posted on 05 February 2017
by Jeff Miller, A Dash of Insight
We have a rather light week for economic data. The biggest reports came last week. Earnings season continues. Everyone is keeping a close eye on President Trump, wondering what might happen next. Meanwhile, stocks are at all-time highs and interest rates have stabilized. This combination creates more questions than answers, which will lead the punditry to wonder:
Is the market optimism justified?
Last week the economic news was strong, but (once again) with little reaction from stocks.
In my last WTWA two weeks ago I predicted a focus on volatility, wondering whether policy uncertainty would have a reaction in stocks. That was a good call, although overshadowed by the policy moves themselves. There were several articles on volatility, mostly noting the lack of reaction in the VIX.
The Story in One Chart
I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes that the week's gain was all from early action on Friday. Some attributed this to the employment report, but the timing is more consistent with a reaction to Trump actions on Dodd-Frank.
Let us also update another chart from this useful weekly article - a graphic picture of drawdowns. You can readily see both the frequency and magnitude.
Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post for several more charts providing long-term perspective.
Some Super Bowl Fun with Two Hidden Lessons
Most readers will be watching the Super Bowl today. Did you know how important this is for market performance in 2017? The old AFC/NFC forecast is passé. We now must "dig deeper" into the data. By email I received an analysis that looked at Manning's, Broncos, and other factors. I'll focus on this year's table.
And here is the recommended interpretation:
Jane Wells asked some questions (What milestone did the Dow recently pass? Who is Janet Yellen?) to the high-income Super Bowl Participants. You will enjoy their answers.
Oscar likes the Falcons, but Vince insists that football picks are not part of his programming! Mrs. OldProf likes the Falcons as well, but that is just because they beat her Packers. I'll stick with the Michigan man.
Use the comments to suggest the "hidden" lessons. WTWA readers should not need me for this one.
Each week I break down events into good and bad. Often there is an "ugly" and on rare occasion something very positive. 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!
This week's news was again quite good-almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the "bad" list, please feel free to suggest it in the comments.
Russia, Iran, and North Korea are other obvious candidates.
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. Jacob Wolinsky has a terrific review of Harry Dent predictions. Here is one of the most dramatic, from just a year ago.
Time to redraw that one. The power of graphs with red lines and arrows is amazing. Jacob's article also includes the results of a Google search for Dent's predictions. You must see it to believe it!
I especially appreciate that Jacob was inspired by his Silver Bullet award in 2013. I only wish that more would join me in highlighting people doing this kind of valuable work.
Meanwhile, Mr. Dent's business model is working just fine. Check out the speaking fees.
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.
It is back to normal for the volume of economic data, but the most important reports came last week.
The "A" List
The "B" List
Fed speakers are back on the trail. Questions will probe the new political environment and hints about future rate hikes.
Earnings reports will remain important. Early actions from the Trump Administration have captured the spotlight and will continue to do so.
Next Week's Theme
There is plenty of good economic news. A nice chart-packed review from Steven Hansen (GEI). And also from Urban Camel. Here is just one example comparing full-time and part-time jobs. There are plenty of great charts in both posts.
The earnings recession is over and future growth looks good. (Brian Gilmartin).
And yet everyone is nervous. (Great piece from Josh Brown).
While President Trump will continue to grab the spotlight this week, I will continue my focus on the stock market fundamentals. In today's Final Thought I will offer some suggestions about how to implement this approach. Meanwhile, expect the key question for this week to be:
Is market optimism justified?
The basic positions cover a wide range. Even if one or more of them seem incredible to you, be assured that someone passionately maintains that viewpoint.
What does this mean for investors? As usual, I'll have a few ideas of my own in today's "Final Thought".
We follow some regular great sources and the best insights from each week.
Whether you are a trader or an investor, you need to understand risk. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.
The Indicator Snapshot
Although dropping last week, the yield on the ten-year note has increased significantly since the election. This has lowered the risk premium a bit. I suspect much more to come. By this I mean that the relative attractiveness of stocks and bonds will continue to narrow.
The C-Score has also dropped. The relationship is not linear, and it remains in the "safe" zone.
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. (see below).
Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.
Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies.
Doug Short: The World Markets Weekend Update (and much more).
RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed, the source of this interesting chart:
This illustrates Dwaine's take on leading indicators, asking about time above the current value.
Georg Vrba: The Business Cycle Indicator and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli's enhanced aggregate spread, considering when it might first give a recession signal.
Scott Grannis: The market is not very optimistic. This shows the importance of our weekly coverage of the equity risk premium, showing the relative attractiveness of investors' two major choices - stocks and bonds.
How to Use WTWA (especially important for new readers)
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. Most readers 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 eight 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?
Most of my readers are not clients. While I write as if I were speaking personally to one of them, my objective is to help everyone. I provide several free resources. Just write to info at newarc dot com for our current report package. We never share your email address with others, and send only what you seek. (Like you, we hate spam!)
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 the top sources we follow.
Felix and Holmes
We continue with a strongly bullish market forecast. All our models are now fully invested. The group meets weekly for a discussion they call the "Stock Exchange." In each post I include a trading theme, ideas from each of our four technical experts, and some rebuttal from a fundamental analyst (usually me). We try to have fun, but there are always fresh ideas. Last week Holmes made a timely call on Macy's (NYSE:M). Many of the stocks cited are worth your consideration.
Top Trading Advice
As I suspected a few weeks ago, Dr. Brett Steenbarger is taking a sabbatical to work on his next book. Most traders have probably not matched me in reading all his posts. Many of them have enduring value, so you should take some time to review his archives. My favorite this week helps you to explore you best trading strengths and virtues.
Ralph Vince has a warning about Trump Effects:
A colorful YOLO story - possibly fake - about a trader going "all-in" on poor earnings from Apple (NASDAQ:AAPL). His collection of puts and short call spreads would make $5 million if it worked, recovering the $2.5 million inheritance he lost in two years. With the strong report, he was completely blown out, as witnessed on a live stream. There are many lessons here whether it was true or not. Handling wealth. Position size, whatever your confidence. Suspicion about those making dramatic calls to sell their services.
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 it would be Davidson (via Todd Sullivan), who pulls together economic data and conclusions in his explanation of why stronger Employment Reports Indicate Higher Equity Markets. He includes several important indicators, emphasizing the need to look at several. This illustrates the right way to do financial research. He writes:
Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different "personality" and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, including four or five specific ideas that we are buying. This week the dip-buying Holmes (who has been very hot) liked Macy's. That worked well for those who did their own research and agreed.
How about health care REITs? Blue Harbinger analyzes twenty candidates, two of which we own.
Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. My personal favorites this week are two entries I see as related. Josh Brown points out the opportunity for young people to start saving and investing, enjoying compound interest. Tony Isola shows the flip side - the cost of an impulsive purchase paid off on a credit card. This is a great lesson!
Seeking Alpha Editor Gil Weinreich's Financial Advisors' Daily Digest has quickly become a must-read for financial professionals. Somewhat to my surprise, the topics are also especially relevant for active individual investors. They frequently join in the comments, adding to the value of the posts for both groups. Gil has several good topics, but I especially liked this discussion of the fiduciary rule. Most people do not understand what this means, and what is at stake. I strongly support Gil's argument.
Watch out for…
Binary options. Another product that seems simple but few understand or trade successfully. (FT).
BDCs. BDC Buzz has the story.
VIX trading. Bill Luby provides data on the poor results of VIX ETPs. Many are tempted to buy the VIX as a hedge without even knowing how it is calculated or whether it is a leading indicator.
Like Josh Brown, I am hearing a lot of worry about what might happen in the Trump Administration. Over the last several months I have highlighted all of the following:
To my surprise I opened Barron's and found Dr. Ed Yardeni making exactly the same points. Anyone reading WTWA for the last few months could have done the interview. I generate my own ideas and reach my own conclusions, but I always like it when astute analysts look at the same evidence and agree.
In a similar vein, my Seeking Alpha colleague Bill Kort has a great analysis of the danger of mixing your opinions about news with your investments. I am delighted that some of my work and my highlighting of Morgan Housel encouraged him to pursue this valuable topic.
Policy uncertainty remains the most important investor worry. We can mitigate this in two ways:
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