The Week Ahead
After two weeks with plenty of data, the coming week’s calendar is a little light.
The “A List” includes the following:
- Initial jobless claims (Th). Employment will continue as the focal point in evaluating the economy, and this is the most responsive indicator.
- Michigan Sentiment (F). Sentiment is a good coincident indicator for employment and consumer activity.
- Retail Sales (Th). The consumer is still a big story.
The “B List” includes the following:
- Industrial production (F). This remains a key factor in overall economic health.
- PPI (F). This will be important at some point, but there is no sign of inflation so far. A calendar quirk means that we will not see the PPI and CPI on consecutive days, as is most often the case.
There will also be some inventory data, but the market pays little attention. The inventory story is easily spun and difficult to interpret. I only see one Fed speech on the calendar – the hawkish Bullard on Monday.
Trading Time Frame
Felix has switched to a neutral posture, now fully reflected in trading accounts. We have no position in equities. Our partial position includes a bond inverse fund and a commodity.
The overall ratings are slightly negative, so we were close to an outright bearish call. This could easily be the case by the end of next week. While it is a three-week forecast, we generate a new forecast every day.
It is fair to say that Felix is cautious about the next few weeks. Felix did well to avoid the premature correction calls that have been prevalent since the first few days of 2013, accompanied by various slogans and omens.
Investor Time Frame
Each week I think about the market from the perspective of different participants. The right move often depends upon your time frame and risk tolerance. Too many individual investors check in only occasionally and then make dramatic decisions based upon slender evidence. That is especially wrong right now.
This is a time of danger for investors – a potential market turning point. My recent themes are still quite valid. If you have not followed the links, find a little time to give yourself a checkup. You can follow the steps below:
- What NOT to do
Let us start with the most dangerous investments, especially those traditionally regarded as safe. Interest rates have been falling for so long that investors in fixed income are accustomed to collecting both yield and capital appreciation. An increase in interest rates will prove very costly for these investments. I highly recommend the excellent analysis by Kurt Shrout at LearnBonds. It is a careful, quantitative discussion of the factors behind the current low interest rates and what can happen when rates normalize.
- Find a safer source of yield: Take what the market is giving you!
For the conservative investor, you can buy stocks with a reasonable yield, attractive valuation, and a strong balance sheet. You can then sell near-term calls against your position and target returns close to 10%. The risk is far lower than for a general stock portfolio. This strategy has worked well for over two years and continues to do so. (If you cannot figure it out yourself, or it is too much work, maybe we can help – scroll to the bottom).
- Balance risk and reward
There is always risk. Investors often see a distorted balance of upside and downside, focusing too much on new events and not enough on earnings and value.
Three years ago, in the midst of a 10% correction and plenty of Dow 5000 predictions, I challenged readers to think about Dow 20K. I knew that it would take time, but investors waiting for a perfect world would miss the whole rally. In my next installment on this theme I reviewed the logic behind the prediction. It is important to realize that there is plenty of eventual upside left in the rally. To illustrate, check out Chuck Carnevale’s bottoms-up analysis of the Dow components showing that the Dow “remains cheaply valued.”
- Get Started
Too many long-term investors try to go all-in or all-out, thinking they can time the market. There is no reason for these extremes. There are many attractive stocks right now – great names in sectors that have lagged the market recovery. You can imitate what I do with new clients, taking a partial position right away and then looking for opportunities.
We have collected some of our recent recommendations in a new investor resource page — a starting point for the long-term investor. (Comments and suggestions welcome. I am trying to be helpful and I love feedback).
Final Thought
What will be the new normal? How will the wide gap between the valuation of stocks and bonds be resolved?
My own answer has been that the two will converge. Interest rates and stock prices will both move higher. At the start of 2011 I predicted ten things that would be more normal. Some have proved accurate while others are a work in progress.
My 2010 forecast of Dow 20K is also proving out – and for the right reasons. You can check out the history, reasons, and progress toward this goal at our new investor resource page. If you are skeptical of the conclusion, you will be just like those who raised doubts three years ago. Why not check out the reasons?
Dow 150,000?
I feel like a real piker when compared with Michael Gouvalaris, who takes a long-term technical viewpoint. Here is his key chart:
Well! 2043 is outside of my regular forecasting range, but the concept is sound. Mike writes as follows:
“…(T)he markets will always favor the upside over the long term because of pure math. The downside risk is 100%, that is the worst case scenario. While your upside is unlimited. We just saw two separate cases of long term macro bull markets that produced over 2000% returns while the declines maxed out at around 55%. Do you see where I am going with this? Institutions adopt this mindset, they look at the 2000% upside over time after a historically oversold decline, as opposed to the downside risks in the short term. It’s easy to blame the PPT, the Fed and a whole plethora of others for market rallies in the face of “headlines” and slow data. Ironically it is almost always the same ones that have gotten monetary policy, QE, fiscal policy etc, completely wrong from the very start.”
Makes sense to me!