Jeff Miller | Jun 08, 2014 03:52AM ET
In sharp contrast to last week, the punditry has less to chew on this coming week. This leaves the media agenda wide open. Discussion will range freely on the potential for the economy as well as the markets. Expect to see stories about China, Europe, low volume, low volatility, and the implications therefrom.
Everyone is expecting the quiet time to end, with a break in one direction or another. Will it be this week? Or are we in for a continuing quiet time?
h2 Prior Theme Recap/h2Last week market summary – a good discussion featuring this chart:
Forecasting the theme is an exercise in planning and being prepared. Readers are invited to play along. I work on it each week because it helps to prepare your game plan for the week ahead. It is not as easy as you might think. Feel free to suggest your own likely theme in the comments.
Naturally 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.
h3 This Week's Theme/h3I suggest: Be prepared! It is quiet, too quiet.
Nearly everyone expects a rebound in volatility.
Here are some perspectives.
As always, the conclusion may depend upon your time frame.
We always use our planning to be prepared, but the current market is a special test. Charles Kirk sets a great example for traders. His invaluable weekly chart show cites both the bullish underpinnings and also the possibility of an early-week test of recent trading gaps. He explains what to watch. (The Kirk Report has a small membership fee, which you will recover almost instantly in your personal trading. The weekly magazine is an entertaining and instructive mix of ideas that I always review in my preparation).
As usual, I have some thoughts that I will share in the conclusion. 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 occasions something really good. My working definition of "good" has two components:
The Good
There was plenty of encouraging news.
Sources of all political stripes contrasted the all-time high in jobs with the reality of continuing high unemployment. No serious analyst questions this. The economic recovery may be enough to retire Bill McBride's scariest chart, but it is certainly not "mission accomplished." Bob Dieli says it well :
As welcome as this news is, you should keep in mind that it is the economic equivalent of winning the first game of the World Series. Namely, a good place to start, but hardly enough to get you a champagne shower in the locker room.
The Bad
There was also a fair share of bad news last week.
The Ugly
The VA hospital scandal. The causes of delayed care will eventually be revealed. We can and must do better for veterans. The Senate will hold hearings. In the House, the "other Jeff Miller (R-Fla.)" is on the job. (The Hill ).
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 are always welcome.
h3 Quant Corner/h3Whether 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 .
RecessionAlert : A variety of strong quantitative indicators for both economic and market analysis.
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." One of his conclusions is whether a month is "recession eligible." His analysis shows that none of the next nine months could qualify. I respect this because Bob (whose career has been with banks and private clients) has been far more accurate than the high-profile TV pundits.
best continuing update of the most important factors to the NBER when they analyze recessions. In general, you need to have a business cycle peak and then a significant decline. In contrast with Bob Dieli's method, this approach shows a possible peak in some of the elements. The most recent update includes employment.
Doug Short uses data from initial and continuing unemployment claims to analyze the probability of recession. Quant types will appreciate his data-driven analysis and fine charts. Some of the themes are similar to those we draw upon from Bob Dieli, and the conclusion is also familiar:
h3 The Week Ahead/h3If history is a guide, the current percent ratios of weekly claims to the labor force contradict the minority view that the US is currently in recession (e.g., ECRI and a few bearish bloggers). Instead, the ratios suggests that even a near-term recession would be months in the future.
We have a light week for economic data.
The "A List" includes the following:
The "B List" includes the following:
There will be more FedSpeak as well as news from China on inflation and retail sales.
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.
h3 Insight for Traders /h3Felix sees more opportunities -- fresh buys in the ETF universe, as more sectors emerge from the penalty box. A high penalty box level implies less than normal confidence in the ratings. This week we were fully invested in the top three sectors for our trading accounts.
The overall call remains very close between bullish and neutral. Even in a neutral market there are often good sectors to buy. This week Felix is even more bullish for our three-week time horizon.
h3 Insight for Investors /h3I 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 current "actionable investment advice" is summarized here .
The market did not provide much opportunity for fresh buys. The gentle upward action is fine for long-term investors and excellent for those trying out our Enhanced Yield approach.
Here are some key themes and the best investment posts we saw last week:
David Tepper has been reassured . Tepper famously made a "Fed has your back" comment that started a rally in late 2010. The idea was that economic strength did not matter since the Fed would act if necessary. Stocks rallied that very day. While the idea was not unique, it carried credibility when coming from a top hedge fund manager. At the recent SALT conference Tepper said he was nervous about the market, apparently sparking 40-50 bps of pull back. This week he professed some satisfaction with the ECB action, although he sees them as still "behind the curve." While I think that too much is made of this, it is worth reviewing.
The bull market has plenty of time to run according to Ed Yardeni – at least another year. He shows the relationship with Arthur Okun's misery index and illustrates with a helpful chart:
Eddy Elfenbein explains that the rotation to value stocks is "still on." Check out his ETF-based chart.
I provided some advice for young investors . My hope is to make this an ongoing resource on my site. Please take a look and offer some comments. Some readers wrote that they passed the information along to young people in their lives. I hope that many find it helpful and it stimulates more ideas and sharing.
Want to be like Warren? Here is an interesting analysis of how he succeeds. "It may be possible to build, in essence, a Buffett-bot portfolio. No Oracle required."
There are still plenty of interesting ideas for cheap stocks. Here is an interesting list from MarketWatch:
The last few weeks have reflected a continuing improvement in economic data. While I do not like to use a "weather" excuse, I also insist on recognizing reality. Some of the economic activity in Q1 was lost forever. Some was pushed forward, creating an artificial boost. It may take a few months to see the actual trend.
Housing is not reacting as positively as auto sales. Employment is a little better, but not great. Corporate profits are encouraging.
Scott Grannis pulls this all together , explaining that 2% job growth, boring as it may seem, implies higher P/E multiples and rising interest rates. The key? No recession in sight. That has been my theme since I noted the weakness in the ECRI method and replaced them in my forecasts, many months before their erroneous recession prediction.
I agree with Josh Brown that full year GDP forecasts will be lower, but only because the upbeat year-end data must blend the known negative data from Q1. The list of 26 worries is an essential part of the trek to Dow 20K , my forecast from four years ago.
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