Last week I suggested that the market might be ready for some real news—corporate earnings. That is still a key topic, but attention is focused on world events. Pundits will be asking:
How Should Investors Respond to Geopolitical Risks?
Last Week
Last week the economic news was good, but mostly ignored.
Theme Recap
In my last WTWA I predicted that attention would shift to corporate earnings reports. Little did I know that a passenger dragged from a United Airlines flight would dominate the news cycle for the week. Just as that was losing interest, the Trump military actions grabbed the spotlight. So much for my expectation (and hope) of returning to news focused on financial markets.
The Story in One Chart
I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the small daily moves and the 1.13% loss for the week.
Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.
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!
There was not much economic news last week, but it was pretty good.
The Good
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Port Traffic showed strength in March. Steven Hansen (GEI) helps us sort through a very noisy data series.
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Foreclosures are down, now below pre-recession levels. (MarketWatch).
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Mortgage delinquencies are at a 10-year low. (24/7).
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Small business optimism registered a strong 104.8.
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Inflation tame. PPI and CPI both declined. Some see this as negative news since it is not hitting the Fed’s target. That makes little sense. If the Fed can continue stimulative policy without increasing inflation, so much the better.
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Weekly jobless claims remained low at 234K. This half of the picture remains solid. We also need new hires.
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Michigan sentiment remained strong at 98. The best chart of this indicator is the Doug Short design, now updated by Jill Mislinski. It shows the indicator, recession periods, and GDP. You can easily see the current level versus past records. If only everyone was so clear!
Earnings expert Brian Gilmartin notes that whatever is bothering the market, it is not earnings!
FactSet’s John Butters agrees.
Those conclusions are important. The data helps us to isolate the market concern: geopolitics, not earnings.
Can investors do better than these three alternatives? As usual, I’ll have a few ideas of my own in today’s “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. (see below).
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. Georgregularly 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.
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 latest update now includes the employment data.
The Quarterly JP Morgan Guide to the Markets is available. This is a key resource for data-driven investors. Among the many great charts, investors should compare their take on valuation with those most popular in the blogosphere. Unlike those, there is some recognition taken of inflation and interest rates, especially the bond indicator.
Another key chart looks at what happens when interest rates move higher.
Why? Ultra-low rates are typically associated with deflation fears and massive skepticism about earnings. As the economy improves, both rates and earning move higher. So do stocks.
Bill McBride
updates his recession analysis. While his excellent record is not as long as our sources, he has the right idea. It is worth reading his current take (no problem in the foreseeable future) and the comparison to his past calls.
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. All our models are now fully invested. 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 (usually me, but sometimes a guest expert). We try to have fun, but there are always fresh ideas. Last week the group discussed three contrarian ideas.
Top Trading Advice
Brett Steenbarger is required reading for traders. My favorite this week is, How Tough Has Trading Been?
Brett collects data from various sources, demonstrating the recent rough patch for many strategies. Then he follows with key advice on how to negotiate these times:
It’s not enough to learn how to trade; it’s critical to trade uniquely. It’s not enough to trade with rules and discipline; one must also find opportunity creatively. The firms achieving the results depicted above are trading trends in liquid markets in a disciplined fashion. A great approach to success would be to research strategies that made money during months when those other participants were performing worst. There is no guarantee that future returns will mirror backtested ones, but digging for gold in well-mined fields is a poor risk/reward proposition.
This is an important lesson. This post is a close winner over the discussion of overtrading.
Mark Hulbert
provides an update on the “oldest market timing system.” Hulbert notes concern among most market timers, and then contrasts with Dow Theory. “All three of the Dow Theorists who I monitor on a regular basis believe the major trend remains up”. Read the entire article to see what might change their minds.
