by Jeff Miller
Over the last two weeks the focus has been on earnings (great) and Fed policy (accomodative – whether you like that approach or not). Briefly put, the worries have been addressed, and stocks have moved higher. This week’s challenge will be employment. Will job creation continue the recent improvement?
Let’s begin with our regular review of last week’s data.
Background on “Weighing the Week Ahead”
There are many good services that do a complete list of every event for the upcoming week, so that is not my mission. Instead, I try to single out what will be most important in the coming week. If I am correct, my theme for the week is what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
In most of my articles I build a careful case for each point. My purpose here is different. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but some will disagree. That is what makes a market!
Last Week’s Data
The news was really great on earnings, expectedly soft on the the GDP, and as expected concerning the Fed.
Most major economic indicators show that the US economy has returned to its normal state, self-sustaining growth. Many seem to have forgotten that economic growth is normal, including the use of slack resources to expand and to build new businesses.
- Economic growth forecasts improved. The ECRI Weekly Leading Index decreased very slightly, but remains at solid levels. Check out the link to see Doug Short’s analysis.
- Risk as measured by the St. Louis Fed Stress Index, remains very low. This measure tracks a lot of market data in the eighteen inputs. It is not a poll, nor opinions, nor a collection of anecdotes. We should all pay attention to some real data. The value moved to -0.156, a bit lower than last week’s -0.143 (adjusted). These are completely normal readings for a scale measured in standard deviations from the norm. For more interpretation, the St. Louis Fed published a short paper with a very nice chart that helps to interpret this index. The chart does not reflect the recent continued decline in stress, but it identifies the dates for important recent events. The paper also has a longer version of the chart, illustrating past stress periods. I am not going to run the chart each week, but I strongly recommend that readers look at the paper. In the 2008 decline there was plenty of warning from this index — no sign right now. The scale is in standard deviations, so anything short of 1.0 or so is neutral territory. I am doing more extensive research on this indicator.
- Earnings have beaten expectations. Solidly.
- Consumer confidence solidified, but at lower levels.
NB: The ECRI and SLFSI are actually readings from week-old data.
The biggest negative was the continuing spike in energy prices.
- Energy prices move higher yet again. Gasoline prices were up five cents in a week. There is continuing stress in the MENA region, with a very uncertain outcome. The price increases directly affect other discrectionary spending.
- Initial jobless claims continued to be elevated. We are continuing with the 4-handle. This series is only one part of the employment story, but everyone agrees on the significance. It is a real-time data series from a good source. I follow it closely, and the story has not been good.
- Housing, by any measure, remains very poor. There is another bad story every week. This week the Goldman estimate of 3.5 million vacant housing units grabbed my attention.
- GDP was weak, but still positive and in line with the most recent expectations.
The US debt story gets the continuing “ugly” award.
The debt story will continue with the political focus on the debt limit and whether it will be raised. I have a continuing forecast that the debt limit will be increased in a timely fashion, but I would not be surprised by a continuing display of self-serving brinksmanship. This will be a market negative until it is resolved.
Our Own Forecast
We base our “official” weekly posture on ratings from our TCA-ETF “Felix” model. After a mostly bullish posture for several months, Felix has turned much more cautious. We shifted from our neutral posture to bullish three weeks ago, and we continue that posture in the weekly Ticker Sense Blogger Sentiment Poll, now recorded on Thursday after the market close. This is based on improved ratings in the various index ETFs, as well as the general trend. Here is what we see:
- 73% of our 56 ETF’s have a positive rating, up nicely from 61% last week. This is a big break in the recent trend.
- Only 50% of our 56 sectors are in our “penalty box,” about the same as 46% last week. This is an indication of moderate short-term risk, and the picture is improving.
- Our universe has a median strength of only +11, up slightly from +6 last week.
The overall picture was about the same last week. We are still 100% invested in trading accounts, since there are many attractive sectors.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list. You can also write personally to me with questions or comments, and I’ll do my best to answer.]
The Week Ahead
The big news for the week, competing with corporate earnings, will be all of the stories about jobs. The ISM survey is one of the best indicators of job growth, so I follow that carefully. We already know that initial claims are a negative factor, and consumer confidence is also weak.
The market is very sensitive to weakness in economic growth, so the ADP jobs data and Friday’s employment situation report will both be extremely important. I’ll do my regular employment preview on Wednesday.
As I write this, the story is breaking that Osama Bin Laden is dead. The initial market reaction to this milestone in the war against terrorism will be positive. It is always tricky to balance interpretations of political and policy results with market reactions. In this case, most would conclude that the terrorist threat has been reduced.
My long-term investment posture is the same as last week.
I look at the Big Four when taking a long view:
- Expected earnings from stocks versus alternative investments: Highly Positive
- Economic Trends: Highly positive
- Risk: Moderate to low
- Worries: Elevated and widely publicized
For each of these I try to use objective measures, avoiding emotion. Having said this, I still do not see a rush to go “all in.” For new long-term accounts I am buying 50% right away in the names we love and waiting for dips for additional buys.
The time frame and your own needs are most important in your investment decisions.
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Jeff Miller has been a partner in New Arc Investments since 1997, managing investment partnerships and individual accounts. He has worked for market makers at the Chicago Board Options Exchange, where found anomalies in the standard option pricing models and developed new forecasting techniques. Jeff is a Public Policy analyst and formerly taught advanced research methods at the University of Wisconsin. He analyzed many issues related to state tax policy and provided quantitative modeling which helped inform state and local officials in Wisconsin for more than a decade. Jeff writes at his blog, A Dash of Insight.