Jeff Miller | Oct 12, 2014 03:33AM ET
Last week featured a low signal to noise ratio – speech after speech, but little fresh information. This week heralds the start of earnings season. While we have a normal measure of government data, market participants will carefully parse the announcements and conference calls.
This week will be all about earnings.
h3 Prior Theme RecapIn my last WTWA I predicted that the media would focus on the speechifiers, be they central bankers, political leaders, or pundits. This proved to be amazingly accurate. Each of the major speeches was covered extensively and the lesser ones also got significant play. It shows what will happen when there is a vacuum in real news. None of the speeches really broke new ground. We could all have predicted the major theme of each in advance. There was little else to report, and the story had a very negative tone.
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/h3In sharp contrast to last week’s data vacuum important fresh news about corporate earnings. The stories from around the world will continue, and there is a normal flow of fresh economic data. Despite this I expect the earnings stories to dominate the financial news flow. This is independent, non-government data and it is directly relevant for future market performance. It also provides a fertile source for pundit spinning, always a main driver for financial media.
Can corporate earnings reverse the recent market decline?
Here are some key takes:
The upcoming earnings week is an important story. I want to provide more emphasis than usual on last week in addition to the week ahead. Please read the investor section carefully for these ideas.
Before turning to my own conclusions, 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
There was not much news. The US economic picture remains solid, while China is a bit weaker and Europe at near-recession levels.
The Bad
Most of the bad news was not about the economy. It was about the stock market reaction to last week’s speeches.
The Ugly
This week’s ugly news is the continuing Ebola story. The need for treatment in West Africa and international issues are now both commanding attention. It is a sad commentary that the story only gets big when there is a single US case. The economic effects are still relatively modest overall, but include concentrated effects in some sectors. Airlines are fighting the battle (via 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, although I see plenty of good candidates deserving sharp analysis and refutation. How about the “Satan Omen?” Nominations 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 .
Recent Expert Commentary on Recession Odds and Market Trends
Doug Short : An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (three years after their recession call), you should be reading this carefully. Doug includes the most recent ECRI discussion concerning continuing economic weakness in Japan. Doug covers the possible implications for the US. The ECRI has an update criticizing the Fed analysis of labor markets. This deserves discussion, but is beyond our scope in the weekly article.
Read the entire post , but be prepared to add context from your other work.
improve performance from low-volatility stocks . I am following his results and methods with great interest.
I added to the recession discussion with some comments on the 2011 ECRI forecast and a possible repeat given current commodity prices.
Bob Dieli does a free download of Bob’s monthly employment report . Not only does this provide a snapshot of the employment market as of September, there is great historical context. Take advantage while this is still available.
h3 The Week Ahead/h3We have a more normal week for economic data and events.
The “A List” includes the following:
The “B List” includes the following:
The speech calendar – loaded up last week – is now at a minimum. Fed Chair Yellen speaks on Friday.
The big stories of the week should come from corporate earnings announcements.
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 has continued the bearish call initiated two weeks ago. Most sectors have a negative rating and the broad market ETFs are all negative. The Felix trading accounts were completely invested in three inverse ETFs at one point last week. Trading accounts are now 1/3 inverse, 1/3 bonds, and 1/3 a non-US ETF.
You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.
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 want to do three things:
What is not happening
Sometimes you need to begin by clearing away misleading information. Here are assorted explanations that I saw last week:
Factors behind big market declines
The biggest market declines have all involved either a recession (defined as a significant decline from a business cycle peak) or a major increase in financial stress.
Current best strategy
If you have a good investment strategy, it is unwise to overreact to relatively normal fluctuations. Stocks climb a “wall of worry.” This means that the stories you read and see on financial TV are already “in the market.” You need to think about what might be different. This was the key idea behind my controversial call for Dow 20K (Scott Grannis does a nice job with this topic, including this chart of volatility.
If you are a value investor, it is up to you to determine what your investments are worth. If your methods are sound and the market disagrees, then you can use volatility to add more to your most attractive holdings. If you have made a mistake in your choices, you need to re-evaluate and move on. Price is what you pay; value is what you get.
If these fluctuations make you uncomfortable, then it may be right to reconsider your asset allocation.
This approach is basically what Warren Buffett and other leading value investors do. To help you, start reading the work of Chuck Carnevale. He relentlessly focuses on the fundamental value of each stock. Everything he writes has great value. We never buy a stock without consulting his screens as part of the process. While we do not always agree with the final verdict, we always appreciate the analysis. Start with this post , directed at retired investors.
We continue to use market volatility to pick up stocks on our shopping list. We do this because we also sell positions when they reach our (constantly updated) price targets. Being a long-term investor does not require you to “buy and hold.” Taking advantage of what the market is giving you is always a good strategy.
Other Advice
Here is our collection of great investor advice for this week:
I do not have a special insight into earnings season, but I do expect a focus on outlook. A skeptical audience will be watching for companies that are worried about a strong dollar or weakness in Europe or China.
I also do not have a personal forecast for next week’s trading. There are plenty of attractive stocks and plenty of funds that are lagging in performance. At some point the psychology will change. Whether it will happen next week is anyone’s guess. There is a fundamental floor on the market.
Last week I invited people to think about some possible positive events. I got very little in the comments on this topic, partly because it is so challenging to do. Let me illustrate with a few ideas. Since they all seem unlikely, no one is thinking about them.
What if China announced a bid for another oil drilling company?
What if Germany became more active in encouraging fiscal policy changes?
What if OPEC signals a change on production limits? The “instant experts” think that the Saudi’s have a deep conspiracy to crush the US fracking industry. What if the explanation is more mundane? (See
What if consumer spending takes a firm upturn in the US? As he does so often, Joe Weisenthal gets the key point right:
One month ago there were literally no bears left. Everyone had flipped bullish, and nobody could think of a good reason for stocks to go down.
And now, people can’t think of any “upside catalysts,” and everyone thinks the markets are going lower.
What’s interesting is that there’s no obvious change of stories. Sure China is slowing, and the European economy is belly flopping. But so? How is that news? It’s not. It just becomes news and becomes significant after the market sells off.
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