by Jeff Miller
In most years this would be a quiet part of the investment calendar, a snoozy summer week. Earnings season has not yet started, but vacations have. Volume is low. Technical levels are being tested.
Big News and Low Volume = High Volatility
In such times it does not take much to spark a big move. With the investment committee members off at the beach, some firms may take a few days to change policy. The field is open for the agile trader, but he had better get it right!The jury is still out on the economic slowdown, Greece, energy prices, and the impact on earnings. It is taking even longer the the jury for my ex-governor, Rod Blagojevich. That jury is taking a long weekend after nine days of deliberations in this second trial. Like the current market worries, this story seems to have gone on forever.
Stock returns have been poor, but as Michael Mandel wisely reminds us, the market does not necessarily reflect the economy.
I’ll highlight the key events for next week, but first review the week just past.
Background on “Weighing the Week Ahead”
There are many good services that do a complete list of every event, including the excellent weekly summary from Steven Hansen. 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.
Readers often disagree with my conclusions. That is fine! Join in and comment. 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
There was plenty of market action without a lot of really fresh news. As a reminder, when I term something as “good” I mean “market friendly. This is especially important to note this week.
There was a little good news.
- Gasoline prices continued to fall last week. In additon, the IEA move to tap Strategic Petroleum Reserves is a market positive, at least in the short term. I understand that there is controversy over motives, timing and political intentions. Some also question the long-term wisdom. For the purpose of our weekly update the only question is whether it is a market-friendly move. Higher energy prices have been treated as a negative, so something that lowers prices will reduce the drag on consumer spending. I am being consistent in my scoring.
- The Greek government won a vote of confidence, suggesting likely success for the austerity program vote this week. There is still a lot of fear linked to this story, with many rushing to declare the potential for a “Lehman event.” There are many steps before we would face a systemic collapse, as I noted here.
The bad news featured the usual suspects.
- Initial jobless claims of 429,000 — still too high to expect solid job growth. Some attribute (see here) the recent levels to unusual seasonal factors and the Japanese supply chain effects. For the moment, I am taking the results at face value. See Steven Hansen’s chart shows how improvement here has really stalled.
- Home sales were weak — both existing and new. Foreclosure prices continue to pressure the new home market. See Calculated Risk for charts documenting the continuing poor data. It does not seem to be getting any worse.
- Lesser indicators are all very weak. So says the Bonddad Blogs’ weekly survey of high frequency coincident indicators, collectively worth noting.
The award for the worst news of the week must go to the Fed. The decision was no surpise — at least not to readers of “A Dash.” In last week’s preview I was four-for-four in my predictions. My most important point was about style, not substance:
The big question for the meeting is not so much what the Fed will do, but how convincingly Ben Bernanke can explain it.
If the Fed thinks it should be doing press conferences, they had better learn to do it right. If the message is directed toward the public at large, you cannot treat it like a college seminar or testimony to Congress. There were plenty of reviews of the Bernanke press conference, many by those who disagree with current policy or hate the institution. Readers who missed my review might find it interesting since I focused on the importance of communication in policymaking.
The economic recovery requires confidence on the part of business and the consumer. Confidence is in short supply right now.
The Indicator Snapshot
It is important to keep the weekly news in perspective. My weekly indicator snapshot includes important summary indicators:
- The ECRI Weekly Leading Index and the derivative Growth Index
- The St. Louis Fed Stress Index
- The key measures from our “Felix” ETF model.
There will soon be at least one new indicator, and the current choices are under review.
The indicators show continuing modest growth at a slowing pace, with little indication of economic risk. The market fears, as is often the case, are greater than one might expect from the data.
Felix is the basis for our “official” vote in the weekly Ticker Sense Blogger Sentiment Poll, now recorded on Thursday after the market close. We have a long public record for these positions.
[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 coming week is a big one for news and data.
We will see more news on Greece, including possible confirmation of an agreement for extending and modifying loan terms.
Personal income and spending will provide a read on the consumer, along with the Coference Board consumer confidence.
Late in the week we’ll get initial jobless claims data, still important as the most timely read of job losses. Those who believe that lost auto jobs are the key are especially watching this series. The Michigan sentiment index and the ISM indes are both variables that I regard as important for estimating job creation.
There is plenty of room for surprises.
In trading accounts last week we reduced our inverse ETF positions, so we are net short 40%. Somewhat to my surprise, we do not yet have any signals for new positions, but some are ETFs moving into the buy range.
For investors, the mission is a bit different. How does one maintain the discipline to follow the advice of Warren Buffett:
If the [investors] insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.
In case you missed it, I recently wrote an article emphasizing the investment approach. You can also get my piece on dealing with risk or our weekly ETF report by sending an email request to etf at newarc dot com.
For Fun and Profit
For an illustration of the value approach I recommend two articles written with intelligence, style, and a sense of humor. I cannot say more without spoiling the fun. Read them in the order I have them listed.
Would you buy this company? by Frank Voisin
A “conversation” with Warren Buffett by Downtown Josh Brown
The Week Ahead: Another Bernanke Press Conference by Jeff Miller
Is a Negative Economic View Warranted? by Steven Hansen
Weak Defense by Chris Kimble
Why the $VIX Isn’t Surging by Albertarocks
BIC Problems for Investors by MacroTides
Europe in Trouble by MacroTides
Comparing World Markets by Doug Short
Stock market Cycle Analysis by Erik McCurdy
Investor Sentiment Leads Price by Guy Lerner
About the Author
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.