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posted on 28 May 2017

The Week Ahead: Waiting For Godot

Written by , A Dash of Insight

The holiday-shortened week ahead features many economic reports, including the most important. The biggest news is at week’s end, so both market participants and pundits will have time to settle in after the long weekend. When they get around to the calendar, I expect many to be asking:

Will we finally see Godot some volatility?


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Last Week

Last week the economic news was mixed, but the market showed strength anyway.

Theme Recap

In my last WTWA I predicted a quiet week for data with plenty of talk about the Fed. That was a reasonable guess, but there was not really a dominant theme. There was some discussion about the Fed balance sheet and policy changes, but it was competing with plenty of other news.

The Story in One Chart

I always start my personal review of the week by looking at a chart of market performance.

Click for larger image.

While there were not many big swings, the 1.4% gain for the week also took markets to intra-day highs.

The News

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!

The economic news last week was mixed, but the market reaction was positive.

The Good

  • Q1 GDP revised higher to 1.2%. This is backward looking, of course, but a small positive.

  • Indicators in all time frames show continuing strength. New Deal Democrat’s summary is a great source. This week’s conclusion:

    The nowcast for the economy remains positive, as does the near term view, with both stocks and jobless claims leading the way. The longer term forecast remains neutral to positive, shading a little closer to neutral based on the tightening yield curve, less robust growth in real money supply, and the miss in corporate profits.

  • The Philly Fed index improved again. Steven Hansen (GEI) has the analysis.

  • Q1 Earnings show continued strength. This includes not only earnings and revenue, but profit margins. FactSet explains. Also see earnings guru Brian Gilmartin the in the quant section (below).

  • Initial jobless claims beat expectations and registered a decline in the widely-followed four-week moving average. For a full analysis see Steven Hansen (GEI).

The Bad

  • New home sales declined 11%. Most sources cited a normal decline from the gains in March as well as weather. The Capital Spectator has a solid and typical explanation. That said, this was a disappointment and deserves careful attention next month. Calculated Risk opines that it was a reasonable report, noting that sales are up 11.3% compared to the same four-month period last year. It is always difficult to interpret highly volatile reports.

  • Durable goods orders dropped 0.7%, the first decline in five months. (MarketWatch).

  • Existing home sales dropped 2.3%. Calculated Risk notes the effect of lower inventory on this report. Bill sees this as the key market factor.

The Ugly

Terrorism in London (UK home to 23,000 jihadists?) and Egypt lead the week’s “ugly" news. This is another “headline" event that is important, but not currently deemed to be a “market" story.

Noteworthy

Did you know that 40% of millennials use Facebook’s feed as their sole source of news? Decades ago Walter Cronkite warned that the public relied too much on TV news. Things change.

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 (once again) to Josh Brown. He is often a candidate and one of the most frequent recipients. This week he describes a Fast Money guest who “came on to discuss the Plunge Protection Team urban legend as a bonafide explanation for why the market has been acting the way it has". He goes on to write:

Now obviously, the existence of a Plunge Protection Team (or PPT), is demonstrably ridiculous. Especially when you consider the fact that we’ve seen the market cut in half twice during the last 17 years, with dozens of instances of 10 and 15 percent corrections all along the way over the last 29 years since the end of Reagan’s term. The idea that there could be some clandestine, bipartisan shadow organization, with enough money to prop up a global stock market, and the solemnity required to faithfully do so across a half-dozen Presidential administrations and all manner of Congressional configurations, is akin to believing in the Area 51 myths or the moon landing hoax.

Readers will certainly note the relevance to this week’s theme. Read the entire post for more background and some great comparisons.

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.

The Calendar

We have the biggest week of the year for economic reports - and it is jammed into a holiday-shortened week.

The “A" List

  • Employment report (F). Job market tightening? Implication for wage costs?

  • ISM index (Th). Good concurrent read on economic changes with some leading qualities as well.

  • Consumer confidence (T). Conference Board version has been very strong. A slight decline is expected.

  • ADP private employment data (Th). Non-government source is a good alternative to the official report, and often changes expectations.

  • Auto sales (Th). Even greater interest in recent months as the “peak auto" debate continues.

  • Personal income and spending (T). Continuing growth expected. Consumer spending remains crucial to economic growth.

  • Initial jobless claims (Th). Continues with record low levels. Not part of the Friday data sample.

The “B" List

  • Pending home sales (W). While not directly tied to construction spending, it is a good read on the housing market.

  • Fed Beige Book (W). Anecdotal evidence from each Fed district will be in front of FOMC members at the June meeting.

  • Construction spending (Th). April data. Rebound from the March decline is expected.

  • Trade balance (F). Deficit is expected to increase by 1 or 2%. More interest in this topic because of current debate over trade policy.

  • Chicago PMI (W). A hint for the ISM report, this index has been very strong.

  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

There is daily FedSpeak on the schedule.

Next Week’s Theme

In a sharp change from the last few weeks, we have a big calendar for economic reports. These include the most important. They come in a holiday-shortened week, with a relatively slow start. Last week I noted that the A Teams would head for the beach on Friday. It was indeed a very quiet day. It might be Wednesday before action is back to normal!

If this combination can’t generate some action, what will? Pundits will be asking:

Is it finally time for some volatility?

As always, there are several viewpoints.

  • The lack of volatility is a bad omen. Just as night follows day, we should expect the worst. (Citations omitted to protect the guilty!)

  • Much is wrong in the world. The Fed is raising rates and plans to cut the balance sheet. Why no reaction? (Ben Levisohn, Barron’s).

  • The market is broken and manipulated. Normal trading strategies do not work. Discussed and refuted by Brett Steenbarger.

  • The move to passive investing has quashed volatility.

  • Lower volatility is a known coincident effect of bull markets. Nice analysis from The Fat Pitch.

As usual, I’ll have more in my Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

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

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.

Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

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.

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. His interpretation suggests the probability creeping higher, but still after nine months.

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. In his most recent post, Brian notes that long-term estimates remain strong - double-digit percentage increases. The expected downward revisions have recently been absent.

Doug Short: The World Markets Weekend Update (and much more). His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating.

The Brooklyn Investor has some reassuring comments about bubbles.

Marc Chandler notes that the oil price-stock correlation has broken down. I say, “At last." This never made any logical sense, but it worked because it was working!

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, Holmes, and Friends

We continue with a strongly bullish market forecast. Most of our models are fully invested. The exception, Road Runner, is fussy about entry criteria. 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 five technical experts, and some rebuttal from a fundamental analyst. This week our dip-buying Holmes model discusses why he is trading Biogen (BIIB). RoadRunner plays upward trending channels and likes Align Technology (ALGN). See the post for charts and a lively discussion.

Top Trading Advice

New Trader U features a guest post from Rayner Teo. You may find some of the ten lessons controversial, but all are interesting.

Do you over-emphasize each trade? Dr. Brett has the touch for explaining important concepts. This post is both entertaining and informative. He explains why single people should go on many first dates and few second ones. (Maybe Mrs. OldProf will now see why I was sending Valentine’s flowers to several women in the days before we got engaged). Brett’s great advice is to view first trades as “small and exploratory".

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 Wade Slome’s frank and accurate discussion of the difficulty in making predictions. He cites a list of the regular flops - Schiff, Whitney, Mauldin, Roubini, Greenspan, and Merton & Scholes. Pedigree is not the test here for these “radical forecasters."

He has a great list of quotes on predictions, and this advice:

Rather than paying attention to crazy predictions by academics, economists, and strategists who in many cases have never invested a penny of outside investor money, ordinary investors would be better served by listening to steely investment veterans or proven prediction practitioners….

In the quote, he goes on to cite Billy Beane - not my idea of a market forecaster, but the concept is solid. There are experts. They do not always have precision forecasts, but it is often enough to provide an edge.

Finding the best experts is an important challenge.

Stock Ideas

Chuck Carnevale takes up the mystery of Amazon’s (AMZN) valuation. Stock strength, dominant sales position, relatively low earnings and high PE. How should we explain this anomaly? Chuck concludes:

Historically, Amazon has not been an especially profitable company. On the other hand, it has generated extremely high revenue and operating cash flow growth. So far, the market has been willing to give it a pass on earnings. Unfortunately, I have never owned the stock but find myself wishing that I had.

Nevertheless, I think it’s only fair to offer some caution. Before an investor makes a buy, sell or hold decision on Amazon, they should at least consider whether the market will be willing to continue to overlook their lack of profitability. So far so good, caveat emptor.

Mark Gerstein’s latest stock screen unearths a handful of “tasty" restaurant stocks.

Merrill’s list of five stocks with higher price targets due to “blow out" earnings. (Lee Jackson).

The top ten from Morningstar’sultimate stock pickers."

Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. I agree with Oscar and Holmes about the current potential in biotech.

Eddy Elfenbein explains that markets may react excessively to news-driven events. Waiting it out in Cognizant Technology Solutions (CTSH) made good sense, as you can see from his chart. (Eddy’s ETF, where you can buy his picks with one trade and a low fee, is also doing very well).

Investing for Yield

Simply Safe Dividends suggests Iron Mountain (IRM), a storage REIT that seems to be in a growth market.

Blue Harbinger reveals another of his “attractive high-yield blue chips for contrarians." It is publicly traded Enterprise Products Partners (EPD).

Currency Effects

While most investors do not trade directly in currencies, they should follow the impacts on stocks. Stocks benefit differentially based upon dollar strength. The recent weakness has been a big story.

“Davidson" (via Todd Sullivan) sees continuing signs of economic strength, supporting the dollar.

Graduates

Interested in a finance career, starting with your liberal arts degree? Here is some advice. It makes sense to me. Writing skills and critical thinking are always important.

Personal Finance

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. As usual, investors will find value in several of them, but my favorite is about retirement. The White Coat Investor offers the top 5 reasons NOT to retire early.

Seeking Alpha Senior Editor Gil Weinreich continues to provide advisors and investors alike with intriguing ideas and links. I particularly enjoyed his discussion about behavioral finance. In addition, his post about the challenge of finding “Alpha" is a close runner-up for best of the week. Gil explains about the changing CFA curriculum and the dangers of blind data crunching. This is a very complex topic, but Gil is right on target with his concern.

The CFA curriculum change leaves the impression that finding alpha today requires this elephantine effort at data crunching. Even if not, I think it’s better to take hawkeyec’s approach, following a simple plan whose success is not dependent on trying to outsmart everyone else.

(Hawkeyec is an astute and regular commenter whom I follow at Seeking Alpha. For convenience, here is the cited comment.)

Watch out for…

Mall REITs. Again. Last week we featured Brad Thomas. This week we have a nice analysis from The Peridot Capitalist. The somewhat contrarian viewpoint describes how some mall owners are evolving. Like last week’s citation, it shows that investors should look more deeply rather than making a decision on the entire group.

Analyst sell signals. Ten stocks cited by John C. Ogg.

Final Thoughts

Much of the ongoing market discussion centers on a mystery: Why are stock prices higher than many think they should be?

The explanation has gone through many variants during the long bull market. The latest versions relate to market manipulation, low volatility, and ignoring the obvious geopolitical risks.

Perhaps the explanation is much simpler. I discussed this in a recent post on Occam’s Razor and Valuation. Check it out for the full list of the ever-changing excuses for failed valuation methods.

What should we consider instead?

  • Expected earnings are increasing nicely - now at a double-digit pace. These have been better predictors than any of the oft-cited bearish valuation methods.

  • The chance of a recession, the biggest historical threat to markets, remains very low.

  • The list of “geopolitical concerns and headwinds" does not translate into an impact on earnings.

And especially: Beware of those who twist good news into bad!

It is quite normal for financial stress to be low when times are good. Why expect high volatility? Good times eventually get worse, but good news is not itself an effective forecast of trouble.

Those who reason this way remind me of Chauncey Gardiner, the simple-minded hero of one of the all-time great movies, Being There. Everyone believes his “wisdom," derived entirely from television and gardening!

This might be the best summer investment movie. Few things could help the average investor more than recognizing the slogans and old news in the typical commentary.

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