posted on 10 July 2016
by Jeff Miller, A Dash of Insight
This week's calendar includes a pretty normal schedule, but not the most important economic reports. There will be an abundance of FedSpeak, with questions about last Friday's employment data. Despite this, the real story will be the start of earnings season. Expectations are pretty low. Statements about the outlook are always important, but that is especially true right now. The financial media will be asking: Can the profit outlook sustain the rally in stocks?
The economic news was pretty good, and the market reaction was even stronger. The continuing market rebound has caught many off base. This week's review emphasizes Friday's employment report, since that was the biggest news.
In my last WTWA, I predicted that the post-Brexit rally might continue if the economic news was good. This could lead to discussion of a possible "summer rally." After a poor start to the week, the economic data finally turned the trick. From my "final thought" from last week:
In addition to summer rally discussions, there was continuing skepticism - sucker's rally, bull trap, and similar terms were bandied about. Sometimes I am right about the theme, but incorrect in my expectations. Last week both were on target.
The Story in One Chart
I always start my personal review of the week by looking at the great chart from Doug Short that summarizes the week. Since that post has not yet been updated this week, here is the picture from CNN Money. It was a pretty quiet week until the big Friday rally.
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!
Three days of violence. Like everyone else, I was sickened and saddened by events. Leaders of all stripes had comments. My own favorite professor, Neil Browne, always emphasized the need for Asking the Right Questions. Although he has allegedly retired, his mission continues. He posted a thoughtful and insightful perspective.
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. There is plenty of misinformation to refute!
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 normal week for economic data. In my calendar I highlight only the most important items, helping us all to focus.
The "A" List
The "B" List
The big story will be corporate earnings. Fed fans can enjoy appearances from at least six of the regional Presidents. Expect each to be asked if Friday's employment data changes the likely timing and number of rate increases.
Next Week's Theme
Markets seem to have digested the Brexit story. The economic data have quieted recession worries. We can expect plenty of post-holiday FedSpeak, but little real news from those sources. It is the start of the Q2 earnings season. There are questions about both the top and bottom lines, but expectations are pretty low. The real question is about the future.
Everyone will be asking:
Can the profit outlook sustain the rally in stocks?
Feel free to join the discussion in the comments, but I see three key questions:
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). His subscribers get Monthly reports including both an economic overview of the economy and employment.
This week the recession odds (in nine months) have nudged closer to 10%. This does not completely reflect Brexit effects, so we may get a further revision.
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 interested can still follow them via Doug Short and Jill Mislinski. The ECRI commentary remains relentlessly bearish despite the upturn in their own index.
RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has a number of interesting approaches to asset allocation.
As we review the weekly indicators it is important to maintain perspective. A 20% chance of a recession would be average. It is not a reason for fear, since it says that a recession is very unlikely. There will be a time to exercise more caution, but we are not yet close to that point. There are many very questionable recession stories right now.
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 remains almost fully invested, including some of the currently-popular fixed income sectors. That is working well. The more cautious Holmes is still fully invested, in a diverse group of 16 stocks from a universe of nearly 1000, selected mostly by liquidity. That group is also responding well. 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
Worried about the Bloodbath of 2016 and post-Brexit fallout? The Trading Goddess has your back with ten suggestions. My favorite is the pocket chain saw.
Wondering when to sell? Adam H. Grimes helps with the question of when to take profits.
Brett Steenbarger shows the preparation needed for trading. (Start at 3 AM? Hmm). He does describe the need to have a balance including some quality time away from the market.
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 this week (HT Abnormal Returns), it would be Phil Huber's Fun With Strikethroughs: Wall Street Maxim Edition. He takes on the common misperception that good investing can be accomplished through a few simple rules, and he does so adroitly with humor. You will enjoy the entire list, but here is my favorite:
As goes January, so goes the year nothing.
Chuck Carnevale is cautious, even including the dividend aristocrats. He carefully describes his valuation concerns while highlighting the best candidates.
Philip Van Doorn (MarketWatch) has more stocks that were hammered by Brexit yet still favored by analysts. Those shopping for laggards may wish to take a look.
Shawn Langlois' excellent "Need to Know" column features a variety of interesting market perspectives. This week's "the call" segment featured Joe Fahmy's four reasons for the Dow to hit 20K this year. (Check out www.dow20k.com for a prediction on this subject made in 2010 - when the Dow was at 10K).
Laszlo Birinyi publishes an excellent monthly newsletter (subscription required). He covers many analytic methods, but he features a collection of past media stories on the market. It is a helpful way to keep perspective. Take this one for example:
[Jeff] This might sound like something from last month, but it was actually written in 2010.
[Jeff] Maintaining the right long-term perspective is one of the biggest challenges for investors. I cite this striking example not to highlight the error of a single analyst. It was mainstream - a prevailing opinion published in a leading source.
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. This week, during his well-deserved vacation, he invited suggestions for good posts that had not gotten much attention at the time of original publication. This produced a number of high-quality ideas that he featured throughout the week. I am not surprised. My sense of something that is really good does not always resonate with readers. Other bloggers share this experience.
I am featuring one of these posts as this week's best. In addition, please check out Wednesday's article on Portfolio Management, and have a look at my suggestion. Cullen Roche's piece on fear and negativity also has a timeless quality.
Watch out for....
The so-called "safe" stocks. These stocks are so overbought that it was a prevalent theme in this week's investment advice.
Ian Bezek warns about utility yield chasing.
Ellie Ismailidou and Anora Mahmudova (MarketWatch) have a similar warning.
Corporate bond yields are also threatened (Barron's).
Barron's questions the fundamentals of the utility business - slowing growing demand vs. supply.
Stocks will eventually respond to an improving economy. We might have to wait for third-quarter earnings reports, another three months. An improved outlook will speed up this process, since stocks have tracked forward earnings. Improving the outlook will improve those projections.
Jeremy Siegel explains how stabilizing energy stocks, low interest rates, and improved earnings could lead to a 15% increase in stocks.
Years ago we could expect conference calls to "talk up" both current news and future prospects. A skeptical attitude was a healthy approach! More recently, CEO's seem more interested in keeping expectations low. The financial community will pounce on negative statements and extrapolate to similar companies. It should be a great story.
The rotation from yield stocks to cyclical names and financials is the best opportunity for long-term investors.
But even more patience might be required.
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