Jeff Miller | Jun 21, 2020 05:50AM ET
The economic calendar is normal including reports on home sales, consumer confidence, personal income and spending and jobless claims. The final revision of Q1 GDP will be of less interest. While there is growing interest in economic data, most investors and analysts know that the threat from COVID-19 has not ended. Bloomberg Businessweek’s cover story about The Great Disconnect .
The most important question remains:
How should investors interpret the mixed economic and market messages?
In my last installment of WTWA, I asked whether investors could depend on the rebound trend. So far, so good. The list of “propositions to consider” will be a good touchstone in a few months. With my vacation at an end, today’s post provides a better opportunity to examine these questions more completely.
The Story in One Chart
I always start my personal review of the week by looking at a great chart. This week I am featuring Investing.com’s version. It has many interactive features including the news indicators which I can show only in static form. I am also showing both the S&P cash version and the S&P futures version, illustrating how different the world looks when watching continuous trading.
In the latter chart we can see some big moves from overnight highs and lows as well as larger daily changes. While there is an active arbitrage trade between futures and cash, the futures react to events more quickly.
On a cash basis, the market rose 1.9% on the week and the trading range was 6.4%. My weekly indicator snapshot monitors the actual volatility as well as the VIX (see below).
Here is the updated tracking for sectors. Consumer staples, health care, and utilities are especially interesting.
Noteworthy
Tesla (NASDAQ:TSLA) is now “the world’s most valuable automaker.” Visual Capitalist compares the companies with a comment on many of them. Take note especially of the irrelevance of actual vehicle production numbers.
The News
Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
New Deal Democrat’s high frequency indicators have always been a valuable part of my economic review. They are especially important as we all try to monitor the economic recovery. His three time frames all show some improvement – positive in the long-term, neutral in the short-term, and “less awful” in the nowcast. NDD warns that this all depends “on the trajectory of the coronavirus pandemic.”
The rebound in sales largely reflects the loosening of restrictions on business activity after two months of stay-at-home orders to combat the coronavirus pandemic. Along with pentup consumer demand, federal tax payments to families and more generous unemployment benefits also helped stoke higher sales.
Yet even after the rebound in May, sales were still 6% lower compared to the same month in 2019, showing the lingering damage caused by the lockdown of the economy.
Continuing claims were 20.544M, slightly lower than the prior week, but still very high. This series lags initial claims by one week and is important to monitor rehiring.
The suicide of a 20-year old student after apparent massive losses in his trading account (Dr. Brett comes to mind, not as counseling but for a solid grounding in what trading requires.
The Week Ahead
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.
The economic calendar is pretty normal, featuring home sales, jobless claims, personal income and spending, Michigan sentiment, and PCE prices. The final estimate of Q1 GDP is not very interesting – old news and too many events since then. While economic data is getting more attention, attention will focus on the Great Reopening and whether states are avoiding an increase in COVID-19 cases.
Financial media will also find it difficult to resist drifting into coverage of political stories rather than the economy and markets.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Some are comforted by the market rally. Many veteran observers are amazed. It is easy to find “experts” making predictions for extreme market moves. The most important question we face?
How should investors interpret the mixed market and economic messages?
Confusion reigns! Some attribute the market rally to day trading, supported by millennials and sports gamblers with nowhere to get action except Russian table tennis and Korean baseball. This inspires talk of a bubble and an imminent crash by “stock market legends (MarketWatch ).
“This is really the real McCoy, this is crazy stuff,” said Grantham during a Wednesday afternoon interview on CNBC that appeared to knock some of the stuffing out of a market that had been drifting along listlessly on Wednesday.
Grantham painted a very dire picture of the investment landscape in the U.S., suggesting that rampant trading by out-of-work investors and speculative fervor around bankrupt companies, HTZ, -3.88% , reflects a market that may be the most bubblicious he’s seen in his storied career.
Not so fast, says the Pundit-in-Chief. Cramer rails against wealthy money managers for scaring investors out of market with bubble talk
“Our viewers don’t want to be talked out of” investing in stocks and potentially making money, Cramer said. “Jeremy Grantham, he may not want it. He may be so rich he doesn’t need it.”
“Our viewers have every right to capture that money despite many people coming on and saying, ‘No, that’s a bubble,’” Cramer said. “Yes, you can lose money,” he added, but also asked, “Why can’t our viewers make money?”
“Davidson” (via Todd Jones ) contends that any excessive valuation is concentrated in a few Mega-Caps driven by momentum investing. He sees economic fundamentals that are “telling a story of a rapid recovery.”
Our mission, should we choose to accept it, is to find some clarity in these extremely mixed messages. I will review each of the leading candidates and then describe my own conclusion.
Many average investors are reassured by the size of the market rebound. They are encouraged by the segment of the punditry that assures us that the “market is always right.” In particular, investors do not see rising coronavirus cases as the biggest market threat .
Nick Maggiulli’s explanation Is the similarity between the sports bettor demographic and the demographic of Robinhood’s customer base, men between the ages of 25 and 34. He goes on to track specific stocks that are favorites of the newly-minted gurus. These include bankrupt issues like Hertz (HTZ).
People, including the new day traders, are victims of sharks, writes Stefan Cheplick .
I am reminded, in moments like this, at how many people are suddenly experts at financial markets. They are connoisseurs of all things easy and fast money. Out of nowhere, there is a new group of people telling me about “double bottoms” “big bottoms” “stocks to buy” and “these things called call options.”
I find it amazing that we can send rockets to outer space and have them land safely in the middle of the ocean. Or that we are making breakthroughs for Coronavirus cures in record time. But, after a few hundred years, people still get scammed by ads that say How To Get Rich Day Trading.
And then he describes reality.
Most of you reading, however, know it does not work like that. It’s more like:
Many investors have developed faith in the Fed after memorizing the Neel Kashkari sees a possible reversal in job gains if “the virus is not tamed soon.” A second wave is now his base case.
All 50 states are now in some stage of reopening, nearly always with some restrictions on businesses. There are plenty of pictures of happy people enjoying some freedom from sheltering in place. There are plenty of crowds.
There are also reports of increases in COVID cases. The visual image is one of those who are not sick. The statistical is often regarded as manipulated, error-prone, or focused on small groups of people. Unless and until there is more tangible evidence and a government response, I expect many to downplay COVID-19 as an economic or market threat.
Here is the main explanation for the mixed message: We are trying to squeeze information from data when nothing is there. Let me explain a bit.
I do not see a mixed message. Properly interpreted, economic data show a modest and expected rebound from the lows. Something is to be expected from the economic reopening. Stock prices have become unhinged from a long-term view of economic growth and earnings.
As usual, I have a few more comments in my “Final Thought.”
Ideas for Investors
I have decided to switch the investor section to a separate post. I hope to run it nearly every week. The content will be similar but including more of my personal reactions and some interpretation from our Great Reset project. One of my personal 2020 resolutions was even more emphasis on investor education – not just recommending stocks but learning how to find suitable choices. I have created a resource page where you can join my Great Reset group. You will get updates about what is being studied and can join in the process. There is no charge and no obligation, but I hope you will join in my Wisdom of Crowds surveys. I need more wise participants! The latest survey results are part of my most recent report. The results of our team effort will be published on a regular basis, so you will be joining me in contributing to a greater good.
Quant Corner and Risk Analysis
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.
For a description of these sources, check here .
The C-Score increased again. It is a dramatic change in underlying factors which normally provide important indications. This level is an extreme outlier that cannot readily be interpreted. I continue my rating of “Bearish” in the overall outlook for long-term investors.
Bob Dieli : Business cycle analysis via the “C Score”.
Brian Gilmartin : All things earnings, for the overall market as well as many individual companies.
Georg Vrba : Business cycle indicator and market timing tools.
David Moenning : Developer and “keeper” of the Indicator Wall.
Big Four .
Another way to consider the data is to ask how far each series is from its high.
David Moenning adds to his usual indicator update by asking, Is There Any Upside From Here? Using a different earnings analysis from Ned Davis Research, he reaches a pessimistic conclusion. One can argue about the right multiple, but he is considering a forward multiple of 22 on 2021 earnings.
Final Thought
For ten years I stayed on the right side of the market by sticking with proven indicators. This meant ignoring headline “risk” designed to create page views. It meant maintaining perspective when there were some weak economic reports. It meant a focus on corporate earnings and the relative attractiveness of investments.
Most of all, it meant attention to risk. Controlling risk through your asset allocation is not the same thing as trying to time the market. I reduced position size on some occasions, but never made extreme moves. To my surprise I have had to remove some regular market commentators from my “reliably bearish” Twitter list. I guess they are true contrarians, determined to be wrong no matter the circumstances!
The best process is even more important in a bear market. When risks are not obvious and are ignored by many, it is a signal for more caution, not less.
I’m more worried about
I’m less worried about
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