November 24th, 2013
by Jeff Miller, A Dash of Insight
Over the last few weeks I have highlighted several changing market concerns. We worried about the government shutdown and the debt ceiling. More recently my emphasis has moved from earnings and seasonal worries, to the possibility of a year-end rally. Last week we highlighted the "bubble talk" and that proved to be a big theme.
This week the focus will change. With the start of the year-end shopping season, it will be all about the consumer.
Can retail sales hold up in a shortened shopping season?
There are three basic viewpoints:
- A big season. Autos (via Automotive News) and retail (via Macy's earnings outlook).
- A bad season. (Via Daily Pfennig). Think weaker confidence, jobs, and government help. See also the WSJ.
- A neutral season. According to the National Retail Federation, a 3.9% rise).
There is a lot of guessing going on! I am pretty confident that this will be the focus, but not very sure about who is right. I agree with Scott Grannis, who notes that retail is far below trend, especially if one evaluates the "core" purchases (removing autos, building materials, and gas stations). Here is the key chart:
I will speculate a bit more 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 regularly follow is the weekly calendar from Investing.com. For best results you need to select the date range from the calendar displayed on the site. You will be rewarded with a comprehensive list of data and events from all over the world. It takes a little practice, but it is worth it.
In contrast, I highlight a smaller group of events, including some you have not seen elsewhere. 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. Each week I consider the upcoming calendar and the current market, predicting the main theme we should expect. This step is an important part of my trading preparation and planning. It takes more hours than you can imagine.
My record is pretty good. If you review the list of titles it looks like a history of market concerns. Wrong! The thing to note is that I highlighted each topic the week before it grabbed the attention. I find it useful to reflect on the key theme for the week ahead, and I hope you will as well.
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 light week for news, but what we saw was pretty good.
- Household debt hit a new low. This has been a preoccupation for many. See Bonddad for a complete analysis and a helpful chart.
- Rail traffic shows continuing strength. Todd Sullivan has the story, analyzing the chart below:
- Negative equity in homes is lower. (Zillow via Calculated Risk).
- Truck traffic is strong on a year-over-year basis. (Via Scott Grannis – analysis and chart).
The news updates were thin. I did not see too much, but feel free to add suggestions in the comments. These should be items from the current week, not the repetition of something you could have said (and probably did) six months ago!
- Fed minutes. The market sold off a little on the theme that QE tapering would start sooner than expected. I do the weekly scoring based on what is "market-friendly" regardless of my own take. Since interest rates moved higher and stocks lower, this has to be regarded as "bad" news. It is an advantage for investors to look a bit deeper. Scott Grannis shows that rates have actually moved higher during QE. I do not think it matter than much to the real economy, so I wish we could get it started and get beyond the rhetoric.
- Sea container counts are weaker. (Via Steven Hansen at GEI).
A Time to be Thankful
Like most people, I count my blessings at this time of year.
It has been a good year for us. While I have tried to do my best, I am grateful for the support of family and friends. In my work on "A Dash" I have benefited greatly from the comments and email support from readers, whose contributions encourage and inspire. I appreciate the fine work of those whom I read and cite each week. I enjoy a fine relationship with several sources who republish our articles, especially the team at Seeking Alpha, where I seem to have a lively community discussion each week. Finally, there are those who mention my work in their own posts and on Twitter. For an unpaid writer, this is important validation.
I note that my Twitter audience -- @dashofinsight -- is far below the top 5. Think Lady Gaga or that Bieber guy -- but one has to start somewhere!
I will be enjoying family and doing some travel next weekend, so there might not be a WTWA post, or it might just be an indicator update.
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. Think of The Lone Ranger. (Thanks to reader CS for this suggestion).
This week's award is a little complicated. Dan Greenhaus of BTIG debunked the chart below and was featured by Joe Weisenthal. Greenhaus wrote as follows:
Indeed, we recently devoted an entire conference speech to pushing back on the idea of an equity bubble. How do we know the story remains? The chart below, overlaying the S&P 500 today against equities in the 20s/30s is now starting to make the rounds. Without getting too personal, "chart overlaying" is lazy and this is no less so. But it does remind us that as much as everyone thinks everyone else is "all bulled up," these views still persist and have shown no indication they are going away any time soon.
This was good work, exposing a typical bogus chart, but there was much more to the story.
It turns out that the original source was Andrew Wilkinson of Miller Tabak. He did the work to normalize the data, generating equal percentage changes. The result is a chart that is a fair comparison of the two periods. Business Insider also covered this story, in a nice post by Steven Perlberg and Andy Kiersz. Here is the comparison chart from Wilkinson's original piece:
The entire story illustrates one of the drawbacks of modern social media. People take something out of context and pass it around. The average person sees the message at face value.
This may be our most complicated "Silver Bullet" story, but I found it fascinating. There was a lot of good work. Sadly, my guess is that most recipients of the bogus chart never saw the refutation.
The Indicator Snapshot
It is important to keep the current news in perspective. I am always searching for the best indicators for our weekly snapshot. I make changes when the evidence warrants. At the moment, my weekly snapshot includes these important summary indicators:
- For financial risk, the St. Louis Financial Stress Index.
- An updated analysis of recession probability from key sources.
- For market trends, the key measures from our "Felix" ETF model.
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 recently edged a bit higher, reflecting increased market volatility. It remains at historically low levels, well 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.
I feature the C-Score, 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 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. Theirmost recent report provides a market-timing update for those considering whether to "buy the dips."
Georg Vrba's four-input recession indicator is also benign.
"Based on the historic patterns of the unemployment rate indicators prior to recessions one can reasonably conclude that the U.S. economy is not likely to go into recession anytime soon."
Georg has other excellent indicators for stocks, bonds, and precious metals at iMarketSignals. His most recent update revisits Albert Edwards's year-old prediction that the Ultimate Death Cross was imminent. Georg refuted the claim at the time, and now takes a more complete look.
Unfortunately, and despite the inaccuracy of their forecast, the mainstream media features the ECRI. Doug Short has excellent continuing coverageof the ECRI recession prediction, now two years old. Doug updates all of the official indicators used by the NBER and also has a helpful list of articles about recession forecasting. Doug also continues to refresh the best chart update of the major indicators used by the NBER in recession dating. The ECRI approach has been so misleading and so costly for investors, that I will soon drop it from the update. The other methods we follow have proved to be far superior.
Readers should review my Recession Resource Page, which explains many of the concepts people get wrong.
Here is our overall summary of the important indicators.
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. Over the last two months Felix has ranged over the full spectrum – twice! The market has been moving back and forth around important technical levels, driven mostly by news.
Felix does not react to news events, and certainly does not anticipate effects from the headlines. This is usually a sound idea, helping the trading program to stay on the right side of major market moves. Abrupt changes in market direction will send sectors to the penalty box. The Ticker Sense poll asks for a one-month forecast. Felix has a three-week horizon, which is pretty close. We run the model daily, and adjust our outlook as needed.
The penalty box percentage has decreased dramatically, meaning that we have more confidence in the overall ratings.
[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
All of this week's data will be announced by Wednesday in this holiday-shortened week.
The "A List" includes the following:
- Initial jobless claims (Th). Resuming a key role as the most responsive employment measure.
- Building permits and housing starts (T). Even more important than usual since both September and October will be reported (a result of the shutdown). I see permits as a better leading indicator, but both are important.
- Michigan sentiment (W). An important concurrent indicator of employment and spending – sometimes affected by elements like politics and fuel prices. Of special interest right now.
- Consumer confidence from the Conference Board (T). See "Michigan sentiment" above. I prefer the Michigan version, but usually there is a very close correlation between the two. Wonkblog informs us that confidence tells us little about the actual economy. This is worth more research. I have personally found it helpful on employment.
The "B List" includes:
- Case-Shiller home prices (T). A delayed look, based on a subset of homes, but widely watched. Also the FHFA release (a different subset) the same day. This is all part of a big week for housing data.
- Durable goods orders (W). Expected to be week if transportation included –core OK.
- Chicago PMI (W). This is being released very early due to the holiday. The main interest comes as an advance read on the national ISM report, which comes out on the first of the month. The time disparity may heighten interest in this one.
One thing we might all be thankful for is a lull in the speechmaking schedule! I see little on the calendar this week. One forecast: The President will make an appearance when he pardons a turkey.
How to Use the Weekly Data Updates
In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a "one size fits all" approach.
To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?
My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.
Insight for Traders
Felix continues in bullish mode. In our trading accounts we have been fully invested and the positions have gradually become more aggressive. Felix's ratings have been in a fairly narrow range for several months. The rapid news-driven shifts are not the ideal conditions for Felix's three-week horizon. This week we see somewhat lower ratings, but more sectors in the penalty box. There are still three attractive sectors, but it would not be surprising to see a move toward "neutral" in the week ahead.
Felix gets credit for identifying biotech (IBB) and riding the wave. This has been one of the top-rated choices in our free weekly email update (email address in the "Felix" section above.
Insight for Investors
I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. I am covering some detailed ideas and links in this section, but also see the conclusion.
There is a continuing barrage of "bubble talk." While my own long-term conclusions are not based on technical analysis, I do follow these indicators for short-term timing and adjustments. In particular, I listen to Felix!
Sometimes there is a nice meld of technical and fundamental analysis. My fellow contributor at Seeking Alpha, Chris Ciovacco, wrote this week about 3 Ominous Bear Market Signals. The analysis reviews commonplace assumptions about the current market top (and also the complaints about the Fed). The conclusions are based upon important technical indicators that show why the comparisons are incorrect. Perhaps looking at this example, will encourage you to read the full article. Chris notes that the bond market is often a leading indicator of trouble. Regular readers will realize this theme as part of my use of the St. Louis Financial Stress Index. Take a look at the credit spread for junk bonds in the two charts below.
This is very nice work in using an objective, market-based indicator.
I also wrote about four themes that are very costly for individual investors. While the post was very popular, you should only read it if you are prepared to have an open mind about current conventional wisdom!
Here is a summary of current recommendations for the individual investor.
- Headlines. The challenge for investors is to distinguish between the major trends and the short-term uncertainty. The main themes are not related to headlines news, even though sentiment may drive market fluctuations. Do not be seduced by the idea that you can time the market, calling every 10% correction. Many claim this ability, but few have a documented record to prove it. Most who claim past success are using a back-tested model. Please see The Seduction of Market Timing.
- Risk Management. It is far better to manage your risk, specifically considering the role of bonds and the risk of bond mutual funds. As I emphasized, "You need to choose the right level of risk!" Right now, it is the most important question for investors. There is plenty of "headline risk" that may not really translate into lower stock prices. Instead of reacting to news, the long-term investor should emphasize broad themes.
- Stepping in gradually. If you are completely out of the market, you are not alone. Consider buying dividend stocks and selling calls against them. This strategy has been working great both for our clients and for many readers. (Thanks for the email responses!) This will work in a sideways market. You can also buy some stock in the sectors with the best P/E ratios.
And finally, 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).
We can expect plenty of on-site interviews and surveys about mall traffic. I have one fearless forecast:
Barry Ritholtz will have a post about the bogus readings from mall surveys!
I look forward to this annual event, which is both accurate and a reality check for those obsessed with media noise. Here is last year's post.
My own guess is for a disappointing season, mostly because the calendar has a late Thanksgiving. I do not think that the economy is so bad, but I am worried about lagging consumer sentiment.
The "breaking news" might have some market effect in thin holiday trading. When we look back in a few months, it will not be important. It is yet another reason why traders might be cautious at the same time investors are seeking opportunity.