Jeff Miller | Feb 08, 2015 01:46AM ET
With a modest schedule of data releases, we can expect more analysis of last week’s news. Trading in several markets changed course rather abruptly. With traders poised to spot any change in trend, the question will be whether this shift is for real.
Is it finally time for “Risk On”?
h3 Prior Theme Recap/h3In last week’s WTWA I predicted that the deluge of economic data would be closely examined for signs of weakness. Put another way, would the economic releases confirm the story of the markets in commodities and bonds? The question was a good one, and the answer was “no.” Friday’s employment report was the final element, changing the terms of the debate from deflation concerns to that old standby, worrying about the Fed.
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 Theme/h3The quirks of the calendar sometimes result in a quiet week following one crammed with data releases. Such is the case in the week ahead, but there is plenty of food for thought. Strength in oil, commodities, and stocks combined with weakness in bonds, utilities and even the dollar. It was the first 2015 sign of a change in market tone. Traders were asking: Is it time for “Risk On?”
Background
Over the last two months I have carefully raised and explored the “message” from various markets.
These themes all gave due respect to the approach of seeking a “message from the market.” This is a favorite for most traders and pundits, but it often serves to explain the past. Few seem to find predictive edge from this approach, although it sounds good on TV.
The alternative is to use economic data and corporate earnings to discover where markets may not be efficient. This helps to identify sectors and stocks that are mispriced. Last week I suggested that it might be time to start with the economic data rather than market prices. This advice echoed my 2015 Annual Preview.
h3 The Viewpoints/h3Here are the main contenders:
The tone change was apparent in oil, bonds, utilities, and other markets. The trading in TNX is typical. This is a CBOE product that tracks the ten-year yield. Just divide by ten. Pick your own upside target for the first move.
And here is the same story told in utility trading – last year’s big winner and last week’s big loser (via SPDR Select Sector - Utilities (NYSE:XLU)).
As always, I have some additional ideas 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 occasions something really good. My working definition of “good” has two components:
The Good
Despite the market reaction, there was plenty of good news last week.
The Bad
The bad news included some significant economic reports.
The Ugly
Measles? Libya again? Medical records hacking? Discussion welcome!
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, but nominations are welcome. I am seeing plenty of bad charts, but little refutation.
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 .
Recent Expert Commentary on Recession Odds and Market Trends
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.” This week’s report covers a range of important issues beyond the headlines, including interesting sections on part-time employment as well as important sectors. An example of important information you do not see elsewhere is the analysis of job growth in trucking, “…if there is nothing to put in the trailer, you don’t put anyone in the tractor.”
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.
Big Four summary of key indicators.
When Will the Panic Buying End “? Read the entire piece for the full interpretation behind this interesting chart:
It is a modest week for economic data.
The “A List” includes the following:
The “B List” includes the following:
There is a little FedSpeak as well as appearances and meetings featuring world leaders. Important corporate earnings continue.
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 continues a “neutral” posture for the three-week market forecast, but it continues to be a close call. The data have improved a bit, but are still marginally neutral. There is still plenty of uncertainty reflected by the high percentage of sectors in the penalty box. Our current position is still fully invested in three leading sectors, and we have gotten more aggressive. For more information, I have posted a further description — . You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.
Brett Steenbarger has typically wise advice for traders – thinking about trading as an entrepreneur would a new business. Great stuff .
A sadder note for many of us is the end of floor trading in many contracts at the Merc. The several Chicago floors at one time had over 10,000 traders. To be successful required a unique blend of spirit, fast thinking, intelligence, athleticism, integrity, and courage. You also had to be impervious to distractions like people spitting on you, poking you with a pencil, or getting in your face. Trades were cleared at the end of the day. If you did not honor a trade, you were soon gone.
Craig Pirrong has a great account of this change, historic but inevitable. Follow his links to some online video documentaries that provide realistic portrayals.
As I have noted for five weeks, Felix continues to feature selected energy holdings. Felix is not just a momentum trader!
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. Major market declines occur after business cycle peaks, sparked by severely declining earnings. Our methods are focused on limiting this risk. Start with our Tips for Individual Investors and follow the links.
We also have a new page summarizing many of the current investor fears . If you read something scary, this is a good place to do some fact checking.
My bold and contrarian prediction for 2015 – that the leading sectors would lose and the laggards would win – looked a lot better this week. If I am correct, there is a very, very long way to run for the cheapest market sectors – energy, technology, cyclicals, and financials.
Other Advice
Here is our collection of great investor advice for this week:
Being Contrarian
If you were going to pick one link to read this week, I recommend this Michael Mauboussin piece . It will take a few minutes, but be worth your time. He explains, using some great examples, why it is not enough to be contrarian. You also must have edge! Sometimes (often?) the crowd is right. Markets may be accurately priced. Can you spot the difference? Will you be patient enough to let your system work? (I confess that part of my love for this work is that it is exactly what I and other value managers try to do).
The Quest for Yield
David Merkel does a great takedown of the new eBonds. We see another version of financial alchemy, turning risky assets into something with an AAA rating. Even if you cannot see a flaw, it might simply mean you need to look farther. Risk must be reflected somewhere, and you need to know whether counter parties can pay.
On the positive side in the quest for yield, Charles Sizemore makes the case for REITs. He explains why this should be a diversification for many and an alternative to bond funds.
Or maybe not! Oliver Renick and Brian Louis explain that REITs are over-valued and poised to fall . Expect bond-like, rate-sensitive performance.
Stock and Sector Ideas
Jeffrey Kleintop warns against being “fooled by currency .” Citing Europe and US multinationals, he notes that a “weaker currency is no substitute for a stronger economy.”
Someone is making a big bearish play in the XLU, the Utilities SPDR. The increase in put buying on Friday was 852%.
Consider using Liquid Alts both for hedging and diversification. Rob Martorana is our go-to expert on this topic. I am less worried than he is about the “aging bull” but I consider his recommendations with great interest and respect.
“Secret” hedge fund picks, leaked from a big-name conference. Including short ideas. (CNBC ).
Market Outlook
Nouriel Roubini calls out the doom-and-gloomers. Here is a key quote:
One result of this global monetary-policy activism has been a rebellion among pseudo-economists and market hacks in recent years. This assortment of “Austrian” economists, radical monetarists, gold bugs, and bitcoin fanatics has repeatedly warned that such a massive increase in global liquidity would lead to hyperinflation, the U.S. dollar’s collapse, sky-high gold prices, and the eventual demise of fiat currencies at the hands of digital cryptocurrency counterparts.
None of these dire predictions has been borne out by events.
Mark Hulbert says that Dow Theory is now flashing a “sell signal.”
h3 Final ThoughtRisk. Many investors wisely begin by thinking about risk. That is how I start each interview with a potential client. Everyone has the need to protect a portion of the investment portfolio, with the assurance that any losses will be modest.
It is not always easy to identify safety. Last year’s most successful investments were bonds and bond proxies. The quest for safe yield has become a crowded trade. Those celebrating the success of bond mutual funds and their utility payouts should look at this week’s results. It is a very small taste of what will happen when interest rates return to more normal levels.
Reward. And we all need some investment reward, either to keep pace with inflation or to increase the retirement nest egg. There is excessive focus on arguments about the overall market valuation. There are plenty of cheap stocks and sectors.
Take only one example. The energy names that I mentioned in the annual preview – refiners and integrated oil companies that actually can benefit from lower oil prices – are all up about 10% in less than a month. (Valero Energy Corporation (NYSE:VLO), Marathon Petroleum Corporation (NYSE:MPC), Chevron Corporation (NYSE:CVX)).
Regional banks that allegedly have exposure to energy company loans are another happy hunting ground.
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