posted on 12 June 2016
by Jeff Miller, A Dash of Insight
This week's economic calendar is back to normal, with Wednesday's FOMC announcement the highlight. Last Friday's trading put the Brexit effects on the front burner, so I expect two themes for the week ahead. The first few days will be all about the Fed and any hints about the pace of rate increases. After the Fed meeting the emphasis will shift to the Brexit build-up, culminating next week.
Expect some punditry magic. The regular Fed experts will morph into Brexit gurus by Thursday morning!
There was little economic news. What we had was encouraging. Once again, markets were pretty firm - until Friday!
In my last WTWA, I predicted plenty of attention to the weak employment report and the implications for stocks. That was a pretty good guess for the early part of the week. There were some who joined me in noting the problems with this report and also plenty who created those "rolling over" curves that are so popular. Every day there was another story from a big-name trader or manager expressing concern about the weak global economy. (More on that topic in the Investor section below).
The Story in One Chart
I always start my personal review of the week by looking at this great chart from Doug Short. You can clearly see the quiet market, at least until Friday! Doug has a special knack for pulling together all of the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis and several other charts providing long-term perspective.
Each week I break down events into good and bad. Often there is an "ugly" and on rare occasion something really good. 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!
The candidate reaction. I have seen many elections where people were unhappy with the choices, but nothing quite like this. 10% of homebuyers say they will consider moving if their candidate loses. It is probably an exaggeration, but still an interesting reflection on the times.
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 New Deal Democrat at the Bonddad Blog. Not only did he take on an extremely popular and deceptive chart, he put the research together and reacted in a timely fashion. Here is the bogus chart:
The chart quickly spread as the "Doomer graph du jour." I saw it on several sites. There is widespread lust for "evidence" of a new recession. Charts like this are frustrating - so many misleading stories, so little time.
The Silver Bullet winners should get appropriate and timely recognition.
As is often the case with these bad charts, the original author does not provide either data or sources! Everyone who wants attention and confirmation bias republishes the chart. NDD demonstrates that the timing of the recession calls is completely wrong if one accounts for the actual availability of the data. This is a common amateur blunder.
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.
We have a fairly big week for economic data and news. I highlight only the most important items, helping us all to focus.
The "A" List
The "B" List
Beyond the FOMC meeting itself, there is no FedSpeak.
Next Week's Theme
It is a rather normal week for economic data, with the FOMC announcement on Wednesday at the highlight. I expect the Fed to be the focus for the first part of the week, with attention shifting to Brexit on Thursday. Next week will feature an even larger Brexit focus. We therefore have a twin theme:
Will the Fed signal any change in the pace of rate increases?
Will the Brexit odds change, and what are the implications?
There is little to add on the Fed issue, which is probably the most over-analyzed in history.
Concerning Brexit, we have three questions (at least):
We follow some regular great sources and also the best insights from each week.
Whether you are a trader or an investor, you need to understand risk. Risk first, rewards second. I monitor many quantitative reports and highlight the best methods in this weekly update.
The Indicator Snapshot
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). Monthly reports including both an economic overview of the economy and employment.
RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting approaches to asset allocation.
Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. His latest update features his unemployment rate recession indicator. A recession is unlikely "any time soon."
Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.
Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).
The ECRI has been dropped from our weekly update. It was not so much because of the bad call in 2011, but the stubborn adherence to this position despite plenty of evidence to the contrary. You can still follow them via Doug Short and Jill Mislinski. Their commentary remains bearish despite the upturn in their own index. While no one really knows what is in the black box, I suggested years ago that they incorrectly emphasized too many commodity series, falling victim to multi-colinearity. Commodity prices fooled them in 2011. Now they seem to be ignoring the rebound.
How to Use WTWA
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. For most readers, they 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 a number of 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:
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 also the best advice from sources we follow.
Felix and Holmes
We continue our neutral market forecast. Felix is fully invested, but the sector balance has become more conservative. Most sectors remain in the penalty box. The (usually) more cautious Holmes is almost fully invested. Holmes uses a universe of nearly 1000 stocks, selected mostly by liquidity. Even when the overall market is neutral, there will often be some strong candidates. That is what we see now. It is not a resounding endorsement of the overall market, but a vote for opportunistic trading.
Top Trading Advice
Anora Mahmudova (MarketWatch) exposes a deceptive chart pattern - the head-and-shoulders. I am interested in hearing from traders about this, but these complex charts seem open to misinterpretation. We rarely hear about failing setups.
Pradeep Bonde has some good advice for improving on a daily basis. He notes that it takes five years for traders to develop the needed skill.
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, it would be a split decision. There is plenty of dangerous and deceptive information about the alleged warnings of big fund managers. Some of these were incorrect, while others were just misleading. In one case the always-bearish prognosticator, Mr. Dow 5000, cannot decide if the Fed has engineered deflation or hyper-inflation. (A supernova can either implode or explodes, he explains). It is all going to blow up somehow, so you should own his bond fund instead. OK....
Here are some helpful articles. If you read them, you will have some inoculation against hype.
As well as the entire process -
We have some diverse suggestions this week.
Think outside the box with James Altucher. He brainstorms on how we can profit now from something we know is coming: the driverless car. This fits my definition of something you will not read about in tomorrow's paper.
I tried to provide another example (Finding the Best Contrarian Stocks), answering some reader questions from last week about why I preferred banks to utilities.
Sometimes you know the theme from current events, but you might not know the best stock play. I am not a big fan of anonymous authors, but sometimes follow them until I am convinced of the quality. Valuentum explains why Palo Alto Networks is more attractive than one might originally think. Hint: free cash flow. We reached the same conclusion a few weeks ago.
Energy prices have been less wild, which is probably good for investors. Some experts are even picking up my recent theme that $50 oil may be something of a barrier, with current prices representing a "sweet spot" for the economy. Oil Insider asks, Have Oil Prices Hit the Sweet Spot? (subscription required, but here is a key chart).
Anyone interested in energy eagerly awaits the annual Statistical Review of World Energy from BP. Here is a key summary chart:
Housing has been one of my favorite themes this year, and it got plenty of attention this week.
Biotech is worth a look.
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 his weekly special edition. There are always several great choices worth reading, but my favorite this week is an article from Morningstar's Russ Kinnel, 20 Common Investing Mistakes. It is a nice analysis of how emotions interfere with decision making and the need for planning. Here are two of my favorites, both very common:
I try to include good advice for young investors, but there is a real shortage of material. MarketWatch has seven good tips for those in their 30's. Many boomers wish they had known these when they were younger!
Watch out for....
Hedge funds (and similar opportunities). Rachael Levy explains, The secret to investing in hedge funds.
There could be a lot of volatility this week - important for traders, but pretty meaningless for investors. At least for those who keep their heads.
I expect nothing meaningful from the Fed meeting, but that will not stop the punditry. There will be massive efforts to infer something.
The Brexit story will include updated odds and I expect it to be the theme next week. I have no special insight about how this will turn out. I am watching my sources closely, especially concerning the possible economic impacts. I was accurate last week in noting this has something to watch, but no one really has a good handle on the implications.
Traders can try to guess the outcome and the reaction. Investors should approach the week ahead with a shopping list. Get ready to take advantage of opportunities. In this WTWA I tried to provide special emphasis on stock ideas. I hope it will provide some ideas for your own research.
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