January 20th, 2013
by Jeff Miller, A Dash of Insight
Have we embarked on a new secular bull market?
Jeff Saut, has been pondering this theme for a few months, specifically watching the Dow Jones Transport Index. In today's issue of Barron's Jacqueline Doherty picks up the question with this intriguing quotation:
"There's a 25% possibility we're in a new secular bull market, and no one believes it," says Jeffrey Saut, chief investment strategist at Raymond James. Supporting his case: On Dec. 31 and Jan. 2, 90% of stocks traded higher. Such broad-based strength is usually followed by more strength. After two 90%-up days, the market has climbed an additional 6.8% one month later 83% of the time and 12.8% three months later 100% of the time, says Saut.
Doug Short does a monthly update on the trend question, including this comprehensive historical chart:
With the market at a new five-year high, I expect this to attract a lot of attention in the holiday-shortened week. The earnings stories continue, and (as I noted last week) will help to clarify the prospects for stocks.
I have some thoughts on the bull market question which I'll report in the conclusion. First, let us do our regular update of last week's news and data.
Background on "Weighing the Week Ahead"
There are many good lists of upcoming events. One source I especially like is the weekly post from the WSJ's Market Beat blog. There is a nice combination of data, speeches, and other events.
In contrast, I highlight a smaller group of events. My theme is an expert guess about what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.
Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!
Last Week's Data
Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.
- It is better than expectations.
This was a very good week, both for data and for earnings. The big complaint from some will be that some of the good news was "pulled forward" by the prospects for higher taxes. The emphasis this week is on the positive, but that is what actually happened. Over several years I have always sought balance, but I will not distort news to give a false impression. Things are getting better, and that is something you should know.
- A little optimism on the Congressional negotiations. Sen. Minority Leader McConnell might reprise his key role from the fiscal cliff compromise. The GOP also seems to be shifting more to a focus on the budget rather than the debt ceiling. The deficit issues need attention, of course, but avoiding the brinksmanship of the debt ceiling debate is market friendly.
- Rail traffic has rebounded. Todd Sullivan provides this chart, along with answers to the key questions you might ask about the decline and the rebound. (GEI also provides an interesting and detailed analysis).
- Initial jobless claims were much better than expected at 335K. The Bonddad Blog notes that this is the first time in the range we would see in a normal expansion since the Great Recession. Most of those commenting are cautious because the seasonal adjustments may be imperfect at this time of year.
- The housing data -- especially housing starts -- continue to impress. This could be the big story of 2013. Calculated Risk was early in spotting the bottoming and the trend change. Here is the link to the full chart page. Any serious investor should be following this regularly.
- Retail sales and industrial production were both upside surprises. See Doug Short's discussion of these indicators and the great charts we have come to expect from him.
- Earnings reports are encouraging. It is early, but the revenue beat rate (shown below from Bespoke) is off to a good start. For several quarters the skeptics have maintained that earnings could not be sustained without more revenue, so this meets a specific challenge. Some of the corporate outlook statements (GE in particular) highlighted improved global conditions.
- The inflation data -- both PPI and CPI -- remained tame, as expected. Many are in a permanent state of denial about inflation data. Even though the complaints have been proven wrong over the years, the arguments continue. Cullen Roche, who is himself something of a skeptic about official methods, has a nice survey of alternative approaches with a chart for each. For full enjoyment, read the comments, especially from the die-hard Shadow Stats adherents. See also the comprehensive Doug Short version, where this is but one chart.
The thin data week included a little bad news. Feel free to add in the comments anything you think I missed!
- The Fed in 2007. The transcripts from this crucial year have now been released. Most of the takes relate to the degree of cluelessness of the various FOMC members. What fun! Eddy Elfenbein highlights the most interesting meeting from August, along with the famous Cramer video. Eddy's astute comparison hits the key point. Cramer had a conclusion based on some information which the Fed was apparently not considering. Unfortunately, the Cramer rant was not very informative. Most analysts, including the Fed, were using data on the size of the sub-prime market. What they did not know was that the banks, apparently including Cramer's contacts, had made bets of many times the size of the market via synthetic CDO's.
- China data is suspect. Quelle surprise!! This has been a recurrent theme here, and with other skeptics. The latest news is from Caterpillar which will need to take a one-time, non-cash charge as a result. The China GDP news this week was positive, but the CAT story emphasizes why many of us are suspicious about the data.
- Michigan Sentiment declined again. I take this more seriously than most. I know and understand the excellent methods. I have used the series in my own research. It tells us something about employment and current spending that we might not learn anywhere else. Doug Short's chart is the best:
Algeria -- on both a human and an economic front. As I write this there is breaking news that the imminent crisis is over -- very good news. The events highlight the continuing risks in a world that has grown smaller, with many interconnections.
The Indicator Snapshot
It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:
- The St. Louis Financial Stress Index.
- The key measures from our "Felix" ETF model.
- An updated analysis of recession probability.
The SLFSI reports with a one-week lag. This means that the reported values do not include last week's market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a "warning range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.
The SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events. It uses data, mostly from credit markets, to reach an objective risk assessment. The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.
The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli's "aggregate spread." I have now added a series of videos, where Dr. Dieli explains the rationale for his indicator and how it applied in each recession since the 50's. I have organized this so that you can pick a particular recession and see the discussion for that case. Those who are skeptics about the method should start by reviewing the video for that recession. Anyone who spends some time with this will learn a great deal about the history of recessions from a veteran observer.
I have promised another installment on how I use Bob's information to improve investing. I hope to have that soon. Anyone watching the videos will quickly learn that the aggregate spread (and the C Score) provide an early warning. Bob also has a collection of coincident indicators and is always questioning his own methods.
I also feature RecessionAlert, which combines a variety of different methods, including the ECRI, in developing a Super Index. They offer a free sample report. Anyone following them over the last year would have had useful and profitable guidance on the economy. RecessionAlert has developed a comprehensive package of economic forecasting and market indicators. I will try to do a more complete review soon. Dwaine Van Vuuren also has an excellent data update this week, demonstrating how the coincident data have reduced recession prospects.
Doug Short has excellent continuing coverage of the ECRI recession prediction, now well over a year old. Doug updates all of the official indicators used by the NBER and also has a helpful list of articles about recession forecasting. His latest comment points out that the public data series has not been helpful or consistent with the announced ECRI posture. Doug also continues to refresh the best chart update of the major indicators used by the NBER in recession dating.
New Deal Democrat at the Bonddad Blog has been a bulldog on tracking the ECRI forecast, including the many changing claims. His latest post refutes the most recent ECRI "telltale charts." The ECRI seems to have responded, but only to their subscribers. Eventually we might learn what they said.
The average investor has lost track of this long ago, and that is unfortunate. The original ECRI claim and the supporting public data was expensive for many. The reason that I track this weekly is that it is important for corporate earnings and for stock prices. It has been worth the effort for me, and for anyone reading each week.
Readers might also want to review my new Recession Resource Page, which explains many of the concepts people get wrong.
Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions. About a month ago we switched to a bullish position. These are one-month forecasts for the poll, but Felix has a three-week horizon. Felix's ratings stabilized at a low level and improved significantly over the last few weeks. The penalty box percentage measures our confidence in the forecast. A high rating means that most ETFs are in the penalty box, so we have less confidence in the overall ratings. That measure remains elevated, so we have less confidence in short-term trading.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list. You can also write personally to me with questions or comments, and I'll do my best to answer.]
The Week Ahead
This week brings little data and scheduled news, an artifact of the calendar and the holidays.
The "A List" includes the following:
- Initial jobless claims (Th). Employment will continue as the focal point in evaluating the economy, and this is the most responsive indicator.
- Leading economic indicators (Th). This is still a favorite for some.
The "B List" includes the following:
- Existing home sales (T). This is a key element of the economic rebound, so it is important to follow.
- FAFA home prices (W). These are the prices from the regular homes in the government market.
- New Home sales (F). Another piece of the housing puzzle. Will the improvement continue?
Earnings stories will be big, especially the technology announcements -- including Google and Apple.
Trading Time Frame
Felix has continued a bullish posture, now fully reflected in trading accounts. It was a close call for several weeks. Felix did pretty well last year, becoming more aggressive in a timely fashion, near the start of the summer rally, and getting out a couple of months ago. Since we only require three buyable sectors, the trading accounts look for the "bull market somewhere" even when the overall picture is neutral. Felix has been cautious, but still has caught most of the rally, and done so with less risk.
Investor Time Frame
Each week I think about the market from the perspective of different participants. The right move often depends upon your time frame and risk tolerance.
Buying in times of fear is easy to say, but so difficult to implement. Almost everyone I talk with wants to out-guess the market. The problem? Value is more readily determined than price!Individual investors too frequently try to imitate traders, guessing whether to be "all in" or "all out."
If you are thinking of going it alone, you might want to follow my series of book reviews for individual investors. If you are not willing to invest the time in reading these books, you should not be making your own decisions! Here are the first and second installments.
Rather than do a weekly update for investors, let me refer readers to my 2013 preview for Seeking Alpha. This covers some key investor catalysts, as well as some specific stock and sector ideas. My recommendations did well last year, and we are off to another good start. You need to be comfortable in taking the other side of one of the most hated rallies in history.
But please beware! General ideas are not for everyone. Each person needs unique treatment. We have several different approaches, including one that emphasizes dividend stocks with enhanced yield from writing near-term call options.
We have collected some of our recent recommendations in a new investor resource page -- a starting point for the long-term investor. (Comments and suggestions welcome. I am trying to be helpful and I love feedback).
Are we really in a new bull market?
My answer is another question: Does it matter?
I am a big fan of Doug Short, who accurately notes that the jury is still out on whether this is a new secular bull. This is rather like how the NBER does recession analysis. By the time you know, it is too late to be actionable investment advice.
When Obama took office there was immediate market skepticism and instant selling. His first speeches were greeted with a running DJIA ticker. His appointments were criticized -- especially Tim Geithner, now seen as especially effective.
Meanwhile, Paul Vigna notes the 72% market gain in Obama's first term. Those who focused on political pre-dispositions and ideology either lost money, or left plenty of gains on the table.
It is better to be flexible. Pick the right time frame for your investments. My current conclusion, subject to change with the data, is as follows:
The next year looks pretty good. It does not matter whether it is labeled as a new secular bull or a bear market rally.