Jeff Miller | May 28, 2017 01:59AM ET
The holiday-shortened week ahead features many economic reports, including the most important. The biggest news is at week’s end, so both market participants and pundits will have time to settle in after the long weekend. When they get around to the calendar, I expect many to be asking:
Will we finally see some volatility?
Last week the economic news was mixed, but the market showed strength anyway.
Theme Recap
In my last WTWA I predicted a quiet week for data with plenty of talk about the Fed. That was a reasonable guess, but there was not really a dominant theme. There was some discussion about the Fed balance sheet and policy changes, but it was competing with plenty of other news.
The Story in One Chart
I always start my personal review of the week by looking at a chart of S&P 500 market performance.
While there were not many big swings, the 1.4% gain for the week also took markets to intra-day highs.
h3 The News/h3Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “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!
The economic news last week was mixed, but the market reaction was positive.
The Good
The nowcast for the economy remains positive, as does the near term view, with both stocks and jobless claims leading the way. The longer term forecast remains neutral to positive, shading a little closer to neutral based on the tightening yield curve, less robust growth in real money supply, and the miss in corporate profits.
The Bad
The Ugly
Terrorism in London (UK home to 23,000 jihadists? ) and Egypt lead the week’s “ugly” news. This is another “headline” event that is important, but not currently deemed to be a “market” story.
Noteworthy
Did you know that 40% of millennials use Facebook’s (NASDAQ:FB) Walter Cronkite warned that the public relied too much on TV news. Things change.
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. This week’s award goes (once again) to Josh Brown. He is often a candidate and one of the most frequent recipients. This week he describes a Fast Money guest who “came on to discuss the Plunge Protection Team urban legend as a bonafide explanation for why the market has been acting the way it has”. He goes on to write:
Now obviously, the existence of a Plunge Protection Team (or PPT), is demonstrably ridiculous. Especially when you consider the fact that we’ve seen the market cut in half twice during the last 17 years, with dozens of instances of 10 and 15 percent corrections all along the way over the last 29 years since the end of Reagan’s term. The idea that there could be some clandestine, bipartisan shadow organization, with enough money to prop up a global stock market, and the solemnity required to faithfully do so across a half-dozen Presidential administrations and all manner of Congressional configurations, is akin to believing in the Area 51 myths or the moon landing hoax.
Readers will certainly note the relevance to this week’s theme. Read the entire post for more background and some great comparisons.
h2 The Week AheadWe 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. You can make your own predictions in the comments.
The Calendar
We have the biggest week of the year for economic reports – and it is jammed into a holiday-shortened week.
The “A” List
The “B” List
There is daily FedSpeak on the schedule.
h3 Next Week’s ThemeIn a sharp change from the last few weeks, we have a big calendar for economic reports. These include the most important. They come in a holiday-shortened week, with a relatively slow start. Last week I noted that the A Teams would head for the beach on Friday. It was indeed a very quiet day. It might be Wednesday before action is back to normal!
If this combination can’t generate some action, what will? Pundits will be asking:
Is it finally time for some volatility?
As always, there are several viewpoints.
- The lack of volatility is a bad omen. Just as night follows day, we should expect the worst. (Citations omitted to protect the guilty!)
- Much is wrong in the world. The Fed is raising rates and plans to cut the balance sheet. Why no reaction? (Ben Levisohn , Barron’s).
- The market is broken and manipulated. Normal trading strategies do not work. Discussed and refuted by Brett Steenbarger .
- The move to passive investing has quashed volatility.
- Lower volatility is a known coincident effect of bull markets. Nice analysis from The Fat Pitch.
As usual, I’ll have more in my Final Thought.
h2 Quant CornerWe follow some regular featured sources and the best other quant news from the week.
Risk Analysis
Whether you are a trader or an investor, you need to understand risk. 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.
The Indicator Snapshot
The Featured Sources:
Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.
Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.
RecessionAlert: Many Twitter Feed .
Georg Vrba: The regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. His interpretation suggests the probability creeping higher, but still after nine months.
Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. In his most recent post, Brian notes that long-term estimates remain strong – double-digit percentage increases. The expected downward revisions have recently been absent.
Doug Short: The Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating.
The Brooklyn Investor has some reassuring comments about bubbles.
Marc Chandler notes that the oil price price-stock correlation has broken down. I say, “At last.” This never made any logical sense, but it worked because it was working!
How to Use WTWA (especially important for new readers)
In this series, I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. Most readers can just “listen in.” If you are unhappy with your current investment approach, we will be happy to talk with you. I start with a specific assessment of your personal situation. There is no rush. Each client is different, so I have eight different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:
Are you preserving wealth, or like most of us, do you need to create more wealth?
Most of my readers are not clients. While I write as if I were speaking personally to one of them, my objective is to help everyone. I provide several free resources. Just write to info at newarc dot com for our current report package. We never share your email address with others, and send only what you seek. (Like you, we hate spam!)
h3 Best Advice for the Week AheadThe right move often depends on your time horizon. Are you a trader or an investor?
Insight for Traders
We consider both our models and the top sources we follow.
Felix, Holmes, and Friends
We continue with a strongly bullish market forecast. Most of our models are fully invested. The exception, Road Runner, is fussy about entry criteria. The group meets weekly for a discussion they call the “the post for charts and a lively discussion.
Top Trading Advice
Rayner Teo . You may find some of the ten lessons controversial, but all are interesting.
Do you over-emphasize each trade? Dr. Brett has the touch for explaining important concepts. This post is both entertaining and informative. He explains why single people should go on many first dates and few second ones. (Maybe Mrs. OldProf will now see why I was sending Valentine’s flowers to several women in the days before we got engaged). Brett’s great advice is to view first trades as “small and exploratory”.
Insight for Investors
Investors have a longer time horizon. The best moves frequently involve taking advantage of trading volatility!
Best of the Week
If I had to pick a single most important source for investors to read this week it would be Wade Slome’s frank and accurate discussion of the difficulty in making predictions . He cites a list of the regular flops – Schiff, Whitney, Mauldin, Roubini, Greenspan, and Merton and Scholes. Pedigree is not the test here for these “radical forecasters.”
He has a great list of quotes on predictions, and this advice:
Rather than paying attention to crazy predictions by academics, economists, and strategists who in many cases have never invested a penny of outside investor money, ordinary investors would be better served by listening to steely investment veterans or proven prediction practitioners….
In the quote, he goes on to cite Billy Beane – not my idea of a market forecaster, but the concept is solid. There are experts. They do not always have precision forecasts, but it is often enough to provide an edge.
Finding the best experts is an important challenge.
Chuck Carnevale takes up the mystery of Amazon’s (NASDAQ:AMZN) valuation. Stock strength, dominant sales position, relatively low earnings and high PE. How should we explain this anomaly? Chuck concludes:
Historically, Amazon has not been an especially profitable company. On the other hand, it has generated extremely high revenue and operating cash flow growth. So far, the market has been willing to give it a pass on earnings. Unfortunately, I have never owned the stock but find myself wishing that I had.
Nevertheless, I think it’s only fair to offer some caution. Before an investor makes a buy, sell or hold decision on Amazon, they should at least consider whether the market will be willing to continue to overlook their lack of profitability. So far so good, caveat emptor.
Mark Gerstein’s latest stock screen unearths a handful of “tasty” restaurant stocks.
Merrill’s list of five stocks with higher price targets due to “blow out” earnings. (Lee Jackson ).
The top ten from Morningstar’s “ultimate stock pickers.”
Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. I agree with Oscar and Holmes about the current potential in biotech.
doing very well ).
Investing for Yield
Simply Safe Dividends suggests Iron Mountain (NYSE:IRM), a storage REIT that seems to be in a growth market.
Blue Harbinger reveals another of his “attractive high-yield blue chips for contrarians.” It is publicly traded Enterprise Products Partners (NYSE:EPD).
Currency Effects
While most investors do not trade directly in currencies, they should follow the impacts on stocks. Stocks benefit differentially based upon dollar strength. The recent weakness has been a big story.
“Davidson” (via Todd Sullivan ) sees continuing signs of economic strength, supporting the dollar.
Graduates
Interested in a finance career, starting with your liberal arts degree? Here is some advice . It makes sense to me. Writing skills and critical thinking are always important.
Personal Finance
Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his top 5 reasons NOT to retire early .
Seeking Alpha Senior Editor Gil Weinreich continues to provide advisors and investors alike with intriguing ideas and links. I particularly enjoyed post about the challenge of finding “Alpha” is a close runner-up for best of the week. Gil explains about the changing CFA curriculum and the dangers of blind data crunching. This is a very complex topic, but Gil is right on target with his concern.
The CFA curriculum change leaves the impression that finding alpha today requires this elephantine effort at data crunching. Even if not, I think it’s better to take hawkeyec’s approach, following a simple plan whose success is not dependent on trying to outsmart everyone else.
(Hawkeyec is an astute and regular commenter whom I follow at Seeking Alpha. For convenience, here is the cited comment .)
Watch out for…
Mall REITs. Again. Last week we featured The Peridot Capitalist . The somewhat contrarian viewpoint describes how some mall owners are evolving. Like last week’s citation, it shows that investors should look more deeply rather than making a decision on the entire group.
Analyst sell signals. Ten stocks cited by John C. Ogg .
Final Thoughts
Much of the ongoing market discussion centers on a mystery: Why are stock prices higher than many think they should be?
The explanation has gone through many variants during the long bull market. The latest versions relate to market manipulation, low volatility, and ignoring the obvious geopolitical risks.
Perhaps the explanation is much simpler. I discussed this in a recent post on Occam’s Razor and Valuation. Check it out for the full list of the ever-changing excuses for failed valuation methods.
What should we consider instead?
And especially: Beware of those who twist good news into bad!
It is quite normal for financial stress to be low when times are good. Why expect high volatility? Good times eventually get worse, but good news is not itself an effective forecast of trouble.
Those who reason this way remind me of Chauncey Gardiner, the simple-minded hero of one of the all-time great movies, Being There . Everyone believes his “wisdom,” derived entirely from television and gardening!
This might be the best summer investment movie. Few things could help the average investor more than recognizing the slogans and old news in the typical commentary.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.