Jeff Miller | May 25, 2014 04:57AM ET
In a holiday-shortened week, there is plenty of data. The Case-Shiller home-price index will set the tone on Tuesday morning. After last week's soft housing reports, many will be asking, Will housing weakness undermine economic growth?
h2 Prior Theme Recap/h2Last week I expected a focus on bonds versus stocks . It was a light week for data and the bond market rally was an ongoing mystery. That theme was as good as any, but nothing really stood out. The appetite for content created many "fluff" pieces and trading was very quiet.
As long as you did not take small moves seriously, there was an opportunity to do some buying at mid-week.
Forecasting the theme is an exercise in planning and being prepared. Readers are invited to play along with the "theme forecast." I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.
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/h3Has the housing recovery stalled out? If so, what does it mean for the economy?
Here are some perspectives:
It all seems pretty negative.
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 .
Last Week's Data
Each 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 little news, but it was mostly good.
The Bad
There was a little bad news as well.
The Ugly
Penny stocks, a market that is once again seeing a lot of action. (excellent 2011 article .
The Humorous
If you missed the video interviews with NYU grads about Janet Yellen's commencement speech, take a minute for a few chuckles. While some have a general idea of who she is, others were wondering and would have preferred a different choice. (Tina Fey?)
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. Last week there was no award. This week I have two great candidates. I'll save one for our next installment.
This week's award goes to Barry Ritholtz for Jalopnik on the same theme. When things get a little slow on the bad news front, some sources are happy to recycle old stories as if they were current. I wonder how many readers looked carefully at the pictures of the cars.
unveiled a new system .
RecessionAlert : A variety of strong quantitative indicators for both economic and market analysis.
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 (2 ½ years after their recession call), you should be reading this carefully.
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.
Blaine Rollins at 361 Capital always has some interesting ideas, with good charts and data. This week he cites an analysis from JP Morgan comparing current conditions to past market peaks – quite different!
We have a lot of data stuffed into a short week. Here is what to watch for.
The "A List" includes the following:
The "B List" includes the following:
Ukraine remains a wild card. There will be a little FedSpeak but also possible hints about ECB policy from a European conference. Negative rates in store? I don't care much about the regional Fed surveys.
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 has lost enthusiasm for the market. Few choices in our ETF universe qualified as fresh buys. (We use a rating of 20 or higher and exclude sectors in the penalty box). The broad market ETFs look a little worse than last week. The overall picture is neutral – with the Qs (PowerShares QQQ (NASDAQ:QQQ)) slightly positive and the Russell 2000 (iShares Russell 2000 Index (ARCA:IWM)) slightly negative. We are still fully invested for Felix trading accounts, but the ratings are marginal holds. We will probably have reduced positions and might even be completely out by next week unless there is some improvement.
Those who want to follow Felix more closely can check us out at Scutify , where he makes a daily appearance to join in vigorous discussions about trading.
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 .
We had enough volatility to do some additional buying, replacing some enhanced yield positions lost at options expiration.
Those trying out our Enhanced Yield approach should have enjoyed yet another good week in a sideways market. Bespoke illustrates this in the current market:
The time decay in last week's slow trading was dramatic but rather predictable. It is always satisfying to make money when nothing is happening. To do so it is important and helpful to own value stocks that pay dividends and add some hedging via short calls. I have written several times about examples that you can try on your own. It reduces your risk.
Start small and get the sense of how to do it. This week on Scutify I responded to a reader question about International Business Machines (NYSE:IBM. I explained that I traded it versus the JUN 190 calls. This has been a rinse, lather, repeat position for us. The stock does not seem explosive to the upside. We have collected dividends and call premiums and played the trading range. Friday the stock moved a little higher while the calls actually declined in anticipation of the long weekend. You won't read that in any book about option deltas!
Here are some key themes and the best investment posts we saw last week:
Summer melt-up? I am not necessarily predicting this, but we all need some balance in our reading. It seems like the pundits and the media are very negative. The emphasis on top-calling makes the risk/reward seem out of balance. The source expects a final surge and then does the obligatory crash prediction. Sheesh! (BAML via Business Insider ).
Time to avoid small caps? The noisy sources emphasize the dire implications of the small cap weakness. Our programs hold these stocks only in our "Aggressive Program" and even then in small allocations. The entire Russell 2000 is equal to about six stocks in the S&P 500. There is big reward, but also big risk. If you are worried about risk, choose larger stocks. Here is a nice analysis showing the distinction between small and mid-caps.
Be careful with ETF choices and trading. Many investors treat ETFs as a cheap substitute for mutual funds with the advantage of more liquidity. There are some problems with that liquidity. Sometimes the ETF holds illiquid holdings, preventing a fair settlement price. On other occasions there are too many sellers hitting the exits at the same time. I regularly trade in ETFs and I am not warning against the entire asset class. You just need to use caution in your choices and trade timing. Tracy Alloway at the FT has a good post on the subject.
Watch out for slick salesmen selling yield. Josh Brown already warned you about brokers and incentives in his excellent book, which I entire post. Conclusion: Someone selling you an amazing yield is probably exaggerating and collecting a big fee. Maybe you suspected that…
Want to know the most popular stocks owned by big hedge funds? They must reveal the holdings and you can see the list in this article by Steven Russolillo of the WSJ . Pretend that you are playing Family Feud and try to guess stocks from the top 5. Answer at the end of the post.
Barry Ritholtz seems to have a new great theme each week in his BloombergView column. This time he discusses risk, using odds of death to provide an out-of-the box challenge to investors. We all over-estimate the odds of dying from terrorism rather than mundane causes like heart disease. The same story is true for investors who exaggerate the odds of market crashes. Read the entire post .
Leon Cooperman, Chairman and CEO of Omega Advisors spoke at Columbia Business School . His chart-packed presentation illustrated the improved financial situation for both households and businesses, as well as catalysts for near-term action. Here is one of the many good charts, leading to his conclusion that "treasuries and corporate bonds are uninteresting and unattractive."
If you are obsessed about possible market declines, you have plenty of company. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. Check out our recent recommendations in our new investor resource page -- a starting point for the long-term investor. (Comments and suggestions welcome. I am trying to be helpful and I love and use feedback).
I was surprised at the traction from the Zillow story about underwater mortgages. Everyone's focus was on the 18.8% rate with little comment that this is much better than the 31.4% rate from only two years ago.
The stories also characterize the market in terms of simple stereotypes. This makes for a compelling story, but it is not good economic analysis. Markets actually reflect a distribution of participants with different price points and motives,
A real economic study would take note of a few factors:
To summarize, if you view housing as a market instead of a few stereotypes it is easier to see how some progress could be possible, progress that includes new construction. Economic growth would be better if we simply had some relief from the housing "drag" of the last several years.
h3 Top Hedge Fund Stocks/h3Top five include Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), General Motors (NYSE:GM), American International Group (NYSE:AIG), and Time Warner Cable (NYSE:TWC). How many did you guess? How many do you own?
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