Stock Exchange: Great Trading has a Foundation of Focus and Discipline

Last week’s Stock Exchange was about how emotion and symbols affected technical analysis. Could our charts help us when the picture displayed involved some psychological event like Dow 20K?

This week I turn from the charts themselves to the trader who must interpret them. Successful trading requires focus and the discipline to stick with successful methods – even through a bout of bad luck.

Dr. Brett Steenbarger, the leading expert in trading psychology, puts it this way:

A topic that has arisen in recent conversations with traders is the importance of focusing on what has been making you money and sizing up those trades, rather than taking many kinds of trades throughout the day or week and watering down your edge.  So often, the difference between profitability and unprofitability is eliminating marginal trades and trading more confidently with our core strengths.  Perhaps most damaging in taking those marginal trades is that we don’t accumulate those small wins that allow us to go after larger ones.  It’s difficult to build confidence when oscillating between winning on good trades and throwing money away on so-so ones.

Dr. Brett writes almost every day about helping human traders achieve their best results? Does this have meaning for our models? Let’s start with a look at their current ideas.

Getting Updates

I have offered a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We will 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 below, 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!

This Week— Focus and Discipline in Trading Systems

Holmes

I love chances to buy on a dip, and this is quite a dip. United Health Services, Inc. (UHS) is down 8% in the last month alone – more than likely an overcorrection. While I like it for short term turnaround potential, I’m not just going to buy and hold. If things keep going south, my active approach to trading stops will get me out of this position before I take too big of a hit.

J: Do you realize that the new President is going to repeal ObamaCare?

H: We have a new President? What is ObamaCare?

J: I know, I know. You do not read news; you just look at charts. But you might have a point here. The original repeal will be rich in symbolism, but is not likely to end insurance for millions of people. There is a lot of selling in this stock based upon fear – not actual knowledge of what will happen. You could have a winner.

H: I usually do.

Athena:  I generally go for stocks that are already popping upwards. This week’s pick, United Rentals, Inc. (URI) is no exception. A substantial jump over the past two months really put this one on my radar, and I like the potential for future growth in the next 4-6 weeks. The rankings on the Relative Strength Index don’t particularly scare me. A high-volume event could push the stock well above the current price, yielding a tidy profit.

J: This idea also has some support from the fundamentals. The FAST graph shows the strong earnings growth and the underlying value.

A: I know you look at P/E ratios and such, but that is not necessary to find a great trade.

J: Shouldn’t you have bought this one in 2015? It has doubled from the bottom?

A: I did not exist in 2015.

J: You were just a glimmer in Vince’s eye.

A: You must learn to look forward. We can all wonder why we did not take some action in the past. That is a waste of time. It is more important to make good decisions in the future.

Felix

I will begin with my responses to reader votes for the favorites list.

As you can see from my presentation, which is neater and more informative than Oscar’s, I show the answers for last week as well as now. I also provide rankings within each category so that you can see which stocks are moving from one group to another.

Bristol Myers (BMY), for example, became a marginal “buy” while Apple (AAPL) dropped into the “hold” group.

J: You have nearly twice as many stocks listed as we agreed upon.

F: I am giving my readers more information. Do I get paid more for that?

J: No. And you must start reducing the list. Just go with the top vote-getters. What is your featured stock for this week?

F: I like Rice Energy, Inc. (RICE) as a long-term investment. A couple sharp declines in the past quarter put the 50-day moving average on a downward trend, but we’re still up on the 200-day moving average. My bet is we’ve bottomed out on this one, and it should be a solid holding looking 10-12 months ahead. That said, a few additional drops wouldn’t surprise me. This is a solid pick if you don’t panic, and keep your timeframe in mind.

J: Isn’t selling losers a part of trading discipline? The other models all do it with trading stops or a similar technique.

F: It is also part of my method. I am just not so quick on the trigger. My performance is similar to that of the others, but has a longer holding period. Some people must pay taxes, and prefer long-term gains. Oscar does not think about that.

J: What about Holmes and Athena?

F: Dogs and goddesses do not pay taxes.

 

Oscar

Here are my ratings for the top reader interests. There are still five open slots, so keep the questions coming.

While no one asked about it, I’m big into trucking this week – think of your power running backs from Alabama. For our purposes the IYT Transport ETF will do. This area has experienced broad-based gains through the last quarter. I’m of the opinion we have some time before we peak. When you come across a 200-day moving average this flat, it’s hard to believe you’ve hit the ceiling.

J: How often do your ratings change? Are these listed in any particular order?

O: Any changes are strictly the result of the stock chart. If the markets change, my ratings will as well. I report the list in order of my strength ratings.

J: Are those like the ratings you use for your fantasy football team? I see that you switched to college football for this week’s column.

O: My fantasy teams depend upon a different algorithm, but it is also a good one.

J: Is that available to our readers?

O: Not unless you give me a raise!

Background on the Stock Exchange

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

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

Questions

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

Conclusion

Human traders are constantly at war with their own emotions. Losing streaks are inevitable – just part of the job.

Our models do not know, of course, when they are in a bad performance streak. Using models is a great way to maintain focus and discipline. That is not, however, the final word. As long as humans remain in control, there will be psychological issues. Is your model still “working?”

Maintaining confidence in your model or trading system is just as important as confidence in your own trading skill.

Why Wall Street Strategists Always Seem Bullish

Let us divide those writing about forecasts into three camps:

  1. Those who make specific forecasts, sometimes required as part of their job;
  2. Those who criticize, but do not forecast;
  3. Those who make dramatic, non-consensus forecasts to get attention.

I plan a few more posts on this theme, but today I want to consider group 2. If you are seeking attention, it is easy to write a popular article about forecasting. Start with the viewpoint that the experts are dumb and that the average investor can do better. People love to be smarter than experts. Surveys show that 90% of all people are above average in intelligence! Well, maybe not 90%, but far more than half. They are very receptive to this approach.

Taking this easy target, the NYT cites a source claiming some great credentials. His report got a million page views and even more publicity in the sequel. I see plenty of bias and errors in his work, but let me start with the most colorful claim:

Now imagine having a coin calibrated to show “positive” 2/3 of the time, and “negative” 1/3 of the time. Flipping this coin would therefore outperform a Wall Street strategist!

This is an oft-cited concept. If the market declines 1/3 of the time (actual performance is a bit better, but we’ll go with the author’s numbers) and no Wall Street strategist forecasts lower stocks, supposedly that is proof that the experts are too bullish.

The author has quite obviously never had to forecast anything, and his math is seriously flawed. Suppose you merely forecast an up market. You will be correct 2/3 of the time. He uses his magical coin. 2/3 of the time it forecasts “up” and it is correct on 2/3 of those occasions. 4/9 in the win column. The coin forecasts “down” on 1/3 of the years, and it is correct 1/3 of the time. That is another 1/9 in the win column. So less than 56% right instead of 2/3.

The author also produces this mystery chart:

What is the wavy pink line? The wavy blue line is (apparently) a consensus average. The pink diamonds are an actual result. So, what is the pink line? A good chart has an explanatory legend, but this is a mystery.

If – instead of the mystery pink wavy line – you compare the blue line to the actual, it is directionally accurate in eleven cases, slightly wrong on four, and more seriously wrong on four others. The focus on the two lines distorts the results. There are other issues, including the time frame for analysis, but I am sticking to points that should be obvious to the average reader.

Everyone makes mistakes, but when you are calling out a lot of experts and possibly misleading investors, you bear a special responsibility to check your work. In the academic world of peer review, this article would not have been published as written.

Turning to the New York Times, readers expect a very high standard of reporting. The article does seek a little balance by looking for an accurate forecast, that of Seth J. Masters 2012 forecast of Dow 20K. It was good reasoning, like my own analysis two years earlier. Perhaps the author might have used (in George W’s words) “The Google” to search for Dow 20K.

The answer to the title question? Analysts are bullish because the long-term market trend is higher. In any given year, markets are likely to rise. If someone goes against the long-term trend, there had better be a compelling reason.

More to come on experts and predictions. My basic theme? A well-done forecast identifies the possible scenarios, specifies key variables, shows the range of errors, and focuses thinking for both the analyst and the reader.

Weighing the Week Ahead: New Year, New Highs, and a New List of Worries

There is a normal dose of economic data this week, but we are entering a quiet, pre-holiday period. As the rally faltered a bit, the Dow 20K talk yielded to a discussion of what could go wrong. I expect this discussion to continue in the coming week, and perhaps the next one as well. The punditry will be asking:

What can derail the rally?

Last Week

In a reversal from the last month, most of the economic news was soft. There was little apparent market effect.

Theme Recap

In my last WTWA, I predicted a week-long fixation on the Dow 20K story. That was very accurate, with the closest call coming just as I arrived at Chicago’s NBC tower for a CNBC interview on my 2010 forecast. I think it represents a delay rather than a jinx. Some might attribute the selling to the Fed and Chair Yellen’s press conference, an “effect” that was reversed the next day. It must have been meJ I’ll stay at the office for the rest of the year!

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally and the move to new highs.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

Personal

I will have several year-end posts planned for the next two weeks, but will probably skip WTWA next weekend. I am planning a Weighing the Year Ahead installment, probably in two weeks.

The News

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

This week’s news was quite good—almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Framing lumber prices are higher, year-over-year. Calculated Risk sees this as an important leading indicator for housing, so we should, too.
  • Initial jobless claims edged lower, to 254K.
  • Hotels are close to an occupancy record. (Calculated Risk).
  • The Fed provided the expected increase in rates with almost no market reaction. (That is the good part). Tim Duy provides some insight. See also “Davidson” via Todd Sullivan.
  • The Philly Fed showed a big gain to 21.5 (7.6 prior) and trouncing expectations. I am not very interested in the Empire State survey, but it mirrored the Philly result. Business and consumer confidence have both strengthened since the election. Confidence is essential for spending, investment, and economic strength.
  • Inflation is still tame, even as it creeps toward the Fed’s target.
  • Household balance sheets are much stronger. Scott Grannis regularly produces this chart. It is far more valuable than material from those focusing exclusively on debt, and ignoring assets.

  • Homebuilder confidence hits the highest level since 2005. (Calculated Risk).

 

The Bad

  • Industrial production declined by 0.4% from October to November.
  • The rail contraction continues. Steven Hansen continues his coverage with multiple takes and time frames. Check it out!
  • China/drone incident. The drone seizure coincided with Friday selling, a hint of market reaction to sensitive international issues. China will return the drone and claims that the story was “hyped up.”
  • High frequency indicators edge lower. NDD’s useful weekly compilation shows continuing strength in short leading indicators, neutral in the coincident group, and some weakness in the long term. He is downplaying the effects due to seasonality, but it bears watching.
  • Housing starts dropped by 18.7%. This was a very bad headline number. Various sources suggest that it emphasizes multi-family while single-family is strong. This is a shift that is quite acceptable, so we should follow it closely. Calculated Risk, our go-to source on all things housing, has a great analysis and this chart.

The Ugly

The Young. Colleges are profiting from helping credit card companies. The choices are frequently worse than the student could find otherwise.

The Old. Brett Arends opines that cost-of-living adjustments may soon end. Already the inflation rate for seniors, mostly because of medical costs, exceeds the standard CPI calculation.

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 opportunities abound and nominations are welcome!
The Week Ahead

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

The Calendar

We have a normal week for data, loaded into the latter part of the week. Things will get very quiet after Friday’s opening.

The “A” List

  • Michigan sentiment (F). Confidence is important right now. Will the mid-month preliminary high hold up?
  • New home sales (F). Not much change expected in this important sector.
  • Leading indicators (Th). This widely followed measure is likely to be flat.
  • Personal income and spending (Th). This important read on the economy is expected to show solid growth.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Existing home sales (W). A small decline is expected. Less important than new construction, but still relevant.
  • PCE price index (Th). The Fed’s favorite inflation indicator – still very tame at a touch over 1%.
  • Q3 GDP third estimate (Th). Little change expected in what is now viewed as “old news.”
  • Durable goods orders (Th). This volatile series is expected to be much weaker than the October data.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

Despite the end of the FOMC quiet period, we have little FedSpeak. Chair Yellen makes an early-week appearance, and that is all I see.

Next Week’s Theme

 

Last week attention focused on Dow 20K. This was true even though it is a rather meaningless round number in a flawed index. It shows the power of symbolism to attract attention. When the rally fizzled out, the story swiftly turned. Everyone questions rapid, short-term moves, so it is a natural for the punditry.

I expect it to carry over into a quiet week, with plenty of focus on 2017. The popular question will be about what could stop the rally. What should we worry about? It is time to rebuild the wall or worry.

What could go wrong?

Pundits were already hard at work last week:

You should ignore the lists or 2017 winners.

Trump’s policies might not get enacted, disappointing markets. S&P businesses are in line for $87.1 billion.

Trump’s policies might be enacted, hurting the economy and markets. (Think trade matters).

Trump might make a bad decision in a crisis. An ill-timed tweet?

Valuations are still excessive. Stocks are too pricey to buy.

The Fed and a strong dollar might hurt earnings.

Stocks might get too expensive for dividend reinvestment. (You can’t make this up).

Bonds are sending a warning.

Or maybe we should look at the bright side?

A nice reversal from the negativity of last January, the worst start to a year ever. (Josh Brown).

The rally is real. Brian Wesbury’s valuation model showed stocks as 30% under-valued on election day.

20% upside for next year? Brian Gilmartin sticks to the facts. This is an earnings-based conclusion.

 

What should investors conclude from these sharply conflicting ideas? As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

The increased yield on the ten-year note has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The Featured Sources:

 

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

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

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

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed. His most recent research update suggests some “mixed signals” from labor markets.

Georg Vrba: The Business Cycle Indicator and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

Doug Short: The World Markets Weekend Update (and much more). Jill Mislinski updates the ECRI coverage, noting that their public leading index is at the highest point since 2010. Surprisingly, the ECRI public statements remain bearish on the U.S. economy, the global economy, and stocks. It is as if they never recovered from the bad recession call in 2011. They have been out of step ever since.

James Picerno highlights an important, oft-ignored relationship. Many worry about higher interest rates. He notes the relationship between higher rates and stronger economic growth.

 

How to Use WTWA (especially important for new readers)

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

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

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you now?)

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar is fully invested in aggressive sectors. The more cautious Holmes also remains fully invested, but with continued profit-taking and position switching. The group meets weekly for a discussion they call the “Stock Exchange.” This week we had a great topic – whether the focus on Dow20K had an effect on technical analysis. The prior two segments were on limiting risk and maximizing returns. (We report exits from announced Holmes positions if you ask to be on that list. Write to holmes at newarc dot com).

Top Trading Advice

 

Brett Steenbarger continues to provide almost daily insights for traders. Sometimes the ideas draw upon his expertise in psychology. Sometimes they emphasize his skills in training traders. Sometimes there are specific trading themes. They all deserve reading. This week I especially liked the following:

Adam H. Grimes has an excellent piece on finding ideas. You must be experienced, but also avoid confirmation bias. Dr. Brett gives a HT and follows up.

Brendan Mullooly takes one of my favorite approaches – drawing a lesson from outside trading, especially from sports. This approach helps rid us of confirmation bias, providing a fresh look. Check out the full post for data on the impact from overtrading. And the sports analogy? Teams that keep switching quarterbacks!

[This chart was approved by Mrs. OldProf, a native of Green Bay and a knowledgeable football fan.]

 

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 advice from legendary investor Peter Lynch. Instead of finding something from the last week, I wanted to find the best choice for current conditions. Ben Carlson did the Peter Lynch report about two years ago, starting with this very relevant quotation:

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.

And also….

Now no one seems to know when they are gonna happen. At least if they know about ’em, they’re not telling anybody about ’em. I don’t remember anybody predicting the market right more than once, and they predict a lot. So they’re gonna happen. If you’re in the market, you have to know there’s going to be declines. And they’re going to cap and every couple of years you’re going to get a 10 percent correction. That’s a euphemism for losing a lot of money rapidly. That’s what a “correction” is called. And a bear market is 20-25-30 percent decline.

They’re gonna happen. When they’re gonna start, no one knows. If you’re not ready for that, you shouldn’t be in the stock market. I mean the stomach is the key organ here. It’s not the brain. Do you have the stomach for these kinds of declines? And what’s your timing like? Is your horizon one year? Is your horizon ten years or 20 years?

What the market’s going to do in one or two years, you don’t know. Time is on your side in the stock market.

 

Stock Ideas

Lee Jackson has an interesting screen that produced 5 Dividend Stocks that You Can Still Buy With Market at Record Highs. “We screened the Merrill Lynch research data base for stocks that are rated Buy, pay a dividend and haven’t gone parabolic this year. We found five that make good sense for investors”.

Wind energy stocks have been left behind in the “Trump rally.” Buying opportunity or victim of policy changes?

But keep in mind that solar is now cheaper than wind energy. Tom Randall (Bloomberg Technology) has a helpful analysis of how much and why.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, including four or five specific ideas that we are buying. This week Holmes likes Amgen (AMGN). Check out the post for my own reaction, and more information about the trading models.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Some Merrill Lynch top picks for 2017 (via 24/7 Wall Street).

Ben Levisohn (Barron’s) sees 23% upside for FedEx.

Interested in REITs? Try health care.

Get ready for Eddy Elfenbein’s new buy list. This annual event is a great source of ideas for investors who like to think in a time frame of at least a year. You can also join in the whole list via Eddy’s new ETF (CWS). It is both convenient and inexpensive.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the important article by Jonathan Clements on your personal risk-free rate. It is not the T-Bill or T-Note from financial analysis, but your own most costly loan. This may seem obvious, but many people fail to consider it in their financial calculations.

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest is a must-read for financial professionals. The topics are frequently important for active individual investors, so the series is worth following regularly. This week I especially liked the discussion of financial literacy. Even active investors are unable to answer basic questions. WTWA readers would get them all right, so it may seem very surprising.

Watch out for…

Bonds cratering while stocks rally. Eddy Elfenbein presents a telling chart.

Final Thoughts

 

My biggest reason for the 2010 Dow20K post was to alert investors to the idea of “upside risk.” There is always – always – a list of plausible worries. These dominate the news and the financial discussions. The other side is difficult. It is boring to say repeatedly that things are normal and promising. Talking about some new development seems smart – attracting viewers, page views, more gigs to make you famous, and even investors who seek confirmation.

The natural process leads to a focus on problems. These are easy to see, while solutions are not. Therefore, most investors do not understand the ill-named concept of the wall of worry.

The new list of worries, all well-known and reflected in current market prices, is a replacement for those listed on my current “investor fears” page, which replaced those from the 2010 era. It seems smart to study world events and use that knowledge to guide your investment decisions. But it is not!

You cannot make these calls as well as the market does. You are almost certain to over-react.

The investor mistakes I highlighted in 2010 are still with us:

  1. Excessive attention to headline events;
  2. Reliance on poor forecasts of the economy, especially recessions; (James Picerno has a great list of typical forecasts)
  3. Too much reliance on backward-looking earnings, reflective of unusual events and times.
  4. Ignoring the long-term economic forces putting idle assets to work. (Mark Hulbert on 24K)
  5. Emphasizing politics instead of investing. In 2008 many investors hated the prospects and principles of the Obama administration. They sat out the start, and never found an entry point.

It is more profitable to accept a measure of uncertainty, rely upon the best recession and earnings indicators, and remain agnostic about politics.

 

This is a good time to ask yourself about how have you done? If you are wondering whether you might do better with a financial advisor, check out my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo! That is true for 99% of my readers, whom I am trying to help. Some readers might well benefit from our help. Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Stock Exchange: Does the Symbolism of Dow 20K Affect Technical Analysis?

Last week’s Stock Exchange focused on making hay while the sun is shining. The week before we discussed risk, where every trader and investor should start. Now the models must deal with news and symbolism. Dow 20K is grabbing the headlines as I expected. It is very nice to get some recognition for my early call on the most important investor perspective – concern about “upside risk.”

How does this affect the decisions of our technical experts? The models are not caught up in the symbolism of Dow 20K or the promise of Trumponomics. It is all about the charts.

Getting Updates

I have offered a new service to subscribers (free) on our Felix/Oscar update list. Each can suggest three favorite stocks and sectors. I plan to report the “favorite fifteen” in each category– stocks and sectors. Sign up at etf at newarc dot com. Ideas and comments are welcome, as always. Green represents a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. For now we are not holding the list to the top fifteen, but we soon will. Sign up now to vote your favorite stock or sector onto the list!

favorites-table-121616

 

This Week— Coping with the symbolism of Dow 20K

Holmes

Holmes: Amgen (AMGN) is an interesting opportunity. The early November drop and recovery attracted my attention. The market message seems to reflect a concern that has been re-evaluated. We could easily see some price recovery here, perhaps to the level of the 200-day moving average.

J: Do you understand that the Presidential campaign involved everyone attacking drug prices?

H: What campaign?

J: Do you know that the President-elect is tweeting about drug prices?

H: I do not know what a President-elect is. And by the way, what is a tweet?

J: Do you know that everyone is focused on Dow 20K?

H: What is this “Dow.” I am talking about Amgen. Whatever you humans might think to be important, the message of this chart is clear – a possibly dubious selloff and a great rebound opportunity. It is my kind of trade!

Athena:  Some might think I have been a little late to the party on some recent picks. In the long run, you all will see. This week I especially like McDonalds (MCD). There’s been a bit of a recovery in place since early August. More importantly, though, the SMA 500 and 200 are both itching to shoot up a little higher. I’d be very surprised to see the price decline, or even start to flatten out, within the next couple weeks.

J: This is yet another of your over-valued picks. Take a look at the excellent analysis from F.A.S.T Graphs:

A: As I keep explaining to you, valuation is not relevant for my trading time frame.

J: Do you realize that this stock is caught up in the “Trump Rally” and the quest for Dow 20K?

A: Unlike the other models, I am aware of news. It is a reflection of my superior wisdom and knowledge. Whatever the causes that motivate you humans, I will enjoy this rally. When it ends, I will sell.

J: That sounds like what some call the “greater fool theory.”

A: There is a limitless supply of fools!

J: I like biotech stocks that have real earnings, like AMGN, but there are better choices. The bottom might well be a few months away.

Felix

Some might be apprehensive about buying a stock at a 12 month high. I like to see a sustained recovery in price and volume, since I plan to buy for a holding period of more than a year. US Steel (X) pushes all my buttons. With improving strength in the overall economy, I predict consistent growth over the next 12 to 18 months.

J: Your choice might also be helped by Trump trade policies against China.

F: Who is Trump and where is China?

J: Those are important fundamental considerations.

F: If it is important, it is all reflected in the price.

Oscar

They may call it the Lombardi Trophy, but there will never be a Super Bowl in Green Bay. And that’s not just because it’s inhospitable there come February (though it is). There simply aren’t enough hotels around to hold the massive crowds. After all, they can barely find a place to host the Vikings fans in Appleton!

J: Very interesting. Moving beyond your favorite part of the newspaper – the sports section — do you have a sector pick for us this week?

O: Right – I got distracted thinking about REIT Hotels. VNQ is the most popular REIT, but I have it rated as a “sell.” The group has been on a downswing the past six months.

J: I expect REITs to be hit hard by rising interest rates. That is what your chart shows. I especially do not like VNQ.

O: Well, there are some better charts.

J: Don’t hold out on us.

O: I really like APLE; it is better oriented to a growth sector.

J: I agree. This is a REIT that we hold for clients who really need fixed income. I expect it to handle higher interest rates via economic growth.

 

Background on the Stock Exchange

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

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

Questions

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

Conclusion

Are the models ignoring the Dow 20K story? None of them watched my CNBC appearance reprising my 2010 call, even though they all work for me! As true technical analysts, they focus on their own setups and expect anything really important to be reflected in price, momentum, and volume.

Will 20K represent resistance? If so we will see some interesting adjustments next week.

Weighing the Week Ahead: Dow 20K?

The post-election market run has been accompanied by improving economic data and increasing confidence. The result has the punditry asking a question that seemed crazy in January:

Will the Dow hit 20K?

Before reading this week’s installment, “Sherman, set the WABAC machine to” mid-year, 2010. The Dow was at 10K and many famous pundits were predicting a fall to 5000. In order to appreciate the psychology of the time, please read my post and especially the comments at Seeking Alpha. You will see some very colorful criticisms of my work! You will enjoy a few good laughs. I’ll comment more on this below, but it is a great place to start.

Last Week

Once again, last week’s calendar of economic news was nearly all good, supporting the market gains.

Theme Recap

In my last WTWA (two weeks ago), I predicted a period of stronger economic news and the possibility of a more positive market reaction. This is what has happened, but most commentators still are not emphasizing the main theme. It is not all about the Fed.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally and the move to new highs.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

 

The News

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

This week’s news was quite good—almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Rail traffic finally scores a slight positive. Steven Hansen provides the current data, as well as the more negative long-term perspective.
  • Senate passes stopgap funding. This is not getting a lot of attention, but it is a big shift from the past eight years, especially 2011, when the last correction came for this very reason. (The Hill).
  • OPEC reached a production limit agreement. Whether this will attract cooperation from non-OPEC countries is open to question. We might also ask whether a floor under energy prices is a positive. That said, the oil price/stock correlation has been a factor since the energy collapse. Months ago, I suggested that we were entering a sweet spot for oil pricing. The OPEC participants see a cap of about $60/barrel, which makes sense.
  • Jobless claims down ticked, and remain near all-time lows. See Calculated Risk for the story and charts.
  • Productivity rose over 3%.
  • Michigan sentiment spiked to 98 on the preliminary estimate. LPL shows why this is important.

  • Borrowers continue to move out of negative equity on their homes. 384K in Q3 (Calculated Risk).
  • ISM non-manufacturing strengthened to 57.2. Doug Short has the story and this chart:

 

The Bad

  • Gas prices rose over five cents. (GEI).

  • Interest rate components of long leading indicators are weakening. (New Deal Democrat). This is mostly a positive story, but the long-term interest effects are worth watching. NDD’s report of high frequency indicators is a regular read for me, and should be for other frequent traders.

 

The Ugly

Secret outside influence on U.S. elections. Foreign countries frequently have an interest in the most important elections. There is nothing new or unusual about that. Voters can weigh the opinions and arguments in the same way they use other information. Actions that are secret are another matter, especially when following the “dirty tricks” approach.

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 opportunities abound and nominations are welcome!
The Week Ahead

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

The Calendar

We have a big week for data.

The “A” List

  • FOMC rate decision (W). An increase is widely expected. The statement and Yellen’s press conference may yield hints about next year.
  • Housing starts and building permits (F). Softening pace expected in this important sector.
  • Retail sales (W). November data following a very strong October.
  • Industrial production (W). Any improvement in this economic weak spot?
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • PPI (W). Interest in inflation measures is increasing, but prices are not.
  • CPI (Th). See PPI above. Eventually these will be important.
  • Philly Fed (Th). The first look at December data is expected to be positive.
  • Business inventories (W). Significant for Q4 GDP, but little change is expected.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

With the FOMC meeting at mid-week, FedSpeak is on mute. Expect plenty more news on possible Trump policies.

Next Week’s Theme

 

The strong data continues, as does the market rise. We still do not see a reflection in forward earnings, but the earnings recession has ended. The Fed is about to raise rates, and no one cares. It is not all about the Fed, and more are learning that. As the market hits new highs, including a big round number on the DOW, the focus this week will be on DOW 20K.

In my 2010 articles I tried to emphasize the right focus for investors. Too many were paralyzed by fear from the frequent disaster predictions. Their upside risk was huge. This section was crucial:

Asking the Right Questions

The bias is inherent in the situation. The problems are known. If you write for a major publication, you are rewarded for analyzing the negativity. If you go on TV, you are expected to parrot the analysis of problems. This makes you seem smart.

By contrast, the solutions are vague and unknown. If you even talk about them, all the “hot shots” are skeptical.

That should be your clue to pay attention. Repeating the known news does not make you money. Try asking these questions:

What if unemployment falls to 8%?

What if the annual budget deficit is reduced?

What if housing prices and sales show a clear bottom?

What if mortgage rates remain low?

What if politicians negotiate a compromise on tax increases?

What if Europe stabilizes?

What if China and other emerging countries resume a solid growth path?

What if earnings for US companies continue to surge, leaving the 10-year trailing earnings in the dust?

What if the US rationalizes immigration?

If you have not thought about these possibilities, you have a fixation on negativity. My Dow 20K concept is designed to set you free — to get you thinking about the long sweep of history and the potential for success. If even a few of these things happen, what would be the market reaction?

This list of worries seems so old….

Two years later the New York Times ran a story with the analysis from a big firm. The reasoning was like mine, but missing the first 30% of the move.

Josh Brown takes note of the Barron’s cover. Since magazine covers are often viewed as contrary indicators, he adroitly includes a few others that might have been viewed as signals of a top. Great insight, and great fun.

Scott Grannis shows the wall of worry climb (but I still like my own version better!)

Eddy Elfenbein highlights the sharp contrast between now and January as well as the impact of the banking sector.

Remember how the start of 2016 was one of the worst market starts in Wall Street history? Howard Silverblatt noted this stat: At the market’s February, low, the S&P 500 was down 10.5% YTD, yet the Financials were down 17.7%. Since then, the S&P 500 has rallied 21.5%, while the Financials are up 45.6%. It’s as if the entire market were the dog being wagged by the banking sector’s tail.

None of this really answers the DOW 20K question, but the information is great. As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

The increased yield on the ten-year note has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The Featured Sources:

 

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

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

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

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed. His most recent research update suggests some “mixed signals” from labor markets.

Doug Short: The World Markets Weekend Update (and much more).

Georg Vrba: The Business Cycle Indicator and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

There is a Correlation Nosedive says Nick Colas (via Josh Brown). This signals an opportunity for those who can identify the best stocks and sectors. The phrase “stock-picker’s market” is oft-repeated. Now it makes some sense.

Dr. Brett analyzes the divergences and the implications.

Brian Gilmartin reports on the recent Chicago CFA luncheon where “Dan Clifton of Strategas Partners gave a great presentation on the coming fiscal stimulus and what it might look like and what it might mean for the US economy in 2017”. This means plenty of money for share buybacks and earnings increases. Brian (who has been very good on both earnings and the market) reaches this conclusion:

In year-end meetings with clients, I’m telling clients from both sides of the aisle that the SP 500 could be up 20% next year. Prior to the election and since last Spring ’16, the SP 500 was already looking at its best year of expected earnings growth in 5 years. The proposed President-elect and Congressional fiscal policy could be another level of earnings growth above what was already built into the numbers, before November 8th.

Personally, the $1 trillion repatriation estimate that Dan Clifton threw out seemed on the lighter side to me. Apple alone has $250 billion sitting on its own balance sheet, which is 1/4 of the expected total.

This is something we all should be monitoring.

 

How to Use WTWA (especially important for new readers)

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

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

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you now?)

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar is fully invested in aggressive sectors. The more cautious Holmes also remains fully invested, but with continued profit-taking and position switching. The group meets weekly for a discussion they call the “Stock Exchange.” This week we talked about maximizing gains. Last week the topic was minimizing risk. (We report exits from announced Holmes positions if you ask to be on that list. Write to holmes at newarc dot com).

Special thanks to our guest expert, Blue Harbinger, who provided first-rate fundamental analysis, providing counterpoint for our technical models.

Top Trading Advice

 

Brett Steenbarger continues to provide almost daily insights for traders. Sometimes the ideas draw upon his expertise in psychology. Sometimes they emphasize his skills in training traders. Sometimes there are specific trading themes. They all deserve reading. This week I especially liked the following, each reflecting one of the main themes:

 

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 Morgan Housel’s post on The Art and Science of Investing. I am delighted that he is keeping his promise to keep writing, leading the effort at a new, multi-contributor blog. This entry, as is the case with much of the best investing work, does not emphasize immediately “actionable” advice, designed to attract plenty of page view. The concept is great, and the post is worth a careful read. Here is the thesis:

This drives people crazy, because the more important a field is, the more scientific and predictable we want it to be. People take scientists seriously because they can count of them. Art is taken less seriously because it comes and goes.

But most fields outside academia are both science and art.

Including investing.

An example?

There is scientific data showing the best way to invest is to buy the cheapest set of companies you can find. There’s equally persuasive data showing the best way to invest is to buy the fastest-growing set of companies, which tend to be expensive. Some investors obsess over brand and intangibles. Others say ignore those and only look at fundamentals. Neither is right or wrong. You just have to appreciate that each strategy lives in its own context, and that market trends come and go. It’s an art.

I love this concept! There are many ways to profit from trading and investing. Arguments about approach may either distract or enlighten.

 

Stock Ideas

 

Brad Thomas suggests two REITs for the new Commander-in-Chief. Besides the recommendations, Brad analyzes some potential losers.

Still wondering about winners from the election? Marc Gerstein’s stock screening methods generate a great list of stocks and sectors.

Looking for safe yield? Who isn’t!! Blue Harbinger provides a first-rate analysis of Saratoga Investment Corp. (SAR). There are plenty of traps in the Business Development Company (BDC) universe. Mark’s analysis shows how carefully you must consider the data in finding sound choices. He carefully considers the implications from higher rates.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, with four or five specific ideas that we are also buying. This week Holmes likes Molson Coors (TAP). Check out the post for my own reaction, and more information about the trading models.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

But Tom Armistead warns that there is too much enthusiasm about Deere.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the Bloomberg analysis of when it is right to wait before claiming Social Security benefits. While it is an individual choice and calculation, delay is good for many. (See also “Watch out for” below.)

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest is a must-read for financial professionals. The topics are frequently important for active individual investors. Gil is on a well-deserved vacation, but his last post is very helpful. He takes a nice look at the current risks and rewards from the market rotation away from bonds.

Watch out for…

Structured products. Larry Swedroe (ETF.com) provides a careful analysis of what the investor is really getting. Most have inflated notions about the returns and are not properly informed about risks. In many cases, a simple fixed-income security would be better. This is a complicated story, but it is worth reading carefully if you, like so many, are considering these investments.

 

Final Thoughts

 

Will we reach DOW 20K? And stay there? I expect us to touch that level soon. When the market gets close to such numbers there is a magnetic attraction. Sellers see it as inevitable, so they back away. It becomes a self-fulfilling prophecy. Whether the level holds will be a trickier question. It will, but perhaps not right away. No one really knows.

My purpose in the DOW 20K project, including buying the domain name, was to help individual investors to focus on the right problem: Missing the upside because of the paralysis of fear. Consider the following:

  • For many years, anyone forecasting more than an 8% gain in the market was tagged as super-bullish.
  • Since 2010 there have been incessant warnings of another market crash, a decline of 50% or more.
  • A market doubling in 6 ½ years represents 11% compounded growth.

It was not a prediction of rush to 20,000, but an emphasis on taking the right perspective. There are always market worries. The big negative predictions always get the attention. It is always difficult to stay the course.

Is DOW20K the end? Definitely not. The fundamentals are all better than in 2010, and the worries are different. I’ll write soon about the methods behind the original call and the current implications. For now, I’ll just say that the upside/downside risk is still attractive.

Investors need not just “buy and hold.” Recessions are the biggest risk, so I watch that closely. The right allocation among asset classes deserves a regular review.

This is a good time to ask yourself about how have you done? If you are wondering whether you might do better with a financial advisor, check out my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo! Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Stock Exchange: How to Maximize Gains

Last week’s Stock Exchange focused on risk – my first step in speaking with a new client. If you take on too much risk, you will find yourself bailing out at the first modest downturn. Our guest expert last week, Blue Harbinger, helped us in discussing the topic. Mark did a great job, just as he does consistently on his blog, and we got a very favorable response from readers. We will invite some other guest experts in the coming days, and we also hope to bring Mark back.

Once you have a handle on risk, it is time to maximize your returns. This is much more difficult than it seems. There are always many reasons to be fearful. It is only when you have confidence in your methods that you can stay the course through the inevitable blips.

Our models help with this problem. There are differing approaches, but all have been doing great. Holmes has just completed his impressive first year of real-time trading, beating the market with a lot less risk.

Readers see many bloggers who publicize alleged results. Some readers ask us to join in this deceptive game. Those others are either reporting on newsletters or they have bad lawyers! A legitimate investment advisor understands the regulations on reporting results. It is very tricky to put anything on the Internet, no matter how honest you are. We’ll respond to any inquiries by qualified investors with detailed results and a discussion. For most of my readers I must explain in more general terms. Today I include a recent discussion with Vince – the man behind the models. (More background here). I am trying to provide some ideas for your own consideration. While we view them as low-risk when employing our stops, no general results should be regarded as specific advice.

J: The models have all been doing well. Is it just because of the market rally?

V: When the market is strong, the models are even stronger. A rally helps.

J: What if things turn South?

V: Each model has a disciplined exit rule. No method comes without risk, but we do a good job of limiting it. How did Holmes do during the January dip?

J: Holmes pulled back a bit, dipping less than 4%. I was impressed. How do you develop such confidence in your results?

V: My method involves extensive training while preserving a generous out-of-sample period. If the latter period performs like the training time, you know you have something.

J: I add an extra test. When we start trading in real time, I track every trade. I am verifying that the model does what it is supposed to – making the right sort of trades and exiting when needed. It confirms the test results, but does much more.

V: That is only what I would expect. Humans are not really needed in my models.

J: Which brings us back to the old story of the space capsule, previously carrying only monkeys. Humans were supposedly not relevant. The designers of the manned capsule insisted on a window and engineers (like you) thought it was unneeded. The explanation? So that the astronauts could see to pilot the craft! We do not override the model choices very often, but humans remain in control.

To summarize: You need to make hay when the sun is shining. Do not get mired in pessimism. A disciplined method helps you to stay the course.

Getting Updates

I have offered a new service to readers on our Felix/Oscar update list. Each participant can suggest three favorite stocks and sectors. I plan to report the “favorite fifteen” in each category– stocks and sectors. If your favorite is not picked as part of the group, I’ll try to provide some individual answers. Sign up at etf at newarc dot com. Ideas and comments are welcome, as always.

This Week— Profiting from the Rally

Holmes

Recently TAP (Molson Coors Brewing) showed up on my list I’m the rebound specialist, and this one really fits the bill. Buying at 97.50 with a 94 Stop, looking for a move back to the 50d MA of 103.75.

I really like the risk/reward of this type of setup. If the stock starts to really move in my direction, I can raise my stops and raise my target price, although I would be likely to take some profits.

While I don’t play strict attention to what analysts say I see that there is a price target of 120.73. This is an added source of comfort for me.

J: Congratulations on your great first year of real-time trading! How much luck did you have?

H: There are always good rebound plays. My method is a natural for traders, and it minimizes risk.

J: Your choice of TAP makes no sense to me. The P/E ratio is over 26 and earnings growth is in the single digits.

H: You humans keep drinking beer! I am playing for modest rebound. You will see.

Athena:  SM Energy (SM) has been down this past week – I see that as more of a buying opportunity than a trend. Energy stocks have been favorable across the board, and here I see an opportunity to take part in a sizeable rally.

J: You and your colleagues all seem to be reaching for energy stocks. In general, I see the idea, but why not pick a name with some earnings.

A: Earnings? Look at the chart, the uptrend, the support…. This is a story. Earnings are not relevant to sustain the uptrend.

Felix

Nvidia (NVDA) recently experienced a sharp bump in price, but don’t let that scare you. The long-term trends here have been moving higher at a steady rate, suggesting the potential for gains over the next year or so. Some correction may be inevitable, but that’s a storm you’ve got to weather to hold out over the long term.

J: The company beat earnings expectations and guided higher, a winning combination.

F: The chart reflects that strength. I see this as a long-term winner.

J: Should we wait for a pullback?

F: For long-term investors it is more important to make attractive purchases when opportunities present.

Oscar

I want to talk about defense this week, and I don’t just mean the Kansas City Chiefs. (That said, eight straight games with at least one turnover is worth mentioning). My favorite sector this week is Defense (XAR).

In the past six months, we have seen a solid upswing in the moving averages here. I still think there’s plenty of room for growth here. I couldn’t say why it’s taken off so drastically since November, though.

J: Did you hear about the election?

O: Sure. Bud Selig in the Hall of Fame???? I did not vote for him.

J: You have a vote?

O: I mean that if I had a vote, I would not have picked him. That All-Star game home field advantage is strange.

J: I was referring to the Presidential Election. The results are viewed as favoring defense stocks.

O: The reason does not really matter, does it? This is a great trade!

 

Background on the Stock Exchange

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

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

Questions

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

Conclusion

Last week we noted that accepting risk before year-end might well be correct. This week we balance the risk assessment with attention to possible rewards. The group still sees a very positive outlook.

Stock Exchange: Model Picks Teach Us to Manage Risk

Individual investors are intensely focused on the concept of risk. And why shouldn’t they be? Finding an appropriate level of downside risk is paramount. However, too few give equal weight to the potential upside risk in their decisions. Permabears and doom-and-gloomers often watch from the sidelines as the market rallies beyond the fear of the day.

We’ve been able to enjoy such a rally in the wake of the election. As the uncertainty surrounding future government policy dissipates, investors have a broad range of new opportunities.This week, our models’ picks give us an opportunity to explore both upside and downside risk.

To help us cut through the fog, we are joined by Blue Harbinger (AKA Mark Hines).

What level of risk is right for you?

The Stock Exchange provides an expert-level debate on technical and fundamental analysis. (Important background is available here). Comments, dissent, and specific stock questions are welcome!

This Week—Is Athena late to the party?

It’s an extremely common mistake for investors to chase a stock on a rally, then panic and sell at the first downturn. This buy-high, sell low strategy is an obvious loser. Athena is our answer to everyone who wants to find a trend, enjoy the ride, and hop out near the peak. Let’s see what she has on tap this week.

Athena

Athena: Drill, baby, drill! Continental Resources, Inc. (CLR) was on a roll in November – though I couldn’t say why. All I see is solid upward trend and a spike in price to cap it off.

clr_technical_chart-athena

Blue Harbinger: Continental has some competitive advantages and challenges relative to other energy exploration companies, but its price still remains highly correlated with the price of oil. For example, Continental has competitive WTI break even prices of around only $30-$35 per WTI barrel, and it was an early mover in the Bakken Shale (Williston Basin). However, it will take a long time to develop its huge acreage.

A: I hadn’t factored in time for future development, but to me that sounds like potential for future growth.

BH: Two other things I know you didn’t factor in – the incoming administration (of which you have no knowledge), and attempts by OPEC to reduce crude supply.

Regarding the incoming Administration, it seems the regulatory balance may shift slightly towards pro-business, pro-profits and pro-growth, instead of pro-environment. That may work in Continental’s favor, but the bigger factor remains oil supply/demand, something the Administration has very little control of.

Regarding the attempt of OPEC to reduce supply, would-be buyers may have already missed that boat. Oil shot up on Wednesday (11/30) as OPEC agreed to its first oil production limits in eight years. Oil, as measured by US Oil Fund (USO) was up 8.65% on Wednesday, and Continental was up 22.88%. Caution is prudent with regards to initiating any new positions, because Continental will likely be very volatile in the near-term.

A: Well that’s all very interesting, but I’m only looking to CLR for the next couple weeks. Am I wrong to see upside here?

BH: We certainly won’t see any concrete policy shifts in your time frame, but that may not matter. Sometimes the appearance of a shift to market-friendliness can move a stock just as much.

Felix

I’m not looking for anything nearly as risky as Athena. Looking out a year or two down the road, I expect broad-based gains from the biotech sector (IBB).

ibb_technical_chart-felix

We’re reaching the bottom of a year-long slip, and the market seems to be correcting its perception of what IBB has to offer.

BH: From a contrarian standpoint, biotechnology and pharmaceutical stocks are attractive. And ETF IBB is a decent way to play the space because it provides diversified exposure at a decent price (the expense ratio is 0.47%).

F: Who’s the contrarian here? It looks like the market is coming to terms with a drastic change in this sector. Could the recent election be having an impact here too?

BH: It makes sense to consider IBB with regards to the goals of the incoming Administration and Congress. Hillary Clinton caused several big drops in IBB over the last year simply by taking issue with the way drugs are priced. Now that her Presidency seems off the table (at least for the next four years), and the threat of the House and Senate being flipped has been removed, the prospects for biotechnology and drug-makers looks better. IBB did pop (up nearly 10%) the day after the election, but it has given back nearly half of those gains.

If you are a long-term contrarian investor, it may make sense to consider some of the individual stocks within the ETF because you don’t have to pay the 0.47% annual expense ratio. For example, the two largest holdings (Celgene and Biogen) have only underperformed the broader market (as measured by the S&P 500) slightly over the last year. However, the third largest holding, Gilead, has dramatically underperformed. We don’t own Gilead, but we wrote about its attractiveness at the end of May (Gilead: A Trump Stock Worth Considering), and it’s valuation has only become more attractive since then.

Oscar

Fantasy football is going to be the death of me. I liked OBJ a few weeks back, but I didn’t like the Giants next few matchups. I left him on the bench. Naturally, he started playing his best games of the season. This on-again-off again approach isn’t working for me.

BH: Did you want to talk about stocks here or what?

O: Right – you gotta stick with what you know. I’m back on airlines & airline manufacturers. I liked ’em near the end of October and I like ’em again now. Check out BA. This one looks like a winner through the end of December, at the least.

 

ba_technical_chart-oscar

BH: Industrials in general (as measured by the Industrials ETF, XLI) have performed well since the election, and Boeing has performed well too. Industrials (like Boeing) tend to be cyclical, and the market seems to like the incoming administration’s pro-growth message.

From a valuation standpoint, Boeing is not unreasonable considering its price-to-earnings ratio (both twelve-trailing-months and forward) is within its historical range.

bh-oscar-1

O: Glad to see we agree (for once). Any reason to hold onto this one for a while longer?

BH: Boeing continues to spit off a lot of free cash flow that it has been using to reward shareholders with big share repurchases and healthy dividend payments. The dividend yield sits 2.9%, which is above average compared to the S&P 500, and may be attractive to many income-focused investors, especially considering interest rates are low and rising (i.e. bonds don’t offer a lot of yield and their prices will decline as interest rates go up).

Holmes

I spy brighter days for Under Armour (UA). The recent selloff here was overdone, and some recovery is expected. Since I’m familiar with profit-taking techniques like trailing stops, some recovery is all I need.

ua_technical_chart-holmes

BH: It appears the selloff was the result of management tempering long-term growth expectations. Under Armour has been growing like wild fire since 1996, but it’s a big company now, and it’s much harder for Under Armour to keep growing at the same high rate.

H: There may be some long-term concerns, but I’m not terribly concerned with that. How does this position look in the fundamentals?

BH: From a valuation standpoint, Under Armour is cheaper than it was, but it’s still very expensive, and the market still has very high expectations for future growth. For example, check out Under Armour compared to its rival, Nike.

bh-h-1

Blue Harbinger: The market can be very fickle when it comes to brands and fashion. Under Armour enjoys a lot of brand recognition and favorability now, but that can change quickly. Plus, it already doesn’t enjoy the same profit margins as Nike.

bh-h-2

H: Be that as it may, I’ll again say I’m really only interested in the stock’s modest recovery. Talk to me again in February, and we’ll see how this one worked out.

Background on the Stock Exchange

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

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

Questions

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

Conclusion

Our models’ picks for this week were uncharacteristically risky – but that’s not all they had in common. By and large, the gang picked big potential movers for their short-term potential. Fundamental analysis and broader market context raise questions, where technical pings see a big upside.

This is why it is important to consider your level of risk tolerance as a function of your objectives. For many long-term investors, these positions would have little to offer. For those with a trading mindset, there may be a tidy profit to make before the holidays.

Weighing the Week Ahead: Are Stocks Ready for Stronger Economic News?

It is (ahem) a very big week for new data. The A-teams are back from their mini-vacations, ready to take a fresh look at the new world. While some will continue to work the Trump Administration/stock theme, it remains mostly guesswork. There is a new theme, which markets and pundits will get around to, perhaps as soon as this week. With a tone change on the economy and deficits, I expect the punditry to be asking:

Can the market embrace some good news?

Last Week

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

Theme Recap

In my last WTWA, I predicted special attention to the Trump stimulus plan and how it might be financed. Must of the week’s discussion was about possible cabinet appointments and the policy implications, but spending and taxation got plenty of attention. It was a s good a guess as any.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally and the move to new highs.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

Personal Note

I am taking a few days off, so there will be no WTWA next week. I hope that the Stock Exchange group does not play hooky.

The News

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

This week’s news was quite good. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Rail traffic is improving reports Steven Hansen at GEI. The story is even better if you remove coal and grain.
  • Technical indicators are strong. Our own technical models remain strongly bullish. Noted technician John Murphy (via Charles Kirk) has this comment:

    “There is little doubt that the market’s trend is still higher. The fact that it’s being led higher by economically-sensitive stock groups like energy, materials, industrials, small caps, and transports is a sign of strength. The fact that tech stocks are starting to strengthen is also a positive sign.”

  • Chemical activity shows continuing strength. Calculated Risk monitors this indicator, which seems to lead industrial production.
  • Durable goods rebounded nicely to an increase of 4.8%.
  • Existing home sales were strong at 5.6M SAAR, beating expectations. Calculated Risk cautiously notes that the results do not reflect the recent higher mortgage rates.
  • Michigan sentiment beat expectations moving to 93.8. Doug Short has a comprehensive review.

The Bad

  • New home sales fell on an annualized basis. The decline included both multi and single-family residences. Calculated Risk offers perspective. Please compare the measured response here and above on existing home sales.
  • Mortgage rates moved above 4%. (MarketWatch).
  • Trucking is still declining, but the rate seems lower. Steven Hansen at GEI reviews the mixed picture.

 

The Ugly Beautiful

At some point, I need to do an update on last week’s “Fake News” ugly award. There is a good cyberspace discussion, but that can wait.

As I occasionally do, I want to focus on the positive for a change. Bill McBride of Calculated Risk had an encouraging Thanksgiving post, Five Economic Reasons to be Thankful. Read the whole post, but here is one that might surprise you – household debt levels.

 

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. This week’s award goes to Jon Krinsky of MKM Partners, with a big assist from Josh Brown. There is a consensus that countries are racing to debase currencies in “beggar thy neighbor” policies. The stronger dollar certainly reduces earnings for some companies, especially if they do not do any currency hedging. The flip-side gets no attention. Josh writes, There is zero evidence of a long-term correlation between stocks and the dollar. Take a look.


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 the data avalanche that we often see when the first two days of the new month are at the end of the week. This quirk of the calendar makes this the biggest week of the year for data.

The “A” List

  • Employment report (F). Expectations are a little lower for the data markets see as most important.
  • Consumer confidence (T). A good concurrent read on spending and employment.
  • ISM index (Th). Still modest growth in this widely-followed measure?
  • Auto sales (Th). Important sector, private data, and not a survey. What more could you want?
  • ADP private employment (W). Deserves more respect as an alternative to the “official” data.
  • Personal income and spending (W). Important economic growth indicator. Will strength continue?
  • Beige book (W). Provides descriptive color for FOMC participants, and occasionally some policy insight.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Construction spending (Th). Rebound expected in this important sector.
  • GDP second estimate (T). Somewhat “old news” but still the base for the ultimate measure of economic growth.
  • Chicago PMI (W). Most important of the regional surveys, with some predictive power for ISM.
  • Pending home sales (W). Less direct impact than new construction, but a good read on the housing market.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

For those who missed it during the holiday-shortened week, Fedspeak is back! We could also get big news out of the oil production talks between OPEC and non-OPEC members.

Next Week’s Theme

 

This will be a big week for news, and it might also be for stocks and bonds. For a long time, the market reaction has been entirely Fed-focused. If the economy looked better, the Fed would start raising rates. If it looked worse, the Fed was expected to help. Whatever the reason, the tone has now changed. Economic data have been better, and there is more optimism. There is growing acceptance of higher interest rates. The market seems untroubled (so far) by the rate move and the strength in the dollar.

While few remarked on the tone change last week, I expect it to get more attention in the week ahead, especially if economic data remains strong. It will leave us wondering – Can the market finally celebrate good news?

This is a multi-part theme prediction. We do not know that the data strength will continue. We do not know what the FedSpeak comments will be. And finally, we do not know how markets will react. We have a clue about how the political world will react (via Charles Kirk).

“I’m getting a real kick out of how so many Republicans have gone from bear to bull on US economy overnight and how many Democrats have done the opposite.”- Patrick Chovanec

This change will be reflected in comments from the punditry this week.

As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

The increased yield on the ten-year note has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The Featured Sources:

 

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

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

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

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed. His most recent research update suggests some “mixed signals” from labor markets.

Doug Short: The World Markets Weekend Update (and much more).

Georg Vrba: The Business Cycle Indicator, (latest edition below) and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

Urban Camel at The Fat Pitch analyzes recession forecasts based upon the Presidential Cycle, a popular current theme. This is a great article. (A Silver Bullet candidate at least). Here is a key quote:

More to the point, there are better ways to forecast the next recession than counting months on a calendar or focusing on changes in the presidency. How?

By monitoring changes in the macro data. A persistent slow down in retail sales, housing consumption, employment growth and other macro indicators will likely be a better method for indicating when a recession is becoming more likely. This is the stuff that matters most; the calendar and presidential terms are demonstrably inadequate on their own. Our regular commentary on the macro environment can be found here.

This is very good advice to the recession worrywarts.

If (like me) you are a quant who is always hungry for more data, you will love FocusEconomics. You get a compendium of information from around the world, with cogent analysis. To take one example, here is their update on the Trump effects:

There are so many interesting topics that it is difficult to describe in one example.

 

How to Use WTWA (especially important for new readers)

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

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

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you now?)

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar is fully invested in aggressive sectors. The more cautious Holmes also remains fully invested, but with continued profit-taking and position switching. The group did not meet on Thanksgiving Day, but you can expect reports to resume in this Thursday’s “Stock Exchange.” Out of the many Holmes picks this week, I can report one that seemed to capture a theme, Fomento Economico Mexicano SAB, (FMX). This Mexican holding company, trading via the ADR, includes several retail holdings. (Think Coke and Heineken). Holmes likes to play rebounds on a technical basis, so this is an interesting play on Trump policy from a source who knows nothing about the election or the news. (We report exits from announced Holmes positions if you ask to be on that list. Write to holmes at newarc dot com).

Top Trading Advice

 

Brett Steenbarger keeps on bringing it, day after day. His posts are a must-read for traders, but often have broader scope. If you are trying to perform well at anything, Dr. Brett can help you. My favorite piece this week was about a movie featuring young drummers. It is often helpful to go outside of your own world, take an objective perspective, and then look for the lessons.

Adam H. Grimes has a good explanation of how to calculate volatility in Excel. I find that most people consistently over-estimate volatility, perhaps goaded by the CNBC reports of “triple digit moves” and a 50-point bounce since the lows. These are both basically meaningless unless you are trading a very large short-term position.

Bill Luby discusses common misperceptions about the VIX. This is a great example of those who need to use Adam Grimes’ spreadsheet!

You can always tell when the crowd gets long the VIX and ends up on the wrong side of the trade.  “The VIX is broken!” becomes an oft-repeated refrain, as does “The markets are rigged!” and the usual list of exhortations from those who are in denial.  The current line of thinking is that the world must be much more dangerous, risky and uncertain as a result of a Trump victory, yet the VIX is actually down 31.4% since the election – ipso facto the VIX is broken.

The VIX is a market measure, not something readily rigged. If you disagree, you are simply on the wrong side of the market.

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 Batnick’s post, This is Not Bearish. The question is the new all-time highs in stocks. I know from experience that the average investor sees this as some sort of warning. Instead of interpreting prices in context, they see a chart or a range and expect mean reversion.

Michael looks at data since 1928. How many new market highs do you suppose have been made since then? How many this year? The answers are 1134 and 11. I suspect that few would come close in their guesses. 18% of all months have closed at all-time highs. Here is what happens after a new high:

The time after a new high is nothing special – and nothing to worry about.

This post was frequently cited, but I enjoyed the color provided by Brian Gilmartin. His story about how a Chicago TV producer uses psychological tests to find the most stressful stories is priceless!

Stock Ideas

 

Brian Gilmartin has a mixed take on health care (seems right to me). Policy is changing. Defensive stocks are in question. More aggressive picks might do well. Check out his objective, earnings-based take for some ideas.

Tiernan Ray (Barron’s) has a helpful article on deal stocks. While value investors always look for cheap stocks, these are also often good takeover targets. It is helpful to keep an eye on the candidates.

Mexico a screaming buy? MarketWatch analyzes the trade rhetoric and prospects. (And note Holmes above).

Freeport McMoran? (FCX). Stone Fox Capital analyzes the relationship between copper prices and the stock price. Not much of a boost is needed, and the copper market has been strong.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is Jonathan Clements’ piece on the two financial numbers you need to know. Hint: You might have a clue about this, but are probably measuring incorrectly.

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest is a must-read for financial professionals. The topics are frequently important for active individual investors. I especially liked this post on dividends. Why do so many insist on regular cash payments?

Gil nails it with his answer – the security of regular payments.

If you are wondering whether you might do better with a financial advisor, check out my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. If you regularly navigate these problems, you can fly solo. Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Market Outlook

Eddy Elfenbein provides several interesting facts about the economy, helping us all to keep perspective. You will enjoy the mixture of surprises and items you might guess. Did you know that nearly half of mutual fund managers do not own their own fund?

Eddy’s ETF (CWS), based upon his successful annual list, is getting a lot of deserved attention. It is off to a good start.

Bill Kort reviews the most recent predictions of the end of the world.

Value Investing

The rebound of the value approach continues. Dana Lyons provides the most recent evidence.

Watch out for…

The bond market. The Brooklyn Investor compares bonds and stocks over a long period. The analysis reveals the shortcoming in measures like the Shiller P/E, which consider neither interest rates nor inflation. There are many helpful charts, but here are some examples.

I am always baffled at comments like, “The market has averaged a P/E ratio of 14x for the last 100 years so the stock market is 40% overvalued at 20x…”.

How can you compare 14x P/E to the current level without discussing interest rates?  And if you think stocks should trade at 14x P/E today, then you should also think that interest rates should be much higher than they are now. For example, the 10-year bond rate averaged 4.6% since 1871 and 5.8% since 1950. But these periods include a time when interest rates were not set by the market.

And also this:

 

1955-2014:

            Interest rate range           average P/E

                   4 – 6%                             23.3x
6 – 8%                             19.6x

I looked at the data from 1955-2014 (adding one more year to update this isn’t going to change much) to see what the average P/E ratios were when interest rates were in certain ranges.

From the above, we see that the market traded at an average P/E of 23.3x when interest rates were between 4% and 6%.  The 10-year now is at 2.3%. So we have a long, long way to go for interest rates to threaten the stock market, at least in terms of the bond-yield/earnings-yield model.

Final Thoughts

 

If you want to analyze a change, you need to know when it starts. Here is part of an example from my causal modeling classes.

When does change start?

  • When the new Captain orders a change in course?
  • When the crew knows the new Captain will order a change?
  • When the crew knows the new Captain, but not whether he will order a change?
  • When the crew knows there will be new Captain who might order a change?
  • When the crew knows there might be a new Captain?

I am sure you get the idea. The methods that track the market under various Presidents have many problems, but the starting and ending points are especially important. There are no new Trump policies. We are all still guessing about what they might be.

And yet – there has been a definite change in tone. Economic strength has a lot to do with confidence – the willingness to invest and to spend. A divided government had many dysfunctional consequences, especially repeated issues about the debt limit and spending on crucial programs. We can expect less of that. There will also be a very different reaction to economic data; the political rhetoric that blinded investors will be reduced.

The generalized Fed theory will have less traction. Those who have been wrong about the market for years have used the Fed as a fig leaf. With interest rates rising and the economy improving, that story must change.

The emphasis on commodity prices as an economic indicator, most prominently by the ECRI, is also proving wrong, as is the impact of a stronger dollar.

This is not an endorsement of specific Trump policies. It is the reality of moving out of the election environment – at least for a year or so! This week’s data avalanche could be the first real test of this new attitude.

Weighing the Week Ahead: Possible Stimulus and How to Pay

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

How much economic stimulus and how to pay?

Last Week

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

Theme Recap

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

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally as well as the late-week weakness (despite options expiration).

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.

The News

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

This week’s news was quite good. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

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

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

 

The Bad

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

The Ugly

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

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

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

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

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

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

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

 

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. Nominations are welcome.
The Week Ahead

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

The Calendar

We have a normal week for economic data, with most of the reports concentrated on two days before the holiday.

The “A” List

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

The “B” List

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

     

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

Next Week’s Theme

 

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

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

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

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

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

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

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

There is a lot of complexity facing investors. Right now, the stimulus plan is probably the most important. As usual, I’ll have a few ideas of my own in today’s “Final Thoughts”.

Quant Corner

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

Risk Analysis

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

The Indicator Snapshot

 

The increased yield on the ten-year note has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.

The Featured Sources:

 

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

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

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

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed. His most recent research update suggests some “mixed signals” from labor markets.

Doug Short: The World Markets Weekend Update (and much more). It is time for another look at Doug’s Big Four, the most important indicators for recession dating. The NBER looks for a significant drop from a peak. All but one are still rising, with industrial production the laggard.

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

 

How to Use WTWA (especially important for new readers)

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

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

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you now?)

 

Best Advice for the Week Ahead

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

Insight for Traders

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

Felix and Holmes

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

Top Trading Advice

 

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

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

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

 

Insight for Investors

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

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Bill McBride’s cold-water splash in the face for those who have been spending too much time on the wrong sites: The Cupboard is Full. It is a nice, objective summary of overall conditions. His summary hits the high spots, citing the relevant data and providing his customary charts. Here is his conclusion:

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

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

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

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

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

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

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

 

Stock Ideas

 

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

What we hear from the new Administration will matter.

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

Give it more time.

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, with four or five specific ideas that we are also buying. This week Holmes revisits a pick from about a month ago, DexCom (DXCM). On the last round Holmes stopped out for a small loss, avoiding a bigger decline. With a new bottom Holmes is trying again. Check out the post for my own reaction, and more information about the trading models.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

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

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

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the very practical discussion of what burglars are looking for in finding a house to rob.

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

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

Seeking Alpha Editor Gil Weinreich’s Financial Advisors’ Daily Digest is a must-read for financial professionals. The topics are frequently important for active individual investors. That is especially true this week as he highlights key questions, among others, about what advisors do and their effect on performance. I especially his post with analysis and links you can use to see whether you would benefit from an advisor. Here is a key quote:

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

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

Here is another test. If you can deal with the challenges in my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them, you can fly solo. Readers of WTWA can get a free copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Market Outlook

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

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

I agree!

Watch out for…

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

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

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

Final Thoughts

 

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

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

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

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

Moody’s Mark Zandi has downgraded economic forecasts.

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

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

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

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

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

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

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

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

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

Stock Exchange: Spotting a Great Chart

Technical analysts dominate the daily discussion of stocks. Fundamental concepts change slowly. Chart patterns change constantly. Usually the calls are dramatic, because no one cares about advice that says, “all is well, keep holding.”

Traders live on stock charts, but investors also pay close attention. Everyone wants to know whether a stock is breaking down, breaking out, or stuck in a trading range. Here is the key question:

How do you spot a good chart?

We have several great charts this week. The Stock Exchange provides an expert-level debate on technical and fundamental analysis. (Important background is available here). Comments, dissent, and specific stock questions are welcome!

This Week—Is Felix right about KHC?

One issue with charts is the wide difference in interpretation. Do analysts see what they want to see? Are the interpretive criteria constant and objective? This week (without telling him) I searched for other opinions on one of our expert selections, Felix’s choice of KHC. The same principles would apply to all the picks, but this is a convenient example. Before turning to Felix, let’s look at other approaches.

This one provides a complex chart and plenty of additional points of interest. It makes a lot of specific predictions, suggesting many trades with moves of less than one point.

 

Here is another, one-year term and 50-day MA. This is a much longer time frame with an implied criterion reflecting that.

And a dramatically different time frame from the same source. Instead of a 50-day MA, we now have two hours.

And one more site, which invites predictions. I am not sure what conclusion you would reach, but the participants have many different conclusions.

The key point of this comparison is the widely differing images and viewpoints. The time frame matters, and so does added complexity.

Let’s see what Felix has to say, and also check out my own conclusion to this article.

Felix

I look for long-term themes, and I have a great one this week. I have a pick without an army: KHC. It is my lone soldier of the week, a strong company. The recent selloffs provide a good point of entry with the rebounds already underway. This should be good for another 5 points.

I’ve had a question this week from A Dash of Insight:

Question from Fred Barone:
Any opinion on CVI thank you

 

Felix: This is a stock I won’t be holding for a while; it has been going downhill since 2013. There hasn’t been much upside. On the other hand, it does rank in the top 25% of my universe, so it is not terrible. I would take a guess that you have been holding this for a while?

[F] Please keep your questions coming. I could use the overtime pay. And by the way, Jeff. Are we working next Thursday?

[J] Next Thursday the market is closed and we are all taking a day off to give thanks and spend time with family.

[F] I don’t have a family and I could use the overtime bonus.

 

Athena

I hope I’m not too late to the party on this one. Teck Resources Ltd (TCK) has been on a solid rise since March. We’ve had the stock price quadruple since then, which is remarkable to say the least. While I don’t expect to cash in on that kind of return in the next few weeks, there is still a tidy profit to be had here.

[J] This pick is not completely hopeless. The company has some earnings. There is plenty of fluctuation but excellent growth expectations. This might work.

[A] The market is sending a message that it will work. I listen, Jeff, and so should you!

Oscar

While I focus on sectors, sometimes ideas get as narrow as a single country ETF. My regular sports channels had a brief blurb about some guy named Abe meeting with Trump. Some of my sources suggested that I should check out the WisdomTree Japan Hedged Equity ETF (DXJ) this week. Much like Japan’s national sport, sumo wrestling, this pick is all about momentum off the bottom.

[J] So you are telling us that you have been following the visit of Japanese Prime Minister Abe? The first foreign leader to meet with President-Elect Trump?

[O] Not exactly “following.” It was on my Facebook news feed.

[J] Why did you choose the Wisdom Tree ETF, which is adjusted for currency variation?

[O] Variation?

[J] Yen for each dollar.

[O] I’m not sure, but on my last visit, dollars were welcome.

Holmes

This week I’m picking DXCM, DexCom a specialty health stock. After a sharp decline on November 1st, this stock has proceeded to consolidate and slowly climb back up from a low of 61.00. I will put in a stop at 62.50.I bought this stock at 70.96, looking for a nice rebound to low 80s or even higher. If we start to rally, I’ll be moving up my stop aggressively. My major concern is that move is based on perceived changes in medical policies from Washington, vs. improvement in the outlook of this company. I’ll be very tight on the trigger if the stock starts to drift lower day after day.

[J] Do you understand that his company has no earnings, no dividend, and no real prospects for the next two years?

 

[H] How have I been doing?

[J] Your picks have been profitable. I also like your frequent decisions to take profits and move on. You are not overstaying your welcome.

[H] That is a very honest. I like that in a human. Next you must learn to be more intuitive. Sometimes stocks rebound before the fundamentals confirm. I often spot such cases.

[J] Are you really considering policy changes from Washington?

[H] Of course not. The price and volume reflect that information!

 

Background on the Stock Exchange

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

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

 

Questions

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

Conclusion

 

My first job in the investment business involved a wide variety of research tasks. My boss, a clever fellow, became suspicious of conclusions from our technical analyst. He asked me to create some stock charts with the data inverted. He presented one group to our analyst, and got a verdict of bullish on all fronts. A bit later he presented the same charts, with the pattern inverted. As he suspected, those were also deemed to be bullish!

Technical analysis is interesting, but usually lacks rigorous testing. In today’s example, I do not know precisely why Felix likes KHC, but here are three ideas:

  1. The stock chart is like those I have seen before — descent from a prior high, a new base, and often an uptick.
  2. Some might see this as a “cup-and-handle” but not all such patterns qualify for Felix.]
  3. When we get a pick, it represents thousands of similar training cases, and hundreds of test cases. It is not just an idea with an argument, but a scientific conclusion.

You cannot identify a “good chart” unless you have many, many comparisons.