (M). Continuing strength expected.
  • Auto sales (M). The concept of “peak auto” has some recent buzz, drawing attention to this private data.
  • ISM services (W). Wider scope than manufacturing, but a shorter history. Strength expected.
  • FOMC minutes (W). Will be scrutinized for hints about the pace of future rate hikes.
  • Initial jobless claims (Th). Is the series edging up from record low levels?

The “B” List

  • ADP employment change (W). A good independent read on job growth.
  • Construction spending (M). February data, but an important sector.
  • Factory orders (T). More February data of significance. Continuing strength expected.
  • Trade balance (T). Usually not a market mover, but will get extra attention this week.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

While the schedule is not as heavy as last week, FedSpeak will be featured on several days.

The Thursday meeting between President Trump and China’s President Xi Jinping could be extremely important for economic policy and the markets.

Next Week’s Theme

This is a big week for economic data. We could usually expect daily analysis of the news, focusing on the Friday employment data. A secondary theme might be the emerging change in Fed policy, with speakers and the release of minutes on Wednesday.

Not this week! The visit of Xi Jinping and the meetings at Mar-a-Lago have significance extending beyond recent economic news. The commentary next week will raise the question:

What will the Trump-Xi meeting mean for the economy and stocks?

No one knows what will happen. The best we can do is collect relevant facts and decide what to watch for. Here is some key background.

  • Trump is advertising a “tough” meeting. Quartz suggests the reasons and key issues:

    He is sure to be coached by hardline China advisor Peter Navarro, who believes China is full of cheating thieves, intent on global domination. After Trump’s allegations that China had stolen jobs and a way of life from America’s middle class on the campaign trail, the stage seems set for a clash. Sensitive topics could include the trade imbalance, China’s over-production of steel, North Korea’s increasing militarization, and Beijing’s insistence that it control the South China Sea, in defiance of international law. American CEOs are worried that the wrong move could destabilize the relationship and harm the US economy.

  • Xi is the most powerful and popular Chinese leader in decades. He is dismantling the “collective leadership” approach. The Economist explains and questions whether this will lead to needed reforms. After describing his takeover of key committees and battle against corruption, the article focuses on his mission:

    All of this helps Mr Xi in his twofold mission. His first aim is to keep the economy growing fast enough to stave off unrest, while weaning it off an over-dependence on investment in property and infrastructure that threatens to mire it in debt. Mr Xi made a promising start last November, when he declared that market forces would play a decisive role (not even Deng had the courage to say that). There have since been encouraging moves, such as giving private companies bigger stakes in sectors that were once the exclusive preserve of state-owned enterprises, and selling shares in firms owned by local governments to private investors. Mr Xi has also started to overhaul the household-registration system, a legacy of the Mao era that makes it difficult for migrants from the countryside to settle permanently in cities. He has relaxed the one-child-per-couple policy, a Deng-era legacy that has led to widespread abuses.

  • Chinese strategy is to reach Trump through his family. The FT describes the background.

    China seems to have grasped that the best way to influence Mr Trump is via his family. Chinese diplomats have gone out of their way to court Mr Kushner and Ivanka Trump, who were their guests of honour at the Chinese new year celebration in February. China has also looked favourably on Mr Trump’s business. Since his inauguration it has approved dozens of pending trademark applications by The Trump Organization. The volume of applications to market Ivanka Trump’s brand in China has also soared. This week, Kushner Companies — the family property group from which Jared has stepped back — ended talks to sell a prime piece of Manhattan real estate on very favourable terms to Anbang, a Chinese company, after members of Congress alleged a conflict of interest.

  • Possible outcomes. The FT continues with the range of what we might expect.

    At one extreme, Mr Trump could threaten to carry out his campaign vow to impose a 45 per cent tariff on Chinese imports — a step that would provoke a global trade war and fall foul of the World Trade Organisation. That would produce a similar outcome to Mr Trump’s rancorous meeting with Angela Merkel last month, in which he presented her with a massive invoice for Germany’s defence costs. At the other extreme, Mr Xi could package a few Chinese investments into easily tweetable jobs announcements. Last year China invested a record $45bn in the US — mostly in real estate, finance and entertainment.

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

Quant Corner

We follow some regular 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. His most recent post notes that the expected growth rate in S&P earnings is now 8.41% — the highest level since October, 2014.

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

Scott Grannis writes this week about the equity risk premium, which I currently score as “high.” This means that I find stocks to be much more attractive the bonds. Here is Scott’s chart of this relationship. The above-average value is IMHO the best gauge of market sentiment – still negative on stocks versus bonds.

 

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 focus was on “Voodoo Chart Reading” inspired by Michael Kahn (see below).

Top Trading Advice

 

Like everyone else, I like reading about Jesse Livermore. He enjoys a reputation as a great trader despite multiple bankruptcies and a life ending in suicide. That certainly is one measure of success!

Joe Fahmy has a nice post highlighting Livermore trading rules from almost 80 years ago. Most still make plenty of sense. It would be a nice project for someone to analyze how these might be different under modern conditions. Out of the many rules I endorse, I especially like this one:

21. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.

Brett Steenbarger remains at the top of trader “must-reads.” My favorite post this week is about trading resilience. Many traders do not recognize how negative factors can affect their work. You need the ability to bounce back.

Chartered Market Technician Michael Kahn uses the “Voodoo” word in discussing charts. He has a great post on what you can and cannot expect to learn from your chart study. I especially like his dismissal of the “death cross.”

First of all, the death cross occurs when the trend has already changed. That is the only way the math works, by the way, because the pattern is defined as the 50-day moving average crossing below the 200-day moving average. That cannot happen when prices are rising.

Anyway, in practice we often see the market bounce right as the cross happens. Why? Because typically it has been falling for a while already. Again, is has to be falling otherwise the short-term average cannot drop under the long-term average.

OK, Einsteins, I know we can make the math work with price spikes and outliers but roll with me here.

So, the market may be a bit oversold and it bounces. But overall the cross appeared because most likely something is wrong. Short of real voodoo telling us what’s what that is all we can hope from charts. They do not tell us what will happen. They are meant to give us clues as to what to 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 Michael Kitces great article, The Evolution Of The Four Pillars For Retirement Income Portfolios.He presents an excellent history of retirement needs and alternatives. He also analyzes the consequences of each of the current choices. I especially like this element of the conclusion, an issue that we frequently discuss with clients:

In fact, arguably when thinking about a retirement portfolio, it’s better to think in terms of “retirement cash flows” than retirement income, as what constitutes “income” for investment purposes (interest and dividends, but not principal) is different than what constitutes “income” for tax purposes (as interest and dividends might be tax-free coming from a Roth, while principal may be fully taxable if withdrawn from a pre-tax retirement account).

Nice work, with many great points. Please read the entire post.

Stock Ideas

 

David Fish has updated the list of dividend champions, challengers, and contenders. This is always a good source of ideas. This week he features McGrath RentCorp (MGRC) and includes some analysis from Chuck Carnevale.

Chuck is back with a deep dive on United Parcel Service (UPS). The quantitative metrics are solid, so he takes on the key concern – the challenges in business to consumer deliveries. This is a typically first-rate analysis.

Brian Gilmartin’s earnings-driven analysis still favors energy stocks. Like everyone else, we will be paying even more attention to Brian next week as earnings season begins.

Barron’s agrees with the energy theme, and also features Under Armour (UA) and Lowes (LOW).

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. Felix, who is most aligned with long-term traders, likes Wynn Resorts (WYNN). The most recent post provides descriptions of each model. You will probably identify with one of the characters, and your questions are welcomed.

Lee Jackson has five “safe stocks” if you think the “Trump magic” has worn off.

Yield Plays

Blue Harbinger has some dividend ideas in health care.

Wade D. Pfau does a nice job in describing bond ladders. I especially like the rolling ladder, which we offer as a complement to higher-yielding programs. Anyone interested in safe yield, with the potential to grow with the market, should read this post.

Emerging Europe?

Frank Holmes opines that the time has come.

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 this week’s best investment advice (see above). Other great posts included the question of whether you would prefer $1 million or $5000 per month for your retirement, and the pragmatic warning about making financial decisions on your smartphone.

 

In his regular column, Seeking Alpha Editor Gil Weinreich takes up yet another important topic – diversification and what is added by ETFs. He cites contributor Roger Nussbaum, who provides a balanced discussion of diversification, stock picking, concentrated portfolios, and recent strong opinions. A timely point for discussion.

 

Watch out for…

 

Costly but natural mistakes. Josh Brown cites data showing that investors significantly underperform market averages. Mostly this comes from psychological reactions, but some is also stock selection. The key chart is below. If you are lagging on your investment performance, please request (main at newarc dot com) my free report on the 12 Pitfalls for Individual Investors. It is a quick and easy test to see if you can profitably “fly solo.” Here is Josh’s chart:

Subprime auto. Steve Eisman warns. Barron’s also features a negative take on CarMax (KMX) for the same reason.

Good companies that are bad investments. Aswath Damodaran explains how to tell this difference. Here is the summary, which I strongly endorse!

Final Thoughts

 

A major change in leadership has everyone thirsting for information about possible policy changes. Stated positions from a candidate are not dependable. Those ideas might change once in office, or might prove infeasible. In the case of foreign policy, the range of possible results is especially wide. The President has a lot of flexibility, and many of the relationships have a personal quality.

This highlights the importance of this week’s Trump-Xi meeting. Like a top poker player, you should be looking for “tells” about true intentions, future policies, and the economic implications.

As is often the case, it is foolish to predict the specific outcome of these meetings. Readers sometimes expect a definitive answer to the week’s question in my “final thought.” That is not the mission of WTWA. I try to do two things:

  1. Explain what will be the focus in the coming week;
  2. Provide help with interpreting events.

It is important to recognize what you do not know, what is unknowable, and what is pure speculation. Pretending that you know a specific answer can be costly.

Given that setting, how can we prepare for this event? Most observers will be focused on specific policy implications. That is a mistake. I am interested in the following:

  • Overall tone and friendliness. I do not expect any golf! This will be an early test of how foreign leaders, aggressively criticized by Trump during the election campaign, respond to him as President.
  • Symbolic quality of the announced results. A tough line by the President? Some clear concessions by Xi?
  • Common ground. Will there be an emphasis on issues like North Korea?
  • Technical missteps. The China team consists of specialist on the specific issues – those who work only on these matters and have done so for years. The US team has dismissed the experts for a more general approach. Will this matter? Will it lead to blunders?

The most important consequence will be the implications for trade policy. One major viewpoint is that President Trump has engaged in tough talk to facilitate bargaining. The other is that he will instigate a trade war. Which is closer to the truth?

This week will provide the first hints. Stay tuned!

Stock Exchange: Are You Guilty of Voodoo Chart Reading?

Michael Kahn, a leading technician and columnist, provides the inspiration for this week’s Stock Exchange. In a recent post he take on a quest: Unmasking the Voodoo of Chart Reading.

This topic really hits home with our Stock Exchange Group. Since they cannot explain their methods in great detail, outsiders sometimes think of them as “black boxes” with mysterious decision criteria. In fact, their general methods are quite clear. Through this series, we share many of their specific decisions. When I review the output, I see it as suggestions from a group of wise friends.

Kahn emphasizes this point.

[Charts] do not tell us what will happen. They are meant to give us clues as to what to do.

Rinse, repeat.

Charts do not forecast the future. They suggest that it is time to take an action.

You don’t sell when the market is overbought. It may still be going up and will get more overbought. But you pay attention because if the market does start to succumb to supply, the indicator – whatever told you it was overbought – will back down by a certain amount.

This is a great attitude to take when employing your technical indicators. Let us try to take the voodoo out of our group’s current ideas!

Review

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

Market Tech Take

We are adding a new feature this week – a technical market overview. We will feature our proprietary measure, MHI, the market health index. This is a specialized combination of breadth and strength in our proprietary universe. For contrast, we will include an alternative technical measure each week. We welcome suggestions. What is your own favorite indicator?

One popular indicator of strength is the percentage of stocks above the 50-day moving average. Stock charts provides an excellent way to follow this indicator.

Another good one is new highs versus new lows. This is based on our special universe. It is over a two-year period. I will improve the time scale for this feature.

The market health is our key indicator. Once again, it covers a two-year period. It is important since nearly every method experiences the worst drawdowns when MHI give a negative signal.

Comments are most welcome on this segment – a work in progress. Vince and I will provide more ideas about interpretation. Meanwhile, watch out for the red line crossing above the green one!

Let’s turn to this week’s ideas.

This Week—How to Take the Voodoo Out of Your Chart Reading

 

Felix

I’m just getting into Wynn Resorts (WYNN). I’ll admit this is an unusual pick for me. Since I could be in this position for as long as a year or two, buying on peak isn’t generally my style. For my holding period, it takes a significant move to trip my trigger.

I find a few things attractive here. For one, the 200-day moving average increased steadily in 2016 despite rapid price fluctuations. It’s since leveled off, and now the 50-day moving average is climbing. I feel I can count on reliable growth here despite some short-term swings.

J: Are you worried about the company’s sensitivity to revenues from Macau? Those fell 40% in 2016.

F: That was just the subsidiary. The Chinese love to gamble. Look to the long run.

J: At least you have a choice that has a reasonable valuation and solid earnings growth. There is even a dividend. Chuck Carnevale’s excellent research tool helps us generate this chart:

F: I am glad you like the earnings, but I am focused on the price. What is this rumor that Mr. Carnevale is taking your job?

J: We hope to have him as our guest expert next week. He has his own job. I am taking a long birthday weekend with Mrs. OldProf. 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!

 

 

 

 

 

 

 

 

 

 

 

 

 

Oscar

In an unusual twist, I don’t have a new sector for this week. I generally try to hold three sectors for a period of 2-4 weeks each – which means I’m a fairly active trader. This week, however, I’m good with my current holdings. In lieu of a new selection, let’s review one of my favorite picks so far this year. The Aerospace and Defense sector (XAR) was very kind to me.

I recommended this one back at the beginning of February. As you can see, that pick enjoyed some steady growth until the end of the month. As I said, I generally exit around the 4 week mark at the latest, so it was easy to walk away with a nice chunk of change here.

J: Yes, we enjoyed booking some profits on that trade. What about your current holdings? I see some hotels and also Roadrunner’s AVGO idea in your account. Are you too caught up in your NCAA brackets to give us a fresh pick?

O: No way, but I really need North Carolina to lose.

J: Good luck with that. What about the reader questions?

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

J: So they are not necessarily your own favorites?

O: No, but there is plenty of overlap.

 

 

 

 

 

 

RoadRunner

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

Reader PN informs me that I can get better performance from RoadRunner if I improve the birdseed diet. She writes, based upon personal experience in Oklahoma, that the best food consists of “small mammals, lizards, and insects.” Birdseed is a last resort. RoadRunner beeped with approval as I read PN’s email.

RR: I’m right up there with Oscar in terms of time frame. I like to get out of any new position within 20 business days at the absolute maximum. Short term growth is imperative. For Broadcom (AVGO), that’s exactly what I expect.

RR: This year has been a steep climb upwards for AVGO, with only a few bumps in the road. To me, the current price point looks more like an investment opportunity than a peak.

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

RR: Yes.

J: I can see that on the chart, but why not draw it for us?

RR: That is your job! I can’t draw.

J: Broadcom looks good on a fundamental basis as well. Here is the fundamental analysis, once again from Chuck Carnevale.

RR: Once again, I am interested only in a four-week trade.

J: It is always better to trade stocks where the fundamentals are solid.

RR: Beep beep.

 

Athena

On occasion, I’ve been known to buy once a stock has already jumped. With Consol Energy (CNX), I’m confident that I’ll be jumping in early enough to come away with a tidy profit.

J: On occasion? That is your regular method.

A: The stock is about matched with its 50-day moving average; however, its 200-day moving average is still basically flat. We’ve seen a pop up from recent lows in early March. Who’s to say this one couldn’t recover to its prices from the beginning of the year.

J: I find myself asking each week: Have you ever learned about earnings? Look at the fundamental chart! The price chart looks like RoadRunner’s old nemesis – Wile E. Coyote.

A: I play for big, short-term winners. If necessary I will move on.

Holmes

I love QEP Resources (QEP) this week. Here we’ve got a stock that’s just gone through a huge correction, bringing the price well below both the 50 and 200 day moving averages. Past performance is no indication of the future, of course, but in my mind, there’s dramatic room for growth here.

Even a modest increase pack to $15.00 would make spending a few weeks with this stock worthwhile.

J: This is another energy name with no earnings.

H: As we all keep telling you, the market often does not require earnings.

J: There is a lot of bullish sentiment on energy. President Trump has been helping the group. CNBC pundits were enthusiastic today.

H: Who is Trump? What is CNBC? What is a pundit?

J: A sound attitude! That is why we keep you on the payroll. Err… I mean the biscuit roll.

 

Conclusion

Charts are always subject to interpretation. When I analyze the results from our models, the charts are a result – not the starting point. A careful look provides ideas about what the model is “seeing.” It is certainly not voodoo, and my own analysis has been sharpened over the years by the constant review of model picks.

The stimulus from new ideas and interpretations is one of our goals at the Stock Exchange.

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

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!

 

 

 

 

Headline Spin — Recession Forecasting is Back!

Investors have learned from both data and personal experience that business cycle peaks (popularly known as recessions) are associated with the most important stock declines. It is natural that any news about a possible recession gets extra attention. There are so many sentiment measures – surveys of different populations, including non-investors – that it is easy to find one that supports any viewpoint.

Since I have recently spoken with several intelligent, but worried investors, my own conclusion is that market worries and Trump angst are at a high point. Consider some evidence. Here is the headline page from a reputable source for professional managers.

 

The array of front page stories has nothing positive about U.S. equities. Here is a front-page story running yesterday on a social media page.

When you actually read the article, you cannot even find the “R” word! Economist Adam Posen, President of the Peterson Institute, is actually writing about an excessive boom (not mentioned in the headline) which would lead to the inevitable bust when the Fed over-reacts. Briefly put, he expects greater amplitude in business cycle, mostly because of deficits which his organization opposes. Posen has no record of successfully predicting recession. More importantly, his near-term prediction is for a boom.

Why the negative headline, with a worried trader looking at a declining chart?

Here is the next case, sent to me by a reader.

Fed rate hikes + low growth = recession, says stock-market strategist

 

This article reproduces an almost indecipherable chart that references three recessions in all of history that began after a Fed rate increase when economic growth was low. Of course, the article does not explain it that way. It seems inevitable. The author, a non-economist with no proven record of recession forecasting, does not even make these claims in his original post.

If it has historically taken 11 quarters to go fall from an economic growth rate of 3% into recession, then it will take just 2/3rds of that time at a rate of 2%, or 6 to 8 quarters at best. This is historically consistent with previous economic cycles, as shown in the table to the left, that suggests there is much less wiggle room between the first rate hike and the next recession than currently believed.

I hope the error in this pseudo-math is obvious to my astute readers.

And here is the conclusion, after explaining that all Fed rate-rising periods eventually lead to bear markets:

For now, the bullish trend is still in place and should be “consciously” honored. However, while it may seem that nothing can stop the markets current rise, it is crucial to remember that it is “only like this, until it is like that.” For those “asleep at the wheel,”there will be a heavy price to pay when the taillights turn red.

So to be clear, the author is bullish for the moment, but giving a warning. I guess he will be right either way.

And meanwhile, how does this recommendation compare to the headline in the original article – the one predicting a recession?

Is there another side to this?

If so, it must be infrequent and obscure. I invite readers to send examples. This cannot just be a bullish story with evidence, since that is not spinning. You need to find a bullish headline that is not supported by the underlying facts.

 

Why the disparity? The truth about recession chances – that we are almost certainly OK for the next year or so – is not an exciting story. Journalists never ask about the record or credentials of sources on technical stories.

Investor Protection

There are two ways investors can protect themselves:

  1. Plow through the entire story, the supporting links, and the bio for the original source. (That is what I do, of course). It helps to know how to spot real experts.
  2. Just ignore these stories – especially when the interview subject is not presented as holding specific and relevant skills and experience. This method will save a lot of time – and also plenty of money!

Actionable Investment Advice

The main educational theme is more significant and potentially profitable than any specific stock recommendation. For those needing a little help in following it through, late stage cyclicals, financials, and technology are all good choices. Bonds and utilities are not.