Professional investment managers never get far from the market. When I was recovering from surgery a few years ago, I asked the nurse for an extra pillow. Since I was supposed to be resting, she was suspicious. "Why?" My explanation -- that I couldn't see the tape -- fell on deaf ears. In fact, she turned off CNBC.
Nearly everyone uses the weekend for some extra reading and planning. Trading is easier when you have thought about possibilities in advance. In this new series I am going to write down a few weekend thoughts. Essentially, these are my own notes. It is not a complete market commentary. There are plenty of those already. I am going to summarize a few points from the prior week. I will highlight what I am watching for in the coming week. I will often highlight some research that might otherwise get missed. Finally, I will present our own trading indicators from our sector model.
I am not going to make a complete argument for each conclusion, as I usually do. Regular readers will generally understand the reasons from past articles. If there are interesting questions or comments, I will do a full article on the topic later.
This weekly piece is intended to be brief. I will try to focus on the things where I hope to add value. Especially while I am developing this concept, I invite comment and suggestions.
Last Week's Surprises
I liked the take from Neal Lipshultz, Unlikely Events Deliver Hellish Week For Stocks. While many have been forecasting a market correction for months, no one guessed the unlikely stew of challenges.
The Good. Corporate earnings continue to surprise positively. For those who are skeptics about forward earnings (also solid) you cannot say that expectations are inflated when the companies keep beating.
Brown's victory in Massachusetts means that the Dems will have to do some horse-trading on taxes to avoid a filibuster. This is market-friendly, although few seemed to notice.
The Bad. Initial jobless claims ticked higher, and I am not buying the seasonality and short week arguments. We need to see improvement here. I did not mind the new home sales as much, since I like building permits as a leading indicator.
The Ugly. President Obama's comments on regulation did not have the proper tone or timing. The market punditry has a political agenda, leading to over-reactions. Normally a President gets four years. The voting public has a clear track record: A poor economy and a shooting war are both very bad. The electorate does not give good grades for effort, just for results. Coakley was the first victim. Fed Chair Bernanke could be the second.
The Week Ahead
The calendar is full. Here is what I am watching:
- Economic data. I'm watching new home sales (difficult to interpret with the changing pattern of incentives), initial claims, and the Chicago PMI on Friday.
- Bernanke. The Senate will probably have a vote on his confirmation next week. Voting against him is an easy way for a Senator to demonstrate that he does not like the Fed or money creation, does not like "bailouts", does not like past Fed policy, or is generally unhappy with the world. Dumping Bernanke would be foolish and send a terrible message. Fans of Austrian economics are not going to get a better candidate, so why bother? I expect confirmation after some posturing all around.
- Obama's State of the Union. A week ago we might have expected a different speech. Now there are some genuine questions. Will he push health care? Will he attack Wall Street? Will he emphasize jobs and the economy? I am confident that he will have a good delivery, but I am not confident that his team will come up with the right message. Given the circumstances, this is more important than usual.
- The Fed Meeting. This is almost an afterthought. There is a lot of misplaced attention on the Fed exit strategy. There will not be any changes until the economy shows further improvement.
Some Helpful Insight
I try to track information that will be helpful in assessing the big picture. The problem with these "big picture" issues is that they often have little relevance in the investment time frame. They are basically unsolvable problems within any normal trading horizon. One of the current topics is unemployment and how long it will take to achieve "normal" levels.
The research team at the Atlanta Fed estimates that it will take monthly job growth of 121K just to keep unemployment rates at the 10% level. This includes an estimate for discouraged workers returning to the work force as well as new entrants. It is a tall order, and a number to keep in mind.
Our Trading Forecast
Plenty of experts see last week's market decline as the start of something big. Charles Kirk has his finger on the trigger (become a member at a modest price for an instant payoff):
Bottom line - we have a market that is in a major pullback and is now threatening to move into a large-scale correction aversion phase.
Bespoke Investment Group shows a long-term trend for a rebound after selling like this week's although recent results were not so good.
Our own indicators (see our regular ETF updates for an explanation) remain bullish, and that was our vote in the Ticker Sense Blogger Sentiment Poll. We are now using our universe of about 60 highly-liquid ETF's with reduced correlation among individual entries. Here is what we see:
- 89% of our ETF's have positive ratings. This is very strong.
- The median strength is 23, a modest positive.
- 44% of the sectors are in the "penalty box," showing lower risk than in recent weeks.
- Our Index Package has a positive rating, and the QQQQ's are a buy.
I'll try to develop these indicators with more context in coming weeks.
To summarize, we are using the selling as an opportunity. The model will give a "sell signal" at some point, but it is still within normal ranges, given the time and extent of the move.
A Final Thought
I tried to explain last week why long-term traders should use volatility to their advantage. Instead of avoiding stocks where politics has caused selling, it is better to recognize when the speeches will have little effect and grab the opportunity. I wish I had not used the highly-charged Goldman Sachs as my example, since it detracted from the main point.
