Jeff Miller | Nov 23, 2014 12:49AM ET
The upcoming calendar has plenty of data in a holiday-shortened week. There could be OPEC or Black Friday news. In spite of this avalanche of information, I expect commentators to look for an organizing principle. In a week when many will be giving thanks, there will be scrutiny of the new market highs.
Many will ask: Are investors too complacent?
A Personal Message
It has been a very good year for WTWA and our followers. I have had a lot of help, so I have personal thanks for many.
I must not leave out Mrs. OldProf, who has given up many Saturdays and Friday nights while I was writing. I might take off next weekend or do an abbreviated column while enjoying the visit of her family.
h2 Prior Theme RecapIn my last WTWA I predicted that media would focus on commodities, with special attention to the rebound potential. Instead, there was plenty of discussion of the Fed Minutes and the energy discussions were all pretty bearish. Even looking at the week’s history it might be hard to come up with a single theme.
By the end of the week, Melissa Lee and the Options Action traders were discussing some of the rebound action in commodities, with a focus on FCX (which I have been using as an example). But no excuses. Sometimes the theme is difficult to capture in advance.
Feel free to join in my exercise in thinking about the upcoming theme. 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. That is the purpose of considering possible themes for the week ahead.
h3 This Week’s ThemeThere is plenty of economic data this week, mostly crammed into two days of releases. On Friday those who are working will be greeted with the results of the OPEC meeting and early releases about Black Friday sales. It is a very tough week for my “Guess the theme” challenge.
I am going to fudge the exercise just a bit this week by discussing “complacency.” This has been a frequent recent pundit theme and is certainly a candidate for a week where it could be confused with “giving thanks” for past gains and warnings to take profits. I will venture out onto that limb and suggest that the week will feature the question: Have investors become too complacent?
The basic argument for this viewpoint is twofold:
The theme is worth a separate post, but let me highlight the most obvious responses:
I emphasize risk control and have special methods for avoiding complacency. You should, too. More about that in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information .
h3 Last Week’s Data/h3Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:
The Good
The news last week was mostly good, even better than stock prices suggested.
The Bad
There was not very much bad news. Readers are invited to nominate ideas in the comments, but remember that we are focusing on recent developments, not a list of continuing macro concerns.
Noteworthy
The most stolen car in my state is the Dodge Caravan? Check out your own state and the reason behind the unlikely results.
The Ugly
Ebola stock scams. The SEC has suspended trading in four small companies making “unverified claims.” Also beware of calls concerning private companies. (Reuters ).
The Silver Bullet
I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. Think of The Lone Ranger. No award this week. Nominations welcome!
h3 Quant CornerWhether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here .
Recent Expert Commentary on Recession Odds and Market Trends
regular updates to the “Big Four” economic indicators important for official recession dating.
TIAA-CREF asset allocation . I am following his results and methods with great interest.
Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.”
RecessionAlert : A variety of strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting market indicators.
This week Dwaine has updated one of his timing approaches in . It is a nuanced report, but you can check it out without charge. You should read it in full. Here is a key conclusion:
The SP-500 is on a tear. Normally such rapid advances coming from rare, deep, oversold levels and rare great-trough buying signals signify new bull-mark sequences with multi-month gains. However some intermediate corrections are likely on the way up. For now, some short-term breadth momentum has faded, but there are no immediate signs of an intermediate market-top forming. But this situation could change rapidly.
Stay tuned!
We are fans of The Bonddad Blog. Last week we highlighted Hale Stewart’s concerns about the global economy. His colleague, New Deal Democrat, has also been a recent skeptic about economic prospects. This week saw something of a change in his viewpoint – sparked by building permits! This is an indicator that I also favor. NDD helped to identify this as something that the ECRI (probably unwisely) dropped from their WLI series. His conclusion :
This doesn’t mean the economy finally achieves lift-off in 2015. But it pretty much takes contraction of the table for the US economy.
Paul Kasriel has a wonkish analysis of US and European monetary and fiscal policy. One reason that I read GEI is their embrace of a wide range of viewpoints. No matter what you think, you will find this piece stimulating. Here is the conclusion:
h3 The Week Ahead/h3The point is that in both the U.S. and the eurozone, there has been fiscal austerity in recent years. Yet, U.S. aggregate domestic demand has been considerably stronger than that of the eurozone. The tale of the two economies is that in one, the U.S., the Fed pursued a QE policy, resulting in the better of times. In the other, the eurozone, the ECB eschewed a QE policy, resulting in the worst of times.
There is a lot of data packed into three days of a holiday-shortened week.
The “A List” includes the following:
The “B List” includes the following:
Most of the speech making will be on hold for the holiday. The big news might come from Thursday’s OPEC meeting. We will also have the expected “flash bulletins” about Black Friday shopping. This could lead to some action in Friday’s slow and abbreviated trading.
h3 How to Use the Weekly Data Updates /h3In 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 continued the profitable bullish posture for another week. There is excellent breadth among the strongest sectors. Ratings have gotten a bit lower, but are still quite solid in many sectors. Felix does not anticipate tops and bottoms, but responds pretty quickly when there is evidence of a change. The penalty box can be triggered by extremely high volatility and volume. It is similar to a trading stop, but not based only on price. There has been quite a bit of shifting at the top, so we have done some trading. You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.
Traders might also be interested in Goldman’s top ideas for 2015.
Insight for Investors
I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The recent “actionable investment advice” is summarized here .
Whenever there is a market decline, we are bombarded with “explanations” and predictions of disaster. To keep perspective I wrote a section recently covering these three points:
If you missed this section from a few weeks ago, I urge you to check out the Investor Section of the earlier WTWA.
Taking advantage of what the market is giving you is always a good strategy.
h3 Other Advice /h3Here is our collection of great investor advice for this week:
Stock Ideas.
Interpreting Information. Morgan Housel covers many You will see plenty of familiar silliness and also have a good laugh from this article. Here are some of my own favorites from his list:
“He predicted the market crash in 2008.”
He also predicted a crash in 2006, 2004, 2003, 2001, 1998, 1997, 1995, 1992, 1989, 1984, 1971…
“More buyers than sellers.”
This is the equivalent of saying someone has more mothers than fathers. There’s one buyer and one seller for every trade. Every single one.
“Stocks suffer their biggest drop since September.”
You know September was only six weeks ago, right?
“We’re cautiously optimistic.”
You’re also an oxymoron.
h3 Market Outlook /h3There are plenty of stories about bubbles and crashes and what the Fed has done wrong. Those who focus on corporate earnings and use P/E ratios more recent than the Taft Administration have a more positive outlook. This is especially true if your concept of an appropriate multiple is adjusted for interest rates and/or inflation. If this viewpoint is correct, there is plenty of market upside left, especially if the economic cycle continues for another two years.
Bryan Rich has a “rational case ” for stocks rising 45% by the end of 2015. Here is part of the argument:
h3 Final ThoughtThe P/E on next year’s S&P 500 earnings estimate is just 16.8, in line with the long-term average (16). But we are not just in a low-interest-rate environment, we are in the mother of all low-interest-rate environments (ZERO). With that, when the 10-year yield runs on the low side, historically, the P/E on the S&P 500 runs closer to 20, if not north of it. A P/E at 20 on next year’s earnings consensus estimate from Wall Street would put the S&P 500 at 2,600.
It is vital to avoid complacency, asking what would change your mind. My sense is that most of those using the “C word” never ask about what might convince them to reach a different conclusion.
In July I did an extensive analysis of the potential for a mid-course correction. This included a list of things to watch for as downside risk. In later posts I highlighted the potential for upside surprises.
The key word here is “surprise.” There is no investment edge from repeating what you read in the morning paper. Here was my list – still worth watching:
If you have a good list of concerns to monitor you may count yourself as vigilant, not complacent.
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