Weighing the Week Ahead: Is there a New Message from the Markets?
We have a light economic calendar and a short week. We’ll get earnings reports from another 10% of S&P 500 companies. With plenty of time and little fresh information, I expect plenty of pure speculation about the state of the market. This commentary will have a broad theme, with pundits asking:
Is there a new message from the markets?
Last Week Recap
In my last edition of WTWA I took note of the growing emphasis on technical indicators, even for long-term investors, asking whether the 200-day moving average should be considered. As often happens these days the stories focused on political developments and the surprise Amazon (AMZN) decision not to build a second headquarters in New York. The S&P climbed above the 200-day MA on Friday without much fanfare. Next problem, please?
The Story in One Chart
I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski. She includes a lot of relevant information in a single picture – worth more than a thousand words. Read the full post for more great charts and background analysis.
Stocks gained 2.5% on the week and the trading range was only a touch wider, 2.66%. You can see volatility comparisons in our Quant Corner (below).
For some additional perspective, here is the chart of the economic expansion.
This chart makes it clear that the rally, while long and strong overall, include major pauses and a few drawdowns along the way.
I am off duty next weekend. I’ll try to post an indicator update, but no promises. I asked Mrs. OldProf if she wanted to pinch hit for me, but she noted that Warren Buffett’s annual letter would be released next Saturday. She didn’t want to compete with that. As always, this will be great reading for investors.
Each week I break down events into good and bad. For our purposes, “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!
When relevant, I include expectations (E) and the prior reading (P).
New Deal Democrat’s high frequency indicators are an important part of our regular research. This week’s update notes that short-term and coincident indicators have turned negative, while the long-term group is still neutral. He provides the following “note of caution” in his conclusion:
A special note of caution this week: In the past several weeks a whole variety of both weekly and monthly indicators in several time frames have abruptly cratered. Part of that may be due to the “polar vortex” giving rise to 30-year low temperatures in part of the country, but I suspect that the effects of the government shutdown have been more pronounced than almost everybody thought. A similar pattern happened during the 2011 “debt ceiling debacle.” If so, the coincident indicators in particular should begin to bounce in the next several weeks.
- The government shutdown controversy ended in compromise. This is great news for the economy and for investors.
- The JOLTS report showed continuing labor market strength. (The Daily Shot).
- CPI and PPI both continued to show a tame increase of 0.2% for January. The PPI core was 0.3% while the headline was -0.1%.
- Earnings reports continue to beat expectations at a rate that is close to the five-year average. Earnings are a touch below with a 70% beat rate but revenues are above (62%). John Butters (FactSet) points out the much-improved reaction to these reports, both beats and misses.
- China/US trade. The overall news was mixed, but those worrying that the 90-day deadline was too short learned Trump might extend March 2 trade deadline. Or you could have gotten this “news” on December 6th. Below is a portion of my post on the China situation. The rest of the table is availablehere, along with some helpful conclusions about what to expect.
|Issue||Fast – Traders||Slow – Investors|
|G20 Meeting||Not specific enough.||Reasonable outline with some initial agreement.|
|90-Day Deadline||Too many issues to resolve in 90 days. No firm schedule.||A deadline is needed to prod negotiators. Extensions are possible, even likely, and that is fine.|
- Mortgage rates continued to decline.
- Mortgage delinquencies dropped to an 18-year low. (Calculated Risk).
- Michigan sentiment registered 95.5 [E 94 P 91.2]. Jill Mislinski has the story, including the low inflation expectations. As usual, she combines many key variables in a single chart.
- Initial jobless claims again moved higher – 239K versus a forecast of 225K and prior of 235K.
- The NFIB Small Business Optimism Index pulled back further from recent highs – 101.2 versus prior of 104.4.
- Industrial production declined 0.6% in January
Retail sales for December declined 1.2%. Ex-auto, the decline (-1.8%) was even greater. Expectations were for a 0.2% gain. James Picerno (The Capital Spectator) analyzes the report, shows the impact on Q4 GDP forecasts from several key sources, and provides important perspective.
It’s important to recognize at this stage that slower economic growth doesn’t automatically lead to a new recession in the near term. While it’s impossible to rule out the possibility that the US will succumb to contraction later in the year, for the moment there’s precious little hard data that shows that recession is a high-probability event for the immediate future.
Eddy Elfenbein joins others in wondering how the report could be so different from other recent data. He concludes: For now, I think this is a suspect report. I want to see more data that confirms this.
Aurora shootings. More senseless death. Another illegal weapon. More brave first responders. Five of them were injured as they saved many other lives. (Daily Herald, Chicago paper focused on the suburbs).
The Week Ahead
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.
The calendar is light with reports all occurring in a three-day segment of the holiday-shortened week. There is some fresh housing data, and leading indicators can now reflect updates from estimates made during the shutdown. The favorite sport of many, parsing anything from the Fed, means that the FOMC minutes from January will get a close look.
We’ll get earnings reports from another 10% of the S&P 500 companies and of course, continuing political news.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Next Week’s Theme
Given the light calendar and short week, there will be plenty of pages and air time to fill. This is a prime environment for the punditry to speculate about what is moving the market and what comes next. With the big week for stocks and weak retail sales, I expect many to be wondering:
Are markets sending a new message?
I riffed on this theme a month ago, at the start of earnings season. At that time most were “explaining” that stocks were warning of a recession, despite what economic data might show. With the market rally, there are some fresh lines in the debate.
- The pundit-in-chief still sees economic weakness in his calls with small retail companies. We were saved when the Fed took his advice and switched course on interest rates. He is available to be Fed chair if needed, and he would do the sort of research that is really required. Summary: A complex rationalization of a conflicting position. Paul Schatz has a nice roundup of key technical factors and the stubborn positions of traders who are unwilling to admit error. He writes about one such example as follows:
Another joker I was on Fox Business with cries everyday stocks rally that it’s all just manipulation. It’s all fake he says. As long as people disavow this rally, it is going to continue.
- Those on my “reliably bearish commentary” Twitter list have switched from emphasizing the market to emphasizing economic data. They are on a mission to find something wrong to describe every day. I often respond or comment, but this seems to be a waste of time. [To see this and other lists, just go to @dashofinsight on Twitter, go to my profile, and choose “list.” While you are there, please “follow” me. I’m still way behind Kim and the Real Donald. Suggestions for new list memberships are most welcome].
Brian Gilmartin made a similar effort with his polite treatment of a chart that is Silver Bullet material. He then did his own analysis of an objective question – how far ahead markets are looking. See his post for a discussion of the key factors and his conclusion that a decline in Q119 earnings is already in the market. Here is the chart in question. I am confident that the WTWA readership can spot the errors.
- Stocks often rise even when there is the “dreaded earnings recession” notes Ben Carlson. He looks at a lot of data and offers explanations for various time periods. He does not see a relationship between earnings growth and stock performance.
- Despite the rally since December, Scott Grannis concludes that investors “are still acting more out of caution than greed or optimism.” He sees no euphoria – just reduced worries.
As always, I’ll have my own conclusions in today’s Final Thought.
We follow some regular featured sources and the best other quant news from the week.
I have a rule for my investment clients. 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
Short-term trading conditions continue at strongly bullish for technically-based methods. This is a good indication for short-term traders. The improvement is enough for our trading models to edge back into the market, but it is not a complete “all clear” signal.
The technical background for long-term trading has improved to “slightly bearish.” The technical indicators are gradually rejoining our fundamental analysis.
Fundamental analysis remains strongly bullish. Earnings are excellent and the risk indicators are low. The overall investment climate has improved to “bullish.”
The Featured Sources:
Bob Dieli: Business cycle analysis via the “C Score.
Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.
RecessionAlert: Strong quantitative indicators for both economic and market analysis.
Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis. With important updates, including the strong employment report and weak retail sales, it is time for an update of the Big Four indicators most important for determining recessions.
The big miss in retail sales is ugly, but the Big Four approach helps to keep things in perspective.
Insight for Traders
Check out our weekly “Stock Exchange”. We combine links to important posts about trading, themes of current interest, and ideas from our trading models. Last week our trading models have edged back into the market. Conditions have improved but are not yet at an “all clear” point. Please note that this is not a short-term bullish or bearish call. It reflects our research on which environment provides the best potential for our own trading systems.
We reached out to fellow traders with the question, Where do You Go for Trading Ideas?
In addition to our discussion of the new model ideas, we suggested some of our own favorites. In addition, we published rankings from Oscar and Felix, featuring the Nasdaq 100. Pulling this altogether was our regular editor, Blue Harbinger.
Insight for Investors
Investors should embrace volatility. They should join my delight in a well-documented list of worries. As the worries (shutdown, Fed policy, trade) are addressed or even resolved, the investor who looks beyond the obvious can collect handsomely.
Best of the Week
If I had to recommend a single, must-read article for this week, it would be Prof. Tim Duy’s Beware of a Recessionary Bias Among Analysts. This problem is the biggest current challenge for individual investors, and Tim does his typical first-rate job of explaining the issue. One must understand that a soft patch need not lead to a recession. Importantly, do not project much from a single data point. He gently “cautions against” this type of analysis:
He then shows that the recent decline is from a surprising mid-year jump, that the long-term trend is intact, and that this is not really a leading indicator. You will enjoy his charts. Please also note the widespread circulation of the Rosenberg assertion.
Chuck Carnevale goes in depth to describe his own comprehensive research process. He takes a single stock and analyzes each step. Crucially, he emphasizes that his articles are designed to identify great candidates, not an instruction of what to buy. Readers know that I usually review the ideas in his posts and I always use his methods on ideas I find elsewhere. He also published Part 5 of his sector-by-sector search for bargains, this time featuring consumer services.
Pot stocks? Barron’s has a cover article (U.S. Marijuana Stocks: You’ve Got to Be High to Buy Them) on American entries, which cannot be exchange-listed. Jonathan Cooper suggests Canopy (CGC) a Canadian company which is the largest because it “has the best execution.” Two of our trading models bought CGC a couple of weeks ago, Barron’s and Cooper emphasize fundamentals. Stone Fox Capital joins in with a warning about Aurora Cannabis (ACB).
Considering a refining stock? If so, you must understand the crack spread. Andrew Hecht sees a lot of potential in Valero Energy Corporation (VLO). His sophisticated analysis is a vast improvement over the many who lump all energy stocks together and just watch the price of oil.
Time to join the robotics revolution? Al Root (Barron’s) suggests five ways to invest. General Motors has 30,000 robots, 13,000 of which are connected.
Some exposure to defense stocks makes sense. William Stamm does a nice analysis of General Dynamics (GD). He sees a favorable environment for a long-term hold. Check out his criteria, which go beyond the knee-jerk “what has worked lately?”
Seeking Alpha Senior Editor Gil Weinreich’s Asset Allocation Daily is consistently both interesting and informative. Each week he highlights stories of interest for both advisors and investors. This week I especially enjoyed his post about the Amazon decision – New York Shoots Itself in the (Amazon) Headquarters. Read the full post for Gil’s analysis, which emphasizes the lost economic benefits. The provocative post also attracted an active discussion in the comments.
Abnormal Returns is an important daily source for all of us following investment news. I read it daily, finding many good ideas. His Wednesday personal finance theme is of special interest for investors. Among the usual collection of excellent choices, I especially liked the Kiplinger article, Social Security Scams Are a Growing Threat. The scammers are finding ever-more creative ways to steal from the elderly. Read the article to learn some simple and easy protective steps.
Watch out for…
Mutual fund redemptions? Most of us do not worry about this issue, but Morningstar identifies the situations where there may be some danger. Problems can occur when the fund is excessively invested in illiquid securities and redemptions rise rapidly. This is a rare problem, but it does not hurt to know the signs.
Helpers bearing advice. Demonetized borrows the Warren Buffett terminology to analyze the transactional financial salesperson. Drawing upon his own experience, he reaches some great conclusions, including this one: Where you run into trouble is when you mistake a TRANSACTIONAL relationship for a FIDUCIARY relationship.
I placed special emphasis on the economic news this week. Understanding the economic indicators and trends helps keep investors on the right track. Without this perspective it is easy to overreact to a single bad report or even a small decline from a peak. Don’t get fooled by a chart with a big red arc over the recent peak and an arrow pointing sharply lower. Every big decline starts at a peak, of course, but some precede plateaus or new peaks. Only time and more information will help determine which.
“Davidson” (via Todd Sullivan) has a great track record bolstered by analysis which makes sense. He is a rare exception to my rule about using anonymous sources, mostly because I recognize good work when I see it. I also have Todd’s assurances that he is “the real deal.”
He notes that analyzing economic context and valuing stocks are the two key elements of investing. What is left out? Market psychology. He writes:
History records that markets have always responded after-the-fact. Investors have never missed an opportunity to profit once the opportunity is recognized. They have also routinely chased investments they believed might have but did not eventually have fundamental returns. The pessimism since Oct 2018 that a recession is looming provides the best opportunity in ~6yrs years for investors. There are many individual opportunities which appear attractive.
Contrast this with much of the pundit commentary. I watched a Bloomberg segment featuring a top executive from one of the big firms. He discussed the decline in earnings growth, emphasizing how tough the comparisons were going to be next year. Complete absent from his analysis was the stellar earnings growth in 2018 with no boost in stocks. Take another look at the long-term chart at the beginning of this post and the data from Brian Gilmartin. Now suppose that we considered earnings growth over a multi-year period, not separately for 2017, 2018, and 2019.
Focusing only on growth imputes legitimacy to the start of the comparison period. That is often quite wrong.
If you watch for this, you will see many examples of this shallow approach to the data.
[I agree with “Davidson” that there are many individual opportunities. If you need help in finding some, send us an email to main at newarc dot com. We can also discuss your personal risk-control needs, or our popular yield-enhancement program.]
I’m more worried about:
- Budget deficits and government debt. I don’t mind a reasonable deficit when times are tough. That is when demand for services is greatest and counter-cyclical policy most helpful. When times are good, it is time to reduce debt. William G. Gale (Econofact) has an excellent and readable discussion.
- Crumbling infrastructure.
I’m less worried about
- Border security. The Bipartisan Policy Center has a fact-filled discussion of past decisions and current trends. Do you know how much of the 1954-mile-long US/Mexico border is fenced? This is a basic fact, but you may be surprised by some of the trends. You can also see pictures of the types of fencing for both vehicles and pedestrians. The symbolism and politics in this story have crowded the economic and investment issues out of the discussion.