The Week Ahead
This week brings plenty of data!
The “A List” includes the following:
- FOMC announcement (W). No policy change, but words will be parsed for hints about tapering.
- Employment report (F). People will speculate in advance that the Fed had the number on Wednesday.
- GDP for Q2 (W). All estimates have been reduced and there is also a major revision of past data. Briefing.com is forecasting a negative print!
- ISM index (Th). One of the best concurrent economic reads.
- Initial jobless claims (Th). Employment will continue as the focal point in evaluating the economy, and this is the most responsive indicator.
The “B List” includes the following:
- Conference Board sentiment (T). While I prefer the Michigan approach, the Conference Board method usually has a very similar results.
- Case-Shiller home prices (T). Slower than other sources but widely followed.
- ADP Employment data (W). A good estimate of private sector employment changes.
- Chicago PMI (W). Mostly interesting as the best guess for the national ISM number.
- Auto sales (Th). This is of special interest for overall consumption trends.
There are also several lesser reports – plenty to analyze. Also, after the announcement the “blackout” on Fedspeak will end, so speechifying will resume with Bullard on Friday.
But mostly – Earnings!
How to Use the Weekly Data Updates
In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.
To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?
My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.
Insight for Traders
Felix has turned bullish and we are fully invested in trading accounts. The positions include USO (oil) as well as foreign and domestic equity ETFs. While we may well change holdings during the week, we expect to remain fully invested. Felix did well with a short bond position and also the USO trade (so far). The jury is out on the recent switch to a bullish posture. 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.
Insight for Investors
The most important current theme for investors is what some call the “great rotation.” I have called this a potential market turning point. The story continues, so my recent themes are still quite valid.
Josh Brown has a great post summarizing the data and calling the rotation “undeniable.”
If you have not been following this section recently, please 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. It has already started.
- 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. (I freely share how we do it and you can try it yourself. Follow here, and 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 news events and not enough on earnings and value. You need to understand and accept normal market volatility, as I explain in this post: Should Investors be Scared Witless?
- 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. Ignore all of the talk about the Fed and focus on stocks.
And finally, 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
Each week I prepare for action by considering what might happen and how I plan to react. For our enhanced yield program we have some positions where we plan to sell calls on a rally. There are also new positions that would be more attractive to start on a dip. Either way, you can plan for the trade.
For long-term investors you should have a shopping list. When we get new accounts we implement long-term programs gradually. For those who have been in cash (or in poor holdings) you do not need to change everything on day one. Start by selling the worst positions and getting started with your “buy” list.
The most important story might be the GDP report. If it is weak enough, the recessionistas will be out in force. After a two-month absence, we might even see an appearance from the ECRI. None of the important economic data series signal recession, nor do any of my best sources. That will not stop the doomsters if the report is weak enough. Since there are new measurements involved, there will be plenty of spin potential.
Operating without a plan leaves you like a deer in the headlights. You will be unwilling to chase stocks higher on a rally and afraid to buy on a dip.
Volatility is the friend of the trader, but it can be the same for the long-term investor. It starts with having a plan for action.