Jeff Miller | Sep 27, 2015 02:24AM ET
The recent Fed non-decision on interest rates increased worries about global economic weakness. Trading in commodity markets underscores a widespread perception of a potential recession. The week ahead is packed with fresh economic data, including the most important reports. The punditry will be asking:
Will the U.S. economy succumb to global weakness?
h3 Prior Theme Recap/h3In my last WTWA I predicted that it would be a week for Fed critiques and reviews, including commentary and speeches from the actual participants. I expected the Fed to “clarify” the message that many took from the post-decision announcement. That was a fairly accurate guess for the major theme, but there was plenty of competition from the Pope, the President of China, and the Speaker of the House. The S&P 500 declined 1.36% on the week, with the NASDAQ and small cap stocks doing worse.
To put this in perspective, here is a different chart from Doug Short’s excellent weekly recap – a look back over nearly two years. As always, the full article includes several other helpful charts. (With the ever-increasing effects from foreign markets, you should also add Doug’s World Markets Weekend Update to your reading list).
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. You can make your own predictions in the comments.
h3 This Week’s Theme/h3The Fed is concerned about the global economy. Or maybe not. Markets trade daily on a risk-on, risk-off basis, led by commodity and energy prices. Many believe that the U.S. economy is on life support. With plenty of economic data on tap we have new evidence for the ongoing debate. I expect the pundits to be asking:
Will the US economy succumb to global weakness?
As always, the viewpoints are varied.
The Viewpoints
The wide range of economic forecasts includes the following:
- The U.S. is already in a recession. QE4 is needed. The ECRI has a creative recession definition supporting this. (Via Doug Short ).
- Market indicators suggest that a recession is imminent.
- The economy is showing modest growth, but we have an earnings recession. (Brian Gilmartin notes that full-year 2015 will probably be positive.
- Sluggish growth continues, overcoming the global drag, but only weakly. The Atlanta Fed’s GDP Now project presents this picture:
- Growth is improving, but gradually. (This is the mainstream economic viewpoint – major economists and the Fed. For specific China attention see also Dallas Fed via GEI ).
- Q2 signaled the start of a real economic rebound.
Josh Brown has a good discussion of this. While the economic debate is important, the major focus remains with the risk-on, risk-off psychology.
As always, I have my own 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 occasion something really good. My working definition of “good” has two components:
The Good
There was some good economic news.
New highs in bearishness – a contrary indicator. Mark Hulbert has the story.
The Bad
There was also a little negative news last week.
The Ugly
Volkswagen's (OTC:VLKPY), (XETRA:VOWG) deception. This story is generating plenty of collateral damage. Looking beyond the future of the company itself, there are questions about the overall German economy (autos make up 17%) and possible offenses by competitors. Auto sales have been an economic bright spot, so even a delay in purchase decisions represents an important drag. (Kevin Roose has a good summary of the issues ).
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. Nominations are 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
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 update . The ECRI’s most recent article suggests that U.S. economic growth has been declining for eighteen months according to their indicators. They have continued in the chorus of Fed critics. While eventually stepping back from their mistaken and insistent recession call in 2011, ECRI has remained persistently bearish on economic growth.
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 systems. These include approaches helpful in both economic and market timing. He has been very accurate in helping people to stay on the right side of the market.
Investing.com . You can filter for country, type of report, and other factors.
The “A List” includes the following:
The “B List” includes the following:
Once again there will be plenty of FedSpeak, but probably no more “clarification.” French President Hollande, German Chancellor Merkel, meet with Putin and Ukrainian President Poroshenko on Friday. I am not holding out a high level of hope, but any progress would be welcome. Few understand how much of a drag the Ukraine conflict has created for the world economy.
There is also the possibility of a government shutdown beginning Thursday. Were that to occur, we might not get the employment data.
I will also be watching for earnings pre-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 remained neutral, although weakness last week puts us on the edge of a bearish call. Felix is still fully invested because there are several remaining pockets of strength. The confidence in this three-week forecast is now stronger than it has been in recent weeks. For more information, I have posted a further description — here ).
This interview with Dr. Brett Steenbarger is worth the time to listen. Creativity can be learned!
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 page summarizing many of the current investor fears . If you read something scary, this is a good place to do some fact checking.
Other Advice
Here is our collection of great investor advice for this week:
If I had to pick a single most important article, it would be this advice from the SEC (via GEI, where there is abundant information on related topics) about investment scams on radio shows. There are plenty of good tips. Any investment source could include these scams, but radio claims are harder to check.
Stock Ideas
How many stocks should you hold? How should you determine the weighting? Chuck Carnevale considers these important and oft-neglected questions.
Barron’s has a nice feature with value investor John Buckingham. He discusses several of this week’s issues and provides quite a few ideas for value investors.
The Business Cycle
Monevator has an interesting collection of charts about the business cycle. If you can figure out where we stand, you can choose the best sectors and stocks. Here is one example:
Personal Finance
Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. The average investor should make time (even if not able to read every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in this Bloomberg ).
h3 Bear Market or Correction?/h3I rarely find these debates to be helpful. I think we have better methods for spotting and avoiding major declines, so someone’s definition of a “bear market” is usually not helpful. Whenever there is a decline from the highs, some will cite it as a minor correction while others see it as the start of the next “big one.”
Saying “no” to the bear market is The Fat Pitch . You can feast on plenty of charts, including the one below:
Cam Hui surveys both technical and fundamental indicators in his balanced take. He writes as follows:
I have received a fair amount of feedback, mostly from technicians and chartists, on my view that the idea that downside risk on stock prices is limited and this is not the beginning of a major bear market. I want to clarify my views on that topic.
For illustration I am including WSJ ) has an excellent description of trends in the bond market and current risks. This article is the start of the series, which I urge readers to follow carefully. Here is a key concern:
h3 Final Thought/h3Domestically, the rise of large bond funds has created new risks . As the funds have grown, so has cross-ownership of the same bonds, increasing the likelihood of contagion if one manager starts selling, the International Monetary Fund says. Regulators worry that many investors may not know what is in their funds. A market downswing could lead to rising redemptions of fund shares, prompting funds to sell assets to raise cash and amplifying selling pressure across the market.
I am confident of our recession indicators, which provide a lot of lead time as well as support from concurrent evidence. Most of what gets written on popular blogs has little basis in sound research. A common mistake is confusion over the role of the NBER, which does the official recession dating after all data become available. Unlike our regular sources, they do not and should not try to make contemporaneous recession calls, and they certainly do not make forecasts. You can save a lot of time by simply moving on whenever you see something that makes this basic blunder. (More info here ).
There is a persistent trading dynamic which is important for both traders and investors. It includes the following:
Rinse, lather, repeat
Here are several example themes from last week:
Trading and Investment Conclusions
If you are a trader, like Felix, these are treacherous waters. You can see the early reaction, but the algorithms and many other traders will be faster than you are. Unless you think that the initial move is too small, you are too late to trade. I see too many traders who have excessive confidence and probably excessive size. If you are a short-term trader you should beware of getting too big with your positions.
If you are an investor, the prospects are much better. As long as you focus on the long run, irrational dips in prices provide opportunity.
Reacting to the China theme, you have discount prices on anything related to the consumer economy.
On the biotech theme we have some aggressive positions mentioned in past articles and drawing on the excellent updates from John McCamant’s Medical Technology Stock Letter . Some are aggressive (ZIOPHARM Oncology Inc (NASDAQ:ZIOP) and Novavax Inc (NASDAQ:NVAX)) and others suited for a wide range of investors (Gilead Sciences Inc (NASDAQ:GILD)).
For autos, the entire sector is good, but I like the Ford (NYSE:F) F150 introduction. Since I expect modest growth, we sell calls against the position, getting expected appreciation, dividends, and call premiums.
For energy, I like mid-cycle stocks outside of the sector. This economic sector had a sharp decline and a gradual rebound. The time before the next business cycle peak is more than one year away and might be several. This is good for financial and technology stocks, and eventually for energy and materials.
Regional banks remain a relatively safe choice, as do stocks like Apple (NASDAQ:AAPL).
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.
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