posted on 19 June 2016
by Jeff Miller, A Dash of Insight
This week's economic calendar is a little light on data, but it packs plenty of important news. Last week I suggested that the Brexit build-up would become the dominant theme. Nothing has changed.
Expect daily stories on three Brexit themes:
While financial media will cover all, my attention will be on the third. What Will the Brexit Result Mean for Financial Markets?
There was little economic news. The biggest change was the reaction to the FOMC meeting.
In my last WTWA, I predicted a week divided between two themes - first the Fed, and then Brexit. It was indeed a two-story week, with an overlap in the middle. The Fed decision was greeted positively for a few minutes, and then the tide shifted.
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 slightly delayed reaction to the Fed announcement. 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!
Continuing violence and terror. The mass shooting casualties have been getting worse.
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. No award this week. Nominations are always welcome.
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 relatively light week for economic data, but a big one for news. I highlight only the most important items, helping us all to focus.
The "A" List
The "B" List
Chair Yellen will provide her semi-annual Congressional testimony to the Senate on Tuesday and the House on Wednesday. The question periods will be closely watched. You might think there is nothing left to learn after last week's FOMC decision and press conference, but any fresh hints will get attention. We also have a resumption of appearances by other Fed participants.
Next Week's Theme
Anyone whose breath can fog a mirror is being asked about his or her opinion of what the Brits should do. That is a lively topic, but not one for us.
The outcome of the vote is important, but the prospects seem to change daily. Again, not a good topic for us.
While the financial media theme for the week ahead will be broader, the key point will be:
What does the Brexit vote mean for financial markets?
I have read scores of articles on this topic, watched webinars from experts, and listened to (some of) the punditry. While it is part of my job, most investors do not want to do this. I will try to provide a few key points as background. Read some of these links, draw your own conclusions, and compare them with mine at the end of this post.
And a tabular summary of the issues:
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 updatefeatures 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. Those interest can still follow them via Doug Short and Jill Mislinski. The ECRI commentary remains relentlessly bearish despite the upturn in their own index.
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 aggressive. Many sectors remain in the penalty box. The (usually) more cautious Holmes is once again 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
Dr. Brett explains why your trading psychology is reflected in your daily life, and vice-versa. Learn how this can be important to achieving your trading goals. As an example he writes as follows:
Which one would he choose, and why?
Adam H. Grimes provides insight on strategy vs. tactics. He defines the difference, but also provides some specific techniques.
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 "Davidson's" take on Brexit (via Todd Sullivan). Here is the key point:
He then produces charts on a series of key economic measures: employment, real personal income, retail sales, job openings, and the housing rebound. Please check out the charts, supporting the thesis that data trumps sentiment.
David Fish updates the list of Dividend Challengers. There are many specific ideas, so check it out.
Chuck Carnevale emphasizes the importance of valuation on your entry point, even when buying a great dividend stock. He has a great example of how waiting for the right entry point (even though a dividend was missed) actually added to total dividends in the long run.
We have some interesting themes this week. Figuring out the stock implications will require some more thought. I am working on it, and I welcome comments.
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 Andrew Comstock's What is the most important financial advice you would pass to your children. The advice garnered from a number of experts is somewhat inconsistent, but thought-provoking. In general, young people need to balance passion and earnings, current consumption versus the future, and borrowing versus saving. My own thought? You need to look forward to your work if you expect to do well.
For both young and old: 51 Things You Shouldn't Do from John Clements.
For millennials: You need more realistic expectations about future returns.
Watch out for....
Chasing last year's winners via annual sector rotation. Josh Brown has a nice post showing the prevalence of this performance chasing. He emphasizes, "The data is unambiguous." His analysis and charts show why this does not work. (Felix objects that sector rotation works, but a shorter time frame is needed).
Yield stocks, the crowded trade. William Smead covers this point, while also noting the declining significance of Fed Stress tests and the potential for banks and the housing market.
Brexit is not another "Y2K" as Barron's suggested this week, but the uncertainty has had an exaggerated effect. Here are my own conclusions:
And finally, as you navigate the week ahead remember this:
The most newsworthy stories are frequently not the most important for your investments!
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