posted on 28 February 2016
by Jeff Miller, A Dash of Insight
This week's economic calendar is loaded with all of the most important data. In addition, Super Tuesday might provide a defining event to the political campaign. Oil remains volatile, and Fed Speakers are on the loose. Despite the political stories, I expect the punditry to be asking:
Can the strengthening U.S. economy support the rebound in stocks?
Prior Theme Recap
In my last WTWA (two weeks ago) I predicted a focus on the biggest market worries. That guess was not very successful, since the market immediately began a nice, two-week rally. The list of topics was still good preparation, since stories quickly turned to "what could derail the rally?" As Doug Short notes, Friday's market did not respond even when "an avalanche of economic data surprised to the upside". Once again, a modest decline in oil prices accompanied a modest decline in stocks. You can see the story in Doug Short's weekly chart. (With the ever-increasing effects from foreign markets, you should also add Doug's World Markets Weekend Update to your reading list).
Doug's update also provides multi-year context. See his full post for more excellent charts and analysis.
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.
This Week's Theme
Earnings season continues, and the political stories will be dominant, at least through Tuesday's elections and Wednesday morning's news. In a non-political season, this week would be all about the economy. We have more of the important reports squeezed into a single week (helped by Leap Year?) than we have seen in many months.
Recent economic news suggests improvement, at least in the U.S. At some point, a better economy will lead to better earnings and more support for stock prices. By the end of the week I expect politics to be a sideshow with focus on the economic data. Market observers and pundits will be asking:
Can economic improvement provide a foundation for equity markets?
I expect the following to be the principal positions, with the usual vigorous support for each, ranging from bearish to bullish.
As always, I have my own opinion in the conclusion. But first, let us do our regular update of the last week's news and data. Readers, especially those new to this series, will benefit from reading the background information.
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:
On balance the news was very good last week, despite the market reaction.
Some of the news was negative.
University bond ratings. Three Illinois state universities were downgraded to junk or just above by Moody's. Illinois is especially bad, but state revenues nationwide have been slow to rebound from recession levels.
For those watching the Academy Awards this weekend (missing the important basketball game between Michigan where I did my grad work and Wisconsin, where I taught and from which Mrs. OldProf graduated) here is some fun.
Which nominated films showed the most profit, either overall or on a percentage. (The winner should be easy).
What about The Big Short? Here are some reactions from Brookings, which hosted an event including interviews - the director, some of those involved in real life, and also other financial professionals.
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. Think of The Lone Ranger. No award this week. Nominations are always welcome!
Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. Beginning last week I made some changes in our regular table, separating three different ways of considering risk. For valuation I report the equity risk premium. This is the difference between what we expect stocks to earn in the next twelve months and the return from the ten-year Treasury note. I have found this approach to be an effective method for measuring market perception of stock risk. This is now easier to monitor because of the excellent work of Brian Gilmartin, whose analysis of the Thomson-Reuters data is our principal source for forward earnings.
Our economic risk indicators have not changed.
In our monitoring of market technical risk, I am now using our new model, "Holmes". Holmes is a friendly watchdog in the same tradition as Oscar and Felix, but with a stronger emphasis on asset protection. We have found that the overall market indication is very helpful for those investing or trading individual stocks. The score ranges from 1 to 5, with 5 representing a high warning level. The 2-4 range is acceptable for stock trading, with various levels of caution.
The new approach improves trading results by taking some profits during good times and getting out of the market when technical risk is high. This is not market timing as we normally think of it. It is not an effort to pick tops and bottoms and it does not go short.
Interested readers can get the program description as part of our new package of free reports, including information on risk control and value investing. (Send requests to info at newarc dot com).
In my continuing effort to provide an effective investor summary of the most important economic data I have added Georg Vrba's Business Cycle Index, which we have frequently cited in this space. In contrast to the ECRI "black box" approach, Georg provides a full description of the model and the components.
For more information on each source, check here.
Recent Expert Commentary on Recession Odds and Market Trends
Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured "C Score."
Georg Vrba: provides an array of interesting systems. Check out his site for the full story. We especially like his unemployment rate recession indicator, confirming that there is no recession signal. He gets a similar result with the twenty-week forward look from the Business Cycle Indicator, updated weekly and now part of our featured indicators.
Doug Short: Provides an array of important economic updates including the best charts around. One of these is monitoring the ECRI's business cycle analysis, as his associate Jill Mislinski does in this week's update. His Big Four update is the single best visual update of the indicators used in official recession dating. You can see each element and the aggregate, along with a table of the data. The full article is loaded with charts and analysis. The latest update clearly shows the January strength.
RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting systems. These include approaches helpful in both economic and market timing. He has been very accurate in helping people to stay on the right side of the market.
Dwaine has introduced a new indicator, using only the timeliest data and a distinct improvement over the ECRI approach. Read the entire post for details and a number of interesting charts.
China is clamping down on negative data - omitting some from reports and fining journalists for negative reports. (NYT).
The Week Ahead
We have a huge week for economic data. While I highlight the most important items, you can get an excellent comprehensive listing at Investing.com. You can filter for country, type of report, and other factors.
The "A List" includes the following:
The "B List" includes the following:
The election stories may well dominate the discussion until Wednesday. Earnings reports continue. Some FedSpeak is on the schedule, most importantly Vice-Chair Fischer on Monday.
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 six 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?
WTWA often suggests a different course of action depending upon your objectives and time frames.
Insight for Traders
We continue both the neutral market forecast, and the bearish lean. Felix is still 100% invested, but with more aggressive choices than last week. The more cautious Holmes is only about 1/4 invested. For more information about Felix, I have posted a further description - Meet Felix and Oscar. You can sign up for Felix and Oscar's weekly ratings updates via email to etf at newarc dot com. They appear almost every day at Scutify (follow here). I am trying to figure out a method to share some additional updates from Holmes, our new portfolio watchdog. (You learn more about Holmes by writing to info at newarc dot com.
Oppenheimer's John Stoltzfus has an idea about trading the bottom of the range. (BI).
How to "pull the trigger" on a trading idea. One idea: Start small. (Finance Trends)
Finding edge in your trading ideas - new information or a fresh look at existing data. (Brett Steenbarger)
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. Major market declines occur after business cycle peaks, sparked by severely declining earnings. Our methods are focused on limiting this risk. Start with our Tips for Individual Investors and follow the links.
We also have a page (recently updated) summarizing many of the current investor fears. If you read something scary, this is a good place to do some fact checking. Pick a topic and give it a try.
Many individual investors will also appreciate our two new free reports on Managing Risk and Value Investing. (Write to info at newarc dot com).
Here is our collection of great investor advice for this week.
If I had to pick a single most important source for investors to read, it would be Philip Van Doorn's MarketWatch piece on how to enhance returns with covered calls. This is a great job of demystifying the subject. He writes:
There are many ways of implementing this strategy, with a significant effect on risk and returns. I have been using it for years, emphasizing the sale of near-term calls with the fastest time decay. Interested readers might enjoy my free report comparing this approach to other income programs like bonds, REITs, and dividend investing. (info at newarc dot com).
With information in hand, you can try it yourself. Start small!
Stock and Fund Ideas
Warren Buffett's annual Shareholder Letter (HT Josh Brown). Hot news that will lead the talk on Monday morning.
Emerging market stocks are very cheap (GaveKal).
U.S. production is declining. Oil & Energy Insider has plenty of good data, and this chart:
George Trager of Investbrain.Net (via ValueWalk) explains the supply and demand behind oil prices in four charts. I especially liked this one:
Watch out for....
Tax scams. Hackers posing as the IRS try to steal your money. The IRS does not ask for money over the phone nor does it take credit card payments. The IRS has also admitted that even more taxpayer information has been compromised. Sheesh!
Hedge fund favorites. Low ownership has been good! What do those guys know, anyway? (ValueWalk).
Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read AR every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in this special edition. There are several great posts, but I especially liked MIT economist Erik Brynjolfsson's explanation of why it is better to own than to rent your home. It is very good. (BI)
With tax season upon us, some people will have refunds to spend. Here is some excellent advice on putting the cash to good use. Hint: Take a little for spending but pay off loans or save with most. (SunTrust)
There is plenty of negative sentiment right now, despite the recent stock rebound. I do not expect any single news release - or even a series of them - to have a dramatic impact on stocks. Until a stronger economy influences earnings, most people will remain skeptical. We might well be three months away from seeing that evidence, even if the Q1 data continue to improve.
The recessionistas will be proven wrong on the current call, and that will gradually help to improve earnings estimates. Many analysts are building recessions into their forecasts, second-guessing their own top economists.
It is difficult to be patient, but it is often rewarding. Take what the market is giving you - a trading range with some sector and stock-specific opportunities.
Thanks to Brian at Investor in the Family for the invitation be interviewed on his podcast. We covered some interesting market topics.
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