Weighing the Week Ahead: Is the Housing Rally Over?

With soft housing data last week and higher interest rates expected, it is a good time to ask:

Is the housing rally over?

Last Week Recap

The big economic news last week was the Fed policy decision and guidance. Friday’s announcement of the Amazon purchase of Whole Foods grabbed the headlines. Attorney General Sessions’ Senate Testimony got the gavel-to-gavel treatment.

Our question from last week – a possible change in market leadership – did attract some discussion. Friday’s grocery news is still being digested, but the sector shifts were pronounced.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. Despite the mid-week Fed announcement, the result for the week was barely changed.


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

Note to Readers

Thanks to all of those who offered suggestions for changes in WTWA and feedback on my first attempt. I am still working on many of the other suggestions.

I am off next weekend, but I will again try to post an abbreviated version including an indicator update.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news last week was mixed.

The Good

  • Jobless claims declined to 237K, maintaining the current record-low levels.
  • Forward earnings estimates are holding up. This may seem like faint praise, but those criticizing the use of analyst estimates point to excessive optimism and repeated cuts in forecasts. Brian Gilmartin tracks these estimates. He notes the comparative strength, but also warns about possible weakness in tech.
  • Chemical activity barometer “suggests continued growth through 2017.” See GEI for the full story.
  • Small business optimism remains high. I have upgraded my attention to this series, since the importance has increased. Sluggish business investment, hiring, and loans to small companies have all been issues. Improved confidence from small business owners is helpful on all fronts. While some have (already?) become pessimistic on the Trump agenda, those relieved of regulations have been more positive. Calculated Risk provides analysis and this chart:


  • CPI remained benign with an increase of only 0.1% in the core rate. Some see this as bad news since it is below the Fed’s target and/or the take inflation as a signal of economic growth. Growth without inflation is good. It gives the Fed a little leeway.
  • FOMC decision got a positive reception. The small increase in the Fed Funds target was expected by markets, demonstrated by the small change in bond yields. Prof. James Hamilton (Econbrowser) explains why the “balance-sheet reduction is not scaring anyone”. He explains, and also provides some interesting data, importantly noting the effects of other news.


The Bad

  • Industrial production was unchanged. The decline from April’s 1.1% gain was expected, but disappointing nonetheless.
  • LA port data is a subject of some controversy. Calculated Risk sees a positive trend, using a 12-month rolling average. Steven Hansen (GEI) prefers rolling unadjusted three-month averages, but notes some anomalies this time. Data nerds should read both pieces in detail to understand how the methods chosen affect what you conclude.
  • Michigan Sentiment declined to 94.5 from a prior of 97.1.
  • Retail sales declined 0.3% compared to the April gain of 0.4% and expectations of unchanged.
  • Housing starts declined and missed expectations. Building permits did the same. On the surface this was bad news, but there is some debate over the data. See below for more discussion.

The Ugly

Collateral damage from the Amazon decision to purchase Whole Foods. While it was obviously bad news for competitors in the grocery business, the reach was much greater. Here is a heat map that I tweeted an hour after Friday’s opening.


There may be some logical extensions of the Amazon strategy, but the effect on only four other stocks exceed the entire size of the deal. In some cases, the declines came because of mutual ETF membership, not any specific analysis. This topic deserves more scrutiny.

Noteworthy

Do you think that chocolate milk comes from brown cows? Does anyone? Mrs. OldProf, who grew up in Green Bay and graduated from Wisconsin, notes that most cows are at least partly brown. That would imply a lot of chocolate milk.

Somehow 16.4 million American adults (7%) hold this belief. These people vote and buy stocks. Check out John Harrington for the story and some other surprising examples.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

It is a very light calendar. Housing data are most important, especially new home sales.

Fed speakers are out in force. Expect more color on the reduction of the Fed balance sheet.

Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.


Next Week’s Theme

We have the combination of a light week for data, last week’s soft data on housing starts, the Fed rate decision, plenty of scheduled Fedspeak, and a calendar featuring home sales. The ingredients suggest a lot of attention to the housing market. People will be asking:

Is the housing rally over?

Here is a range of opinion.

  • The weakening market is a very bad sign. New Deal Democrat analyzes the turn down in permits, starts, and completions. Check out the post for the full story. He promises more to come.
  • Gains in homebuilder stocks and builder sentiment provide a better indication. (Scott Grannis).


  • Housing starts to remain in the expected range of 3 – 7% growth, year-over-year. Multi-family is solid, but the increasing trend is over. Single family starts are taking over. (Calculated Risk).


  • The monthly data present a misleading picture. Steven Hansen (GEI) explains how to interpret the difference between permits and completions.

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

Quant Corner

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

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 


The Featured Sources:

 

Bob Dieli: Business cycle analysis via the “C Score.

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

Georg Vrba: Business cycle indicator and market timing tools.

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

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

We should expect a raft of forecasts from newly-minted recession experts. This example takes the good record of the inverted yield curve and extrapolates from small recent moves. Part of the extrapolation is from some dubious “technical analysis.”

The yield curve is part of our recession forecasts. The influence of other important variables is considered, along with the likely timing. Articles that feature the ‘R’ word are popular, but usually misleading.

 

Insight for Investors

Investors should have a long time horizon. They can often exploit trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Wade F. Slome’s excellent analysis of the stock market rally – accompanied by “worry, pessimism, and skepticism.” He describes his list as a “small sample.”


He notes as follows:

the endless laundry list of crises and concerns has not broken this significant, multi-year bull market. In fact, stock prices have more than tripled since early 2009. As famed hedge fund manager Leon Cooperman noted:

 

“Bull markets don’t die from old age, they die from excesses.”

 
 

On the contrary to excesses, corporations have been slow to hire and invest due to heightened risk aversion induced by the financial crisis. Consumers have saved more and lowered personal debt levels.

 

Read the full article to see his warning signs – a combination of several trends.

 

Stock Ideas

Simply Safe Dividends does his usual careful analysis of restaurant supplier Sysco (SYS). The dividend is safe, but there are some issues on the horizon. Amazon, which he regards as unlikely to compete in this space, and extra debt taken on for a recent acquisition. That said, he assigns a “dividend Safety Score” of 97. DIY investors interested in dividends should read this post carefully. This is the kind of work required.

A brief digression – which I hope you will enjoy. On trading floors people are watching different things. There is no reason to have everyone covering the same news flow. When there is news, we often shout it out so everyone knows what is happening. This is one reason that managers often choose to work from a desk on the trading floor.

When I see a Sysco truck or news about the stock, I am reminded of a Cramer anecdote about how to avoid confusion:

“Wrong Sysco ( SYY) preannouncing!”

In a market that is so Cisco-dominated ( CSCO) — and believe me, this is Cisco-dominated — just the sheer possibility that someone might take Cisco shares on Sysco saying something positive required that our trader shout out the good news for the food broker.

Chuck Carnevale offers a comprehensive analysis of AbbVie, which he notes has growth, value, and high yield. The analysis uses the stock as an example that helps explain his method. You get both an interesting idea and some information strong stock-selection methods.

Energy stocks? John Butters of FactSet reports that this sector accounts for nearly half of the Q2 growth in earnings for the S&P 500.

And how about wind and solar energy? The EIA reports that monthly generation from these sources has reached 10% of the total.


A lagging railroad? Barron’s Trader Extra recommends a look at the Genesee and Wyoming railroad (GWR). You cannot guess where they operate! It is an interesting idea, although real value depends upon a resumption of earnings growth.

 

Personal Finance

Abnormal Returns always has first-rate, daily links for investors. His Wednesday topic is personal finance – of special interest to the individual investor. I especially liked the discussion about the recent reversal for value stocks, the underlying factors, and the long-term success. The Bloomberg piece includes a range of good sources and provides a balanced perspective. Also excellent is the advice from Todd Wenning on how an investor should avoid distractions. Hint: Why do you think your brokerage makes it easy for you to see online quotes?

Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. This week I especially enjoyed the renewed discussion about thrift versus economic growth. Your own viewpoint is probably reflected and discussed.

Value versus Growth

GMO notes that value stocks showed strong gains in 2016, which have been erased in 2017. There are always shifts, but this has been much more dramatic than usual. They provide an exhaustive analysis of the trends and possible causes and highlight this conclusion:

Overall, the lion’s share of the performance gap between value and growth across the globe can be accounted for by an expansion in multiples that has outstripped even the habitually bullish analysts’ expectations for future earnings. This should be no small consolation to valuation-oriented investors: Multiples running ahead of fundamentals is a classic sign of over-extrapolation by investors

Watch out for….

What is in your ETF holdings. Here is a little test. If you own an ETF, try to name the top holdings. If you do not like a particular stock, go the other way. Is this a big holding for some of your ETFs?

 

Final Thoughts

This week’s topic raises interesting questions that have relevance for many other current issues.

Topping markets? The first sign of a rollover in an economic series always gets a reaction. One viewpoint is that it is a clear sign of a top – time to expect the worst. Often it simply puts us on alert, but requires more evidence. If you look at a data series of almost anything, you will see small declines from a top followed by further increases.

Economic relationships do not work like light switches. Changes are not accurately described as two-person transactions – buyer and seller. A change in mortgage interest, for example, affects the point of intersection of supply and demand curves. It shifts the supply at a given price. While we know that this reduces quantity, we do not know by how much.

Even after we improve the analysis by thinking of supply and demand curves, we must consider the micro – the behavior of the individuals making up the curve.

  • Some buyers, who have been on the edge of a decision and fearing higher rates, may step up. (See Diana Olick citing this as the reason behind the jump in mortgage applications). This changes the shape of the demand curve.
  • Some sellers, sensing a tightening market, may absorb some of the implied price increase. This changes the supply curve.

Anyone who begins with a conclusion that “buyers are priced out” is leading with his chin.

Demographic changes? Millennials are starting families and establishing homes. The worries about the overhang of foreclosure homes has decreased. The big wild card now is the level of future immigration. (See this excellent post from Calculated Risk).

One reason that I continue to love the homebuilders is that the factors moving interest rates higher – stronger economic growth and higher wages – are the same as those that will increase housing demand.

What worries me…

  • Continuing contention in Washington. We will need bi-partisan compromise to deal with the big issues like growing government debt and entitlement programs, not to mention infrastructure and tax reform.
  • The unknown effects of ETF trading.

…and what doesn’t

  • Concern about “escape velocity.” Those who do not understand the current economic cycle rely on mistaken metaphors. They are attempting to persuade through language alone, without analysis.
  • The unwinding of the Fed balance sheet. Any reasonable path will barely ripple the market.

 

Stock Exchange: Can Psychology be Applied to Market Behavior?

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

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

Our goal is to be both educational and fun. We welcome comments, links, and ideas to help us make this a great resource for traders.

Review

Our last Stock Exchange we asked whether you should buy the rip or the dip. If you missed last week’s edition, check it out.

This Week— Can Psychology be Applied to Market Behavior?

This great topic has attracted recent attention from the experts we follow.

Trading Tips

Dr. Brett Steenbarger, whose imagination continually creates new ways to view the evidence in front of us, challenges us to consider the psychology of the market. This is sharply different from the normal focus on the psychological challenges to the individual trader. Brett writes:

When we think of trading psychology, we typically think of the psychology of the trader and the factors that either contribute to or distract from a peak performance mindset.  Another facet of trading psychology is reading the intentions of other market players.  This is very similar to psychology in poker.  The mindset of the poker player is important, and it is also important to read the psychology of the other players at the table.  The skilled poker player reads those tells from other players to infer if they are bluffing or if they might be holding the nuts.  When short-term trading/market making occurred on the trading floor, reading the other participants in a market truly was more like reading other poker players.  With most market activity being electronic, we need other ways of inferring the intentions of market participants.

Michael Batnick has an interesting post about experience. One feature is a story about famous hedge fund star Stanley Druckenmiller – why he got a big promotion, leapfrogging eight more senior people:

…the reason he was given that position was because he didn’t yet carry the burden of experience. When he asked why he was promoted above the others around him, his boss said, “For the same reason they send 18-year-olds to war. You’re too dumb, too young, and too inexperienced not to know to charge. We around here have been in a bear market since 1968.’ This was 1978. ‘I think a big secular bull market’s coming. We’ve all got scars. We’re not going to be able to pull the trigger. So I need a young, inexperienced guy to go in there and lead the charge.”

His conclusion is that experience is overrated. I disagree. The real challenge for asset managers is to draw upon experience while avoiding the human frailty.

Let’s turn to this week’s recommendations from our group. They were all eager to put Brett’s poker advice into action, but we did get a few comments.

Expert Picks from the Models

This week’s choices cover a wide range, from energy to financials, to tech. There is something for everyone.

Road Runner: I recommended Netflix (NFLX) in my first appearance on the Stock Exchange. In late March of this year, it had come off of recent highs and reached the bottom of its 6-month channel. I happily held the position as it appreciated through this spring, selling at some point in late May. Now, I think a re-entry may be appropriate. Let’s review the chart:

The collapse of this stock, beginning in June, took it from the very top of its channel to the very bottom. We’re below the 50-day moving average, but not yet close to the 200-day moving average. Further significant declines are unlikely, and there is significant upside.

J: It is always interesting to revisit a trade we have held before. This stock has also attracted attention from one of our trading experts, Adam H. Grimes?

RR: And does he see what I do?

J: Almost. He notes the decline and potential rebound. He is not quite ready to pull the trigger.

RR: If he had spent some time being chased by that crazy coyote, he would move faster! Beep, beep.

Holmes: Range Resources (RRC) declined after a small rally last week. This is typical of stocks providing a good entry opportunity.

The stock showed some life after a patchy decline since mid-April. At its current price of $23.18, it is well below both the 50-day and 200-day averages. I am looking for a rebound to these points. With a PE of 18.6 the stock is also attractive on the fundamentals.

J: It looks like a consistent downtrend, along with the rest of the energy group. The price of oil looks stuck under $47 per barrel.

H: I am not trading oil. Whatever is happening in that market, this stock is showing attractive relative strength.

J: Have you been following the OPEC news?

H: You know well that I do not read news — just charts.

Felix: Micron Technology (MU) is my pick for the week. It’s a good bit sexier than my usual selections, but I have a good reason for it! Look at the chart:

Growth over the past year has been significant, and most importantly, it has been steady. Outside of a jump in mid-May, we’re seeing steady rises in stock price – reflected by the modest curves on the moving averages. I like that the stock has tumbled a bit this month. I’ll gladly take that as a buying opportunity.

J: This morning the pundit-in-chief opined that many people, focused on the stock symbol, thought it was some type of animal rights stock.

F: Who cares? It does not matter. Traders do not care what the company does. We succeed by identifying and exploiting the flow of trades. That is what I have done. What is this company anyway?

J: A chip stock.

F: So! It is in the food group!

J: Not that kind of chip; a semiconductor chip.

F: You should be more precise in your language.

J: Do you have updated ratings?

F: Of course. My fans have made some new requests. My assistant is supposed to respond to all of them.

J: Your assistant? I didn’t see any new additions to the payroll.

F: Oops. Here they are.

 

 

 

 

 

 

 

 

 

Athena: Discover Financial Services (DFS) is an interesting pick after a possible new uptrend. DFS saw a high upward run in the last two months of 2016 trading into 70’s from about 57.50 in early November. The stock had a fall into the higher 60’s territory in January this year. The past prices illustrate the market view of potential value. The recent basing signals a possible bottom.


J: Nice to see you back on the job! You understand that part of your vacation was unpaid.

A: Unlike human traders, I do not force it when nothing is there. That shows up in my long-term results.

J: I really do understand that, and I hope your vacation was refreshing. Turning to DFS, haven’t we discussed this stock before?

A: Not from me, but perhaps one of the others…

Holmes: Yes, I bought the dip in late April.

J: How did that work out?

H: Not well, as you certainly know. Please keep in mind: My batting average is above .500 and the winning trade size is much greater than the losers. My trading discipline helps me to avoid big losses. Small losses are just part of the game.

J: Thanks for explaining. You have indeed done well on limiting losses.

Oscar: I do not have a new sector this week.

 

J: That is a disappointment. Everyone is talking about a possible change in market leadership. The story is that all of the gains come from a few stocks. Why don’t you own those?

O: That general impression is completely wrong. Lawrence Hamtil looks at market leadership over the years. Most people would be surprised.

J: A very interesting article. How did you happen to see it?

O: Someone took my sports section.

J: An honest answer. Did you analyze the sectors requested by your fans?

O: Yes. This week’s list includes everything that has been requested.

J: An astute reader asks about TLT and TBT. You list both in the sell range. Since these are inverse holdings, how can both be a sell?

O: The rankings in the sell range do not imply a recommendation to “short” the group. They simply have very low ratings when other choices are much stronger. I would sell either one for a better opportunity.

J: Thanks for clarifying. You are basically saying that bonds are not a good choice – either long or short.

O: Exactly.

 

 

 

 

 

 

Conclusion

Psychology is a part of trading. Technical analysis, as Dr. Brett explains, is a way of reading the psychology of the market.

This week, a member of our analytical team was having trouble finding the Road Runner trading channel. He opined that the model seemed to be wrong. This is the human psychology question in a different guise. Our answer is very clear.

The model is not wrong! You are. It is based upon thousands of objective cases. If it does not look persuasive to you, grasshopper, you need to change your perspective.

 

After many years of looking at model charts and recommendations, I treat them as wise, but silent, advisors. In the Stock Exchange series, I try to make great advice come to life.

 

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

Stock Exchange Character Guide

Character

Universe

Style

Average Holding Period

Exit Method

Risk Control

Felix

NewArc Stocks

Momentum

66 weeks

Price target

Macro and stops

Oscar

“Empirical” Sectors

Momentum

Six weeks

Rotation

Stops

Athena

NewArc Stocks

Momentum

One month

Price target

Stops

Holmes

NewArc Stocks

Dip-buying Mean reversion

Six weeks

Price target

Macro and stops

RoadRunner

NewArc Stocks

Stocks at bottom of rising range

Four weeks

Time

Time

Jeff

Everything

Value

One month or long term

Risk signals

Recession risk, financial stress, Macro

 

 

Background on the Stock Exchange

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

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

Getting Updates

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

Weighing the Week Ahead: Is it Time for New Leadership?

Friday’s eye-opening decline in the strongest gainers for 2017 has many people wondering:

Is it time for new market leadership?

Last Week Recap

The big news last week was the Comey hearing and speculation about what it meant. Markets have not been reacting to the political news, but it still commands media attention. CNBC provided non-stop coverage.

The punditry did spend time on my question from last week – bonds versus stocks – but seemed happy to turn to the action on Friday instead.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. The loss for the week was only 0.3%, but Friday’s trading added some excitement to a slow, summer Friday afternoon.


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

Note to Readers

Thanks to all of those who offered suggestions for changes in WTWA and encouragement about my main mission. There are many great ideas that I am trying to implement and many loyal readers who like things as they are. Here are the changes so far:

  • Eliminating much of the material repeated every week and placing it in a static source. I need to find a good way to encourage new readers to check out the background.
  • Reducing the calendar to summarize my own views on what is most important.
  • Moving the Silver Bullet to a standalone series. I am trying to make it more visible, not diminishing the importance. I realize that this is a bit less convenient for current leaders, but I hope they will help me out in establishing this.
  • Moving the trading ideas to the Stock Exchange series. Once again, please read and give this a chance. WTWA readers must be aware of the different time frame.
  • Changing the emphasis of the weekly theme to what I see as more important, with secondary consideration to media attention.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news last week was mixed, but the market reaction was positive.

The Good

  • Household balance sheets show new records in wealth in nominal, real, and per capita terms. (Scott Grannis).



  • ISM services registered 56.9. The strong value beat expectations. There was also strength in employment, business activity, and new orders. (ISM).
  • Commercial real estate is looking stronger according to the Dodge Momentum Index. This is claimed to be a leading indicator. See Calculated Risk for analysis and charts.

The Bad

  • Little progress in the debt ceiling debate.
  • Factory orders dropped 0.2%, the first decline in five months. (Reuters).
  • Wholesale sales declined to levels usually associated with recessions. (Steven Hansen at GEI). The lower inventories are also likely to affect Q2GDP.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

It is a fairly light calendar. The FOMC meeting will be most important for markets – especially the press conference. Watch for hints about future policy and a resulting change in the slope of the yield curve. There will be some FedSpeak in the days after the meeting.

I am also interested in building permits

Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.


Next Week’s Theme

The Fed decision will be a popular topic, but the week will begin with a deeper look at Friday’s trading. People will be asking:

Is there a change in market leadership?

Here some of the early explanations:

  • The FANG stocks were dramatically over-valued. A shift was long overdue. Anything might have started it.
  • The Amazon crash captured the attention of the CNBC crew, where they cited the rapid decline in a major name. The focus was mostly on Amazon, but partly on retail strength.
  • The rapid selling is evidence of inherent danger in the current market. Flash Crash redux.
  • Overall, the change in the major indexes was not that great. The differential effects happened too quickly to be called a rotation, but could it be the start of one?

Whatever the reason, it was not just a flash crash in AMZN.


 
 

As usual, I’ll have more in my Final Thought. I have an unprovable, but plausible hypothesis. It fits the evidence and timing from the chart above.

Quant Corner

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

Risk Analysis

I have a rule for my investment programs. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 


The Featured Sources:

 

Bob Dieli: Business cycle analysis via the “C Score.

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

Georg Vrba: Business cycle indicator and market timing tools.

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

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

Wisconsin economist Menzie Chinn (Econbrowser) Has his own helpful variant of the Big Four chart we often show here. He sees slowing growth, but no sign of a recession.


 

Insight for Investors

Investors should have a long time horizon. They can often exploit trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be David Van Knapp’s comprehensive and thoughtful response to investors who buy good companies without regard to price.

He does a nice introduction and valuation. He explains that valuation affects probability, not certainty. And he uses some great examples. He explains that markets are not efficient, despite what you learn in school. He illustrates with another good example.

Especially devastating is his refutation of the facile and self-serving argument that has gained recent popularity: large cap stocks are never mispriced because markets are so efficient. He writes:

the idea that large-cap stocks are never mispriced ignores the data. It is clear that even the largest companies go through periods of mispricing. The following table shows the differences between the 52-week highs and lows for the biggest members of the S&P 500 right after the Brexit vote last June.

My summary cannot do justice to this fine work. Read it carefully. Read it twice!

 

Stock Ideas

Brian Gilmartin reviews the pluses and minuses for GE, including both fundamental and technical analysis. He notes the importance of the upcoming earnings report, and the attractions of a dramatic alternative for those with a growth portfolio.

Chuck Carnevale explains that attractive valuation based upon earnings is just a starting point – a way to avoid mistakes. As usual, he provides a helpful specific example.

Blue Harbinger analyzes closed-end funds, with special attention to risk. Mark produces a few ideas worth consideration.

Business Insider highlights an interesting chart from Twitter. It shows the lagging expectations for solar energy growth.

Subscription Sources

I read these sources, sharing a touch of the content so that you can decide whether to buy an issue yourself.

Barron’s has even more stock information than usual. It is the mid-year roundtable issue with ideas from nine participants. There are also interesting articles on energy stocks, tech stocks, and emerging market ETFs.

Personal Finance

Abnormal Returns always has first-rate links for investors. Once a year he takes a well-deserved vacation and substitutes a series of stimulating questions posed to the financial blogging community. I always appreciate being part of this project, and I give special thought to my answers. Looking at this year’s results, I see that my colleagues have done the same. You will find plenty of good advice.

Seeking Alpha Senior Editor Gil Weinreich reads extensively and has a great imagination. Nearly every day the raises an interesting topic for advisors and investors alike. This week I thought his discussion of financially fair divorce and divorce software was especially interesting.

[Mrs. OldProf wandered into my home office as I was doing this research and started scowling. Mystified by this, and eventually figuring out the problem, I explained that my reading was professional research, not personal. Her normal cheerful smile returned. There is a lesson there somewhere.]

Market Outlook

Fear and Greed Trader has another nice market summary. Especially helpful is his analysis of the recent claims of market skeptics. He also identifies some sectors that are benefiting from the rotation that is this week’s theme.

 

Watch out for….

Those turning good news into bad. Charlie Bilello joins in on one of my favorite topics. He lists many things that you might consider as part of the perfect market environment:

The following attributes might come to mind:

1) High returns with low volatility and 2) low drawdowns, with 3) global participation, 4) both stocks and bonds rising, 5) the economy expanding, 6) earnings growing, and 7) an easy Central Bank.

Sound too good to be true? Let’s take at where we are today…

He follows this introduction with a data-filled answer to each question. He then answers the key question: Is this as good as it gets?

I don’t know, but for investors it’s pretty darn close. The challenge, as we know from history, is that just because something is really good doesn’t mean the next stage has to be really bad. If it were, the game would be easy. You would just sell everything today and wait until everything is really bad next month to buy everything back at a lower price.

But that’s not how the market works. Most of the time, really good environments continue to be good for some time and even when they’re less good, they’re still ok. And importantly, investors can still make money in the transition from really good to ok.

Final Thoughts

 

Not every market ripple needs an explanation, but Friday’s trading was pretty interesting. None of the TV pundits had a good explanation. Here is what I observed:

Not much was happening; it was a typical, quiet summer Friday. I noticed a decline in Nvidia (NVDA), a company featured on the Stock Exchange a few weeks ago. It has been a profitable trade, and we still hold it in some programs. Since the decline was 10% or so in a few minutes, there must be some news. Checking out my sources I learned that a negative report had been issued by Citron Research, a noted short-seller. CNBC caught up with this, and invited Citron’s CEO to participate in the discussion. Jim Cramer and Josh Brown, both NVDA fans, were also part of the impromptu debate. One question was why Citron picked this particular moment for the report. The (rather lame) answer was “valuation” and some colorful analogies. There was no fresh news. Within a short time, the entire tech sector was selling off hard.

I remarked to my team that this was a pretty safe way to make money. You get really short, and maybe inform some friends about your plan. You write a report, release it, and your pals give it exposure. A slow Friday afternoon is a perfect time. You go on TV. As the stock craters, you cover your shorts and enjoy the weekend, having made a lot of money in a couple of hours.

This is a completely legal business model, if the reports are factual. By coincidence, Jesse Barron has a feature on The Bounty Hunter of Wall Street in this week’s New York Times Magazine. It features Andrew Left, the Citron CEO. I strongly recommend that you read it and study the examples. Compare them to Friday’s events.

What can you do to protect yourself? As I have often said, do not use stop orders that become market orders when your price is touched.

Does this mean new leadership for the market? We’ll have a better idea soon, but it is something important to watch.

What worries me…

  • Lack of compromise in government. Many believe that gridlock is good. Not so. We will need bi-partisan compromise to deal with the big issues like growing government debt and entitlement programs.
  • Growing tension with Russia, and within Russia.

…and what doesn’t

  • The idea of a “complacent” market. It is a poor description. We have a balance of widely divergent opinions and ideas. A stalemate – at least for now.
  • The Fed decision. We are far from the point when these rate hikes will make a difference. (See analysis by Fed expert Tim Duy).