Weighing the Week Ahead: The Millennial Effect on the Housing Market

The economic calendar includes many reports, but few of the most important. I expect the housing market to attract attention. There are several relevant releases on tap, and the sector is especially important. Some will take up a special slant, asking:

Will Millennial buyers extend the housing market rebound?

Last Week Recap

In the last edition of WTWA I mused on the confluence of records in the data and in stock market indexes. I suggested that some of the punditry would start worrying that things were “as good as it gets.” This was a topic for some, including David Templeton, who responded with a qualified “no,” but suggested the need to look beyond the mega cap stocks. Check out his reasoning and persuasive charts.

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 loss of 0.21% on the week. Once again, it was a week of very low volatility; the intra-week range was only a touch more than 1%. Historically 1% moves are commonplace — each day!

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

The News

Each week I break down events into good and bad. For our purposes, “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!

The economic news has been mostly positive, as summarized by New Deal Democrat’s helpful compilation of long, short, and coincident indicators. His conclusion is neutral on the long term and positive in shorter time frames.

The Good



  • Job openings increased….and other good news from the JOLTS report. No one does a good job of analyzing this report. Many try to interpret it as a sign of employment growth, a purpose for which it was not designed. With fewer indicators to summarize this week, let me suggest the key things we should watch for.
    • Ratio of unemployed to job openings.


  • Beveridge curve – indicator of labor market structure.


  • Reason for job separations —layoffs or voluntary. Layoffs get a lot of news. A high quit rate shows confidence on the part of employees.


 

 

The Bad

  • Jobless claims were 239K, 10K higher than last week, and worse than expectations.
  • Response to earnings was weak. Bespoke reports that despite solid earnings, there is a divergence between the overall S&P and the average member stock.


  • Michigan sentiment dipped to 97.8 from last month’s 100.7 and expectations of 101.
  • Rail traffic weaker via Steven Hansen of GEI. He looks beyond the headline data to elements he has identified as more predictive. While still better than a year ago, the improvement is decelerating.
  • Hotel occupancy rate declined 0.9% last week. The rate remains ahead of the record-setting pace of 2015. (Calculated Risk)


 

The Ugly

Each week seems to bring another case of outlandish violence. While there are some common themes among the perpetrators, there is no consensus about solutions – or even whether to act. Opinions about the best policy reaction seem to depend more upon beliefs rather than facts. That is always a tough situation for public policy proposals.

Millennial Notes

My research always leads me to a few items that are interesting, but not necessarily relevant to the week ahead. One such item was a list of terms and expressions that Millennials would use, but older people would not. I had the inspiration to write a paragraph or two using these terms, in the Blazing Saddles tradition. Mentioning this to Mrs. OldProf, she informed me that this was one of my dumber ideas. She was right, of course. A quick look at another source showed that many terms from the first source are now (already?) retired.

Millennials are far more likely to prefer bitcoin to stocks or bonds.


And this is despite their low ownership; only 4% have ever owned bitcoin.

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.

The Calendar

We have a normal calendar. The inflation data is edging up to a level where it will attract more interest. Retail sales is always an important report, as is industrial production.

That said, I see the Friday reports on housing as the most significant news. Building permits are an important leading indicator. That data series and new housing starts are volatile series. That makes them a challenge to interpret, but no less important.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.


Next Week’s Theme

The calendar is a busy one, but not one to suggest important surprises. If inflation picks up, that will attract more analysis of the business cycle and the Fed. With several housing reports on tap, that may well be the focus of attention. So far, the recovery has been led by consumer spending, with little help from business investment or housing. If the rebound is to continue, more sources of growth are needed. The answer may come from the changing U.S. demographics, leading people to ask:

Can Millennials provide the push for an extended housing rally?

Here are some perspectives, in my customary bearish to bullish range.

  • Get ready to revisit the housing bubble! (The IMF – a partial warning; Jesse Colombo, who sees many, many bubbles; and 58% of homeowners themselves)
  • Housing growth is stalled by several headwinds
    • High prices (contra-Calculated Risk)
    • Rising mortgage rates
    • More rigor in loan requirements
    • Lack of supply (Zillow)
    • Down payments a challenge for new buyers
    • Tax proposal killing the mortgage interest deduction (By the Numbers)
  • The numbers do not lie

  • Now the largest group of home-buyers (Washington Federal)
  • Factors sparking the decision to buy a home (few readers will guess the most frequent – answer at the end of today’s post)

As usual, I’ll have more in the Final Thought, where I always emphasize my own conclusions.

Quant Corner

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

Risk Analysis

I have a rule for my investment clients. 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: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools.

Doug Short: Regular updating of an array of indicators. Great charts and analysis.

Guest Source:

The BLS. Most observers engage in plenty of discussion about the initial release of employment data. Why? It is an important topic, so people grab on anything, ignoring the problems in short-term measurement. Each quarter the BLS releases a new installment of the Business Dynamics series. Because this uses state employment data, reviewed and aggregated for this purpose, it is much more accurate than the monthly estimates. In fact, it makes sense to review the various estimates using this result as the “right answer.”

For Q1 2017 the net increase in private jobs was 654K. The sum of the initial monthly reports on employment Friday was 553K. The actual difference would have been a major source of debate if known at the time.

Also worth noting is the massive change – much more important than the net result. 7.3 million jobs were created. And of course, 6.7 million were lost. Opening establishments accounted for 1.3 million new jobs, something that the birth/death adjustment truthers should study.

It also demonstrates that many more people are touched by unemployment than the official rate indicates. No wonder economic perceptions are often worse than the data seem to show.

 

Insight for Traders

We have not quit our discussion of trading ideas. The weekly Stock Exchange column is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. This week’s post continues our discussion of the strength of combining different trading approaches – a blended approach. To illustrate, we provided some historical data on the trading models. And of course, there are updated ratings lists for Felix and Oscar, this week featuring small caps. Blue Harbinger has taken the lead role on this post, using information from me and from the models. He is doing a great job.

Insight for Investors

Investors should have a long-term horizon. They can often exploit 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 Brett Steenbarger’s analysis of Frustration, part of his trading psychology series. While I most frequently cite Dr. Brett when we specifically deal with a trading theme, there is often an overlap with investor decision making. This is such a case. Investors with a sound overall approach can become frustrated at a stretch of losses or concern about reaching their goals.

…frustration is a great example of the principle that strengths, taken to an extreme, can become vulnerabilities.  When we are achievement oriented and demanding of ourselves, having something get in our way breeds a natural frustration.  That frustration, in turn, triggers a fight/flight state and suddenly we are no longer nicely grounded in our brain’s prefrontal cortex.  Instead, we activate motor areas to cope with the situation and act in ways that we would never entertain if we were calm and focused at the start of the trading day.

This often describes the behavior of individual investors, especially those who constantly chase what worked last month or last year. Polling from Pew Research shows that many share this sentiment.

[Investors feeling frustration might find helpful my paper on Investor Pitfalls. If your frustration relates to missing the rally and/or being behind on your retirement program, I have another piece on how to edge your way back into the market. Both are available for free from main at newarc dot com].

Scott Grannis shows how the perceived problems have actually provided fuel for the stock rally.

Stock Ideas

 

“Doghouse stocks?” Ray Merola is reviewing some recent occupants. In this post he is analyzing Celgene (CELG). He takes note of the high risk in trials and the disappointing sales of a key product. He concludes that the market has over-reacted. This is a data-driven analysis worth reading.

Starbucks or Facebook? Peter F. Way’s unique approach to risk/reward suggests Facebook. Check it out.

Brian Gilmartin shows what’s hot and what’s not in corporate earnings trends. Energy rolling, and financials depressed. Which is the opportunity?

Homebuilders “hammered” by the tax plan?

Interested in Speculation?

Brad Thomas looks at Puerto Rican debt via DDR Corp. (DDR)

Or Contrarian Choices?

Here are the six most shorted Nasdaq stocks.

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. While his series’ theme emphasizes financial advisors, the topics are usually of more general interest. His own commentary adds insight and ties together key current articles. It is a valuable daily read. My favorite this week discusses the possible value of an annuity in your retirement plan. He cites an article by Dick Cotton, showing how the annuity can provide a foundation for other, more aggressive investments.

This is a great example of Gil’s series expanding horizons for many advisors.

Alan Steel (HNW Magazine) shares his customary wisdom with a discussion of current exaggerated pessimism, something that many seem to ignore. Here is his analysis:

Some folks are calling it a secular bull that is both old and decrepit, and busily sunning itself through its golden years from the light of a few big stocks as it has done since about March 2009. 

Others consider the market crashes within that eight year (plus) period, like the 21.6% S&P 500 drop from May to October 2011, and the recession-level peak-to-trough numbers in the US, Japan, China, and emerging markets (amongst others) from mid-2015 to early 2016 (details here), put the age of this bull at somewhere around 4.5 years, or perhaps just a year and a half. 

Then there are the gloomier folks who, despite the long-term upward trend, positive corporate earnings, basement level inflation, low unemployment, respectable jobs growth, and historically low interest rates, habitually pick at the scabs of negative investor sentiment and draw dotted lines between now and the ghosts of recessions past. 

These apostles of Joe Granville have helped position that latter category as the people’s choice.

As such, independent investor sentiment levels about the stock market are about as euphoric right now as a stomach ulcer.

He goes on to cite the Gallup data I noted above, before concluding:

For me, I think the majority of investors are doing what they always do – waiting around for some kind of wonderfully perfect moment that will finally have built up enough financially fibrous scar tissue to replace the skin torn away by events like 2008/09, 2000/02, and even (for the oldies) way back to 1987 and its less memorable ilk.

Unfortunately, market nirvana is almost always either a day away or the day we missed.

So, when it comes to investing, perfect is always the enemy of good.

Abnormal Returns is always interesting, but the Wednesday edition is especially geared to individual investors. My favorite this week takes up specific steps that investors might follow to “improve our behavior.” These are great ideas, but my sense is the choice of “hire a coach” might be the only real winner for most people.

Watch out for….

Consumer staples stocks. Barron’s notes that the sector might not be as safe as most think. (I agree). The full article provides a complete analysis, but here is a helpful summary.

Tupperware (TUP). Simply Safe Dividends looks at the sustainability of the dividend.

Stocks attracting the rare Wall Street “sell” rating.

 

Final Thoughts

Taking advantage of demographic trends is an important way to improve your investment results. The growing economic significance of Gen Y is obvious. The change in the housing market is an important example.

Housing àEconomic Growth à Stronger Stocks

Strength in housing ripples through many other parts of the economy, including materials, employment, construction, and transportation. (Ritholtz). I have recommended home building stocks many times over the last year, and it has worked out well.

The “bubble” skeptics seem to reason that if sales or prices reach a former peak, that should be a warning. This simplistic approach would never recognize an overall positive trend in anything!

Here is a look at the 2018 Housing forecasts (Calculated Risk).


 

What worries me…

  • The debt limit is now on our radar. It is time to see some progress on this issue.
  • Trade issues. While there were no accidents on the Asian trip, there are also no indications of policy progress. The I wish the President had more willingness to use expert advice. The advantage of free trade is probably the most widely shared conclusion of economic experts.

…and what doesn’t

  • Stalled tax reform. The current plans are very unlikely to get enough votes within the Republican party alone. Taking more time and gaining some bipartisan support will not happen until next year, but the result will be stronger.
  • The economy. Our indicators show little risk and there is plenty of upside.

Surprising answer to a key reason for Millennial home buying: Dogs.

Stock Exchange: Fearing Macro Headwinds? Try A Blended Approach

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and,
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review:

Our previous Stock Exchange considered the benefits of trading strategies that have a low correlation with the overall market (i.e. such strategies can be attractive, especially for investors fearing a market-wide pullback—or simply uncomfortable with volatility). If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: Fearing Macro Headwinds? Try A Blended Approach

This week’s Stock Exchange continues the discussion of the benefits of low-correlation trading strategies. For example, the traditional wisdom for reducing risk has been to invest in less stocks and more bonds. However, with interest rates still near historically low levels (and expected to keep rising, thereby putting downward pressure on bond prices) bonds are decidedly less attractive for many investors. And with the threat of inflation on the horizon, bonds can be even less appealing considering their low real returns. Further complicating the macroeconomic environment, the president’s new pick for fed chairmen is expected to not rock the boat significantly, but he does add some uncertainty.

Other macroeconomic headwinds include dynamic international trade policies which could have long-term impacts on the strength (or weakness) of the US dollar, proposed changes to US tax rules, and simply the fact the markets continue to set new highs thereby making many investors increasingly nervous that this rally cannot continue forever. For perspective, the following chart shows which market sectors typically perform best during different stages of the market cycle, and the recent strength we’ve experienced in technology stocks, for example, is consistent with the idea that the current market rally will eventually capitulate.

Source

Trading Model Performance:

In managing our trading models, we find that low correlattion trading strategies can keep returns high while simultaneously reducing the volatility risks associated with many of the macroeconomic headwinds that keep traditional stock market investors up at night. And per reader feedback, we’ve recently started including a table summarizing the performance results for our models. The table (below) shows actual client results after commissions and fees (I watch this every day, and now readers can see it as well). We’ll share additional information, including test data, with those interested in investing. For our weekly updates, we use only real-time results.

The results in the table above include all of the positions (10 for Road Runner and Athena, 16 for Holmes, and 20 for Felix), not just the specific stock examples we discuss in the Stock Exchange every week (and sorry Oscar, you have too many individual stocks and trades to be part of this approach). We’ve included six months of data since that is the shortest real-time record we have. All of the models are expected to perform well over longer time periods. Holmes, for example, has returned over 21% in the last eighteen months.

Unlike most equity strategies, our approach has a very low correlation to the market. This is an attractive quality because it can reduce risk (as measured by volatility) while simultaneously keeping returns high. If you are uncomfortable with macroeconomic volatility, our lower correlation strategies can be attractive and worth considering.

Expert Picks From The Models:

This week’s Stock Exchange is being edited by Blue Harbinger (aka Mark Hines). Blue Harbinger is a source for independent investment ideas.

Holmes: This week I bought Itau Unibanco Holding (ITUB). Are you familiar with this company?

Blue Harbinger: Yes, Holmes. This is the largest privately owned bank in Brazil. And I’m very curious, what has gotten you interested in this stock?

Holmes: It ranks highly in my model. I am able to sift through data on many different securities (including ADRs, like ITUB). And ITUB’s dip over the last month is the sort of set up I like to see. From the chart below you can see it is below its 50-day moving average, and it has attractive upside over the next six weeks.

BH: Holmes, this stock scares me. It seems the Brazilian economy has a lot of political and inflation risks right now. For example, Brazil has a large budget deficit (including huge pension liabilities) and I’m afraid the government may basically try to print money in order to meet its obligations (like they’ve basically done in the past). This would spell bad news for banking stocks like ITUB. For further perspective, here is a look at this company’s FastGraph.

Holmes: I am a trader, and my typical holding period is about 6-weeks, so I’ll be in and out of this one before the long-term inflation risks set it. I am attracted by the current price (i.e. it has upside).

BH: So you’re not concerned with the macroeconomic risks facing this stock?

Holmes: I’m a trading model, and my security selection and holding period is far less correlated with the overall market than a buy-and-hold strategy. Besides, when you combine my trades with the other trading models, we deliver strong returns that have low correlation with the market. If you’re concerned with macro headwinds, my trades should be attractive to you

BH: I’ll keep a close eye on ITUB, and let’s discuss in about 6-weeks (i.e. after your typical holdings period).

Holmes: Deal. How about you Road Runner, do you have any trades for us?

Road Runner: I don’t have any new buys this week, but I sold XPO logistics (XPO) last week. If you recall, I bought that one back on September 7th, and the trade worked out quite well for me, as you can see in the following chart.

BH: Remind us Road Runner, what exactly is your style?

RR: I like to buy stocks that are at the bottom of a rising channel.

BH: Sounds like a combination of mostly momentum and little “dip buying.” Momentum trades have been working great in our current macro environment (the market has been rallying), and I appreciate buying things on the dip. XPO has been exhibiting strong fundamentals too (as you can see in the following FastGraph), but the industrial sector as a whole has been doing well considering where we are in the market cycle as shown in our earlier sector table.

RR: If you’re worried about a market pullback, consider a blended approach. As the earlier performance table shows, a blended approach between our trading models has been performing quite well.

BH: Thanks Road Runner. How about you Athena, do you have any trades for us?

Athena: I sold my Tesla (TSLA) shares last week.

BH: Any particular reason?

Athena: the trade simply wasn’t working out  as well as expected, so I exited the position for risk management purposes. I originally bought the shares on July 20th as we discussed in this article.

BH: I won’t give you a hard time on this trade considering your overall track record has been stellar as shown in our earlier performance table. Besides, Tesla has been disappointing from a fundamentals standpoint (as shown in the following FastGraph), and cyclical stocks in general are starting to make people nervous.

Athena: That’s interesting that people are getting nervous, as you say, but I’m an emotionless model. I don’t let emotions cloud my judgement. Besides, I typically hold my positions for only a few months or less, and market cycles don’t usually play out in that short of a time period.

BH: Fair enough, Athena. How about you Felix—what have you got for us?

Felix: I ran the 30 Dow Jones stocks through my model this week, and the following list includes the top ranked names.

BH: Thanks, Felix, and that’s interesting. I take it you are a momentum trader considering the names at the top of your list have been performing well this year.

Felix: I am a momentum trader, but I typically hold my positions for about 66-weeks, which is longer than the other traders. I exit when my price target is achieved. I also use macro factors and stops to control risks.

BH: It seems to me like you’re basically “chasing returns,” but I know there is a lot more to your strategy. I also know you have a very strong track record of performance. Plus, volatility is reduced significantly (and returns remain attractive) when your picks are combined with the other models’ picks. Thanks again for sharing your rankings.

Conclusion:

If you are worried about macroeconomic headwinds and market wide volatility, you might want to consider a blended approach. For example, there are benefits to blending our different trading models. And there are also benefits to blending our trading models with traditional long-term stocks. Specifically, they are less correlated thereby providing less volatility while also keeping returns high.

Stock Exchange Character Guide:

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 out Background on the Stock Exchange for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

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

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome.

Weighing the Week Ahead: Is This as Good as It Gets?

Last week I wrote that there was so much on the calendar that it was impossible to choose a single theme. This week presents the opposite problem. In the wake of the big news, what will command attention? As I studied the data, I was struck by the confluence of record results. Put that together with record stock prices, and there is a natural question for the ever-skeptical punditry:

Is this as good as it gets?

Last Week Recap

In the last edition of WTWA I predicted a paradise for the punditry, gorging on a feast of data, Fed news, and policy proposals. That was a pretty easy call, and it did give us a chance to think about a range of key issues. I noted that a lot of news does not necessarily translate into volatility – and so it was. The market shrugged off the appointment of a new Fed Chair, Mueller’s indictments, and the GOP tax proposal. The economic data was mixed, and so was the market.

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 gain of 0.26% on the week, after Friday’s strength. Once again, it was a week of very low volatility; the intra-week range was less than 1%. Historically 1% moves are commonplace — each day!

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

The News

Each week I break down events into good and bad. For our purposes, “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!

The economic news has been mostly positive, as summarized by New Deal Democrat’s list of long, short, and coincident indicators.

The Good

  • Lumber futures are stronger. Mark Hulbert navigates the complexities of trends and tariffs, concluding that this is a useful leading indicator for stocks.
  • Auto sales continued a “hot streak” (WSJ). The SAAR is now 18.1 million, with good prospects for the end of 2017.
  • Jerome Powell’s nomination as Fed Chair was quietly accepted by markets. With New York Fed President William Dudley reportedly about to announce his retirement, there are four more openings to fill.

  • Consumer confidence measured by the Conference Board is at the highest level in 17 years. Jill Mislinski’s analysis is comprehensive and the summary chart is great. Bespoke’s charts show that future confidence is lower than the present.


  • Earnings reports remained strong (FactSet) with earning beat rates 4.8% higher than average and revenue beat rates 1.2% higher. Bespoke has a nice summary of the biggest winners and losers.
  • Initial jobless claims hit the lowest level since 1973 (four-week moving average). Once again, let us look at Jill Mislinski’s informative chart. It helpfully shows the long-term view, but with a focus on the last year.


The Bad

  • ISM manufacturing is cooling from a hot September reports Bespoke. The decline to 58.7 from last month’s thirteen-year high is “modest” they suggest. They are also encouraged by the comments:


  • The rally is somewhat narrow. Lara Crigger (ETF.com) describes the presence of the “Four Horseman” in many ETFs. The heavy weighting of these stocks can generate an exaggerated impression of overall strength.
  • The employment news. While the report was mixed, the headline number missed expectations, so I’ll score this as “bad.”
    • PBS highlights the lower labor force participation and lack of wage growth, up only 2.4% over the last year.
    • The miss in the headline number was much smaller when considering upward revisions to the prior months.
    • ADP private job growth was solid. (James Picerno)
    • New Deal Democrat summarizes the data and reaches the following conclusion:

      This was an excellent report in terms of labor utilization, decent in terms of jobs growth, and poor in terms of wages.

      The big declines in unemployment, underemployment, involuntary part time employment, and persons who want a job now but haven’t looked have nudged us very close to what has been “full employment” in the past two expansions.  We may be as little as 1.5 million jobs away.

The Neutral

This week had some news worth mentioning, but without a real market effect.

  • The GOP tax reform proposal. I have predicted that this would have no market effect, and that proved true this week. The original proposal sparked hundreds of articles on who would benefit from each provision. This is a necessary process, of course, because information is needed before deciding. That said, the proposal is not close to mustering a Congressional majority. Michael Kitces has a nice, detailed review of the proposal. It includes the summary table below. If you see yourself has getting a tax reduction, what should you do? I consulted Mrs. OldProf, who tracks issues like this with care (although not as much as used following the Packers). Her recommendation: Do not spend the tax reform money just yet!


The Ugly

Kids’ play time is overwhelming geared to screens. 18.6 hours per week and 2.7 on homework?


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.

The Calendar

We have a very light data calendar. The JOLTS report is interesting to wonks, but usually spun into an inferior read on job growth. The President’s Asia trip will capture the news, but few would venture a guess about the market effect. We are past the peak of the earnings season, but some important news remains.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.


Next Week’s Theme

With little on the calendar and so much space and time to fill for the financial media, what will be the focus next week. It is the opposite of last week, when there were many possibilities. As I was preparing the updates on data, I noticed that many economic indicators are reaching record levels – right along with stocks.

I suspect that this will be fertile ground for discussion next week. Since the financial punditry always must dig deeper, I expect to hear the question – Is this as good as it gets?

Here are some perspectives, in my customary bearish to bullish range.

  • Yes. Some of these levels just cannot get much better. Unemployment claims, unemployment, consumer confidence and the VIX are good examples. And of course, the over-valued stock market will follow when these measures roll over.
  • Maybe. The pros and the individual investors disagree. (David Templeton of HORAN). The interesting charts show that bearish individual sentiment at the end of August coincided with the next leg of a rally. The active manager exposure index has declined from 71.7% to 60.2%, but this is viewed as a slightly lagging or concurrent indicator.
  • Eventually. Volatility is at a record low. Fund manager Ploutos provides an interesting analysis of historical VIX readings, with this conclusion:

    What did I take away from this study? Equity volatility does not change from ultra-low to high overnight. With equity volatility historically low, do not expect a sharp economic or financial market correction absent some exogenous shock. While equity multiples in the U.S. continue to be historically extended, we could continue to see low volatility and rising stock prices over the next 12 months. When equity volatility persists at an above-average rate for an extended period of time – as it did in 1999 and late 2007 and early 2008 – it may be time to pare your risk and accumulate dry powder for a correction.


  • Not yet. The record earnings expectations march higher, and the stock multiple has not caught up. (Brian Gilmartin).
  • Good is good. Do not second-guess the obvious. The Fear and Greed Trader wisely notes the need for advance planning followed by calm execution. He reaches a conclusion like Urban Carmel’s:

    So the first myth that needs to be abolished is that one won’t have the time to get out before the next crash. Not true, the 2007/2008 financial crisis is the first example showing that to be the case. Anyone care to point out a more dire time in equity market history?

  • The best is yet ahead. Barry Ritholtz notes that “sell in May” missed s 7.9% gain. He cites LPL’s Ryan Detrick who showed that such contra-seasonality gains have nearly always been associated with a further rally in the next six months.

  • Maybe a lot higher. “Davidson,” who has been very accurate throughout the rally, analyzes economic fundamentals, reaching the following conclusion in what Todd Sullivan calls “some of his best work”:

    Economic indicators provide investment signals well before investor market psychology begins to shift. Investors remain decently pessimistic while economic indicators forecast continued economic growth and higher profits. As more investors turn optimistic, markets should continue to rise higher. I expect markets to rise as long as the T-Bill/10yr Treasury rate spread remains favorable. One cannot predict how high. One can only discuss the potential. The SP500 in 3yrs+ has the potential to reach $3,500-$4,500. A wide range and over-valued, but it is impossible to predict how optimistic market psychology can become. For now, the best one can do is to simply say “higher”.

    The cutoff point for equity investing will be in my opinion the T-Bill/10yr Treasury rate spread narrowing to 0.20%. At 1.35% today, we have 2yrs-3yrs of higher equity markets ahead in my opinion.

As usual, I’ll have more in the Final Thought, where I always emphasize my own conclusions. In this case, it includes what I see as most important.

Quant Corner

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

Risk Analysis

I have a rule for my investment clients. 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: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools. This week Georg suggests a method for improving the popular Shiller CAPE valuation indicator. A key is that he takes a 35-year moving average to include multiple business cycles and smooth the effects of changes in earnings reporting. This is an interesting approach, but it does not leave very many cases of signals. Quants will really love this article.

Doug Short: Regular updating of an array of indicators. Great charts and analysis. With all the recent data, it is time for another look at the Big Four indicators most relevant for recession dating. (via Jill Mislinski).


Guest Sources:

Urban Carmel joins the many who see the near-term recession risk as low. Check out his chart-filled post for details.

Want to know more about the Atlanta Fed’s GDP Now program? Here is a link to a podcast interview with Pat Higgins, a policy adviser and economist who created the tool. Let’s also look at the most recent forecast for Q417.

Insight for Traders

We have not quit our discussion of trading ideas. The weekly Stock Exchange column is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. This week’s post is about the advantage of diversity when a pullback is threatened. To illustrate, we provided some historical data on the trading models. And of course, there are updated ratings lists for Felix and Oscar, this week featuring small caps. Blue Harbinger has taken the lead role on this post, using information from me and from the models. He is doing a great job.

Insight for Investors

Investors should have a long-term horizon. They can often exploit 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 Bespoke’s brief and sharp take on politics and investing. As usual, they make their argument with charts. In this case, the topic should be familiar to WTWA readers: Don’t mix political opinions and investing. I maintain that understanding likely policy outcomes will improve investment results. Some readers confuse this with political advocacy. Sometimes the policy issues matter to the market, and we should all pay attention.

Bespoke provides two excellent charts, the first showing President Trumps plummeting approval rating.

The second shows approval ratings and the stock market during the Trump administration.

This is like the early response to President Obama. We must monitor events, but do so without getting political passions involved.

Stock Ideas

David Fish updates his list of dividend champions and contenders for November.

Financial engineering? An activist investor looks deeply into the debate over Restoration Hardware (RH), suspecting a near-term spike higher.

Want to participate in the bot revolution? Here are two ETFs to consider.

Simply Safe Dividends analyzes AT&T (T) asking whether this high-yielding dividend aristocrat is a value trap. (I don’t think so, but selling near-term calls against stocks like this is a winning long-term strategy).

Lee Jackson (24/7) highlights four dividend stocks recommended by UBS.

Electric vehicles and Nickel?

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. His own commentary adds insight and ties together key current articles. As usual this week he had several good articles, but my favorite this week discusses takes up the question of whether retirees should use a “bucketing” approach or treat assets as a unitary portfolio. He cites a provocative post by investment manager Ron Surz.

Alan Steel (HNW Magazine) has a witty analysis of the many predictions of Albert Edwards. Look at the article titles as well as the publications featuring his viewpoints.

Abnormal Returns is always interesting, but the Wednesday edition is especially geared to individual investors. My favorite this week raises the 3 great misconceptions about retirement saving.

Suze Orman says you should not retire until you are 70. Walter Updegrave (Money) disagrees.

Watch out for….

Morningstar ratings. Those stars describe history. Not so good at helping you think about the future. (WSJ)

Unproven claims that marijuana can cure cancer (FDA). If that does not matter to you, here are the fifteen states most likely to legalize the drug. Gallup reports than 64% of Americans support legalization for recreational use.

Final Thoughts

Can we expect to identify market tops from the record strength in economic indicators? No.

This is one of the most deceptive practices, and sadly, a common one. Writers who are perpetually bearish (or bullish) will interpret data in a straightforward fashion when it suits their purpose. When it does not, the predict something like “the sunset always follows the sunrise.” I call this the Chauncey Gardiner approach. It is just as naive as it is in the movie, and verges on intellectual dishonesty. If I seem unusually exercised by this topic, you are reading me right!

When indicators and markets finally roll over and get worse, we will be able to look back and spot the “top.” That is much different from a real-time forecast. The current level of economic strength can continue or improve – perhaps for years. Many pounce on the first decline in an indicator and leap to an unwarranted conclusion.

This is not just a bearish trait. When the market was reaching new lows in 2008, the same argument was made by bulls, including Mr. Buffett. How long can things go? Buy when there is fear. These comments were right, but it took several months. While a relatively short time on a historical stock chart, it seemed like an eternity to investors as markets declined much further.

Trying to guess the top (or bottom) from improving (or worsening) indicators is a fool’s errand.

Stocks are driven by earnings and interest rate expectations. These factors remain favorable, as I record each week. We have no special threats to financial stability, and plenty of fear built into the market. I also expect the “slower” economic indicators to follow the “soft” data that many try to dismiss.

Monitoring these factors is one of the prime missions of WTWA.

What worries me…

  • Mueller indictments and President Trump’s response. This is still on my list. The first indictments showed an inclination to move up a chain of possible offenders. If a Trump family member is included and the President fires Mueller, the Nixon-era Saturday Night Massacre comparisons will get headlines. N.B., I refer not to the substance of the issue, but to the market reaction.
  • The Asian trip. I wish the President had more willingness to use expert advice. With important trade and security matters at stake, it is an opportunity to improve some ties with needed allies.

…and what doesn’t

  • Stock valuation. Since I regard the most popular levels as flawed, I focus on expected earnings and alternative opportunities. While some individual stocks seem richly valued, I am having little trouble finding attractive choices.
  • Low VIX readings. The so-called “fear gauge” is low because actual trading volatility is low. Again, this is something we document each week. If you have been trading on an expected increase in the “fear gauge” you have been losing.