There is a strong theme for this week's trading: Psychology versus Data.
The objective is to make a profit. Each week is a new challenge.
It is my intention to do my look ahead on Friday or Saturday, but this week was a little special on a personal level. Regular readers know that my main hobby is tournament bridge. That is no surprise. Skill at bridge is highly correlated with successful trading. The traders in my group at the Chicago Board Options Exchange were all top-rated experts at bridge. Some were also chess and backgammon experts. Anyway, at the Chicago Contract Bridge Association's annual banquet, they graciously gave me their most prestigious award. I understand that this is a poor excuse for taking last night off and not writing about stocks, but there you have it!
Last Week's Surprises
The news from last week did not surprise us, but the stock results certainly did. Our economic and political forecasts were pretty accurate, as noted in our mid-week update. Here is the weekly review.
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.
The team at Bespoke Investment Group does a fine job with data. In a series of great articles (click through to see their customary excellent graphics) they show the following:
- The earnings beat rate is at 70%;
- Guidance is also strong;
- And you just can't blame earnings season.
The GDP numbers were also stronger than expected. The main bearish theme was given a lot of play since the market sold off. The idea was that part of the unexpectedly large growth came from inventory rebuilding. Here are three key thoughts that you will not see anywhere else:
- Inventory rebuilding comes when corporations expect better sales and see the need for stronger inventories;
- There was an increase in business investment, supporting our thesis that technology purchases have been too long delayed;
- Personal consumption is stronger, in defiance of bearish projections.
This was a very good report, and it was good for the right reasons -- not just government spending, although that will be a continuing contribution.
The Bad. Initial jobless claims ticked higher once again. I am concerned about this, since I do not think that job creation has really kicked in. A sustained recovery requires real job growth. This was the most disturbing economic data of the week.
The Ugly. Anything related to stock performance was ugly. Here is the Bespoke take on stock performance:
This type of action, when the market trades sharply down even though economic reports and earnings reports both beat estimates handily, is not good. There's simply no way to sugercoat it. Since the start of the pullback, earnings and economic numbers have remained strong, so the market is signalling that the indices got ahead of themselves based on what's in store for earnings and the economy in the future.
This states the issue quite frankly. You can look at data or you can look at the tape.
The Week Ahead
Earnings reports continue, with everyone watching to see if the pattern of selling all news continues. I am looking at two key reports:
- The ISM report is a very good concurrent economic read. Let us see if it matches Chicago.
- The payroll employment report is the big one for the market. As usual, people will ignore the wide sampling error. We are also concerned about the recent inability to estimate job creation. I will have my regular forecast mid-week.
To summarize, last week had the bullish catalysts, but the market moved lower. If good news had no effect, why would anyone see an upside surprise this week?
Our Trading Forecast
Our own indicators (see our regular ETF updates for an explanation) have shifted to neutral, and that was our vote in the Ticker Sense Blogger Sentiment Poll. Here is what we see:
- 67% (down from 89%) of our ETF's have positive ratings. This is fairly strong.
- The median strength is 6 (down from 23), a slight positive.
- 35% (down from 44%) of the sectors are in the "penalty box," showing lower risk than in recent weeks.
- Our Index Package has a neutral rating, but the QQQQ's are a buy.
A Helpful Insight
For nearly two weeks stocks have moved lower each day, regardless of the actual news. Even when the new data seems good, the market opens higher and then sells off.
For those with a short-term orientation this can be very distressing. Some vocal pundits suggest that it will be the pattern for the entire year. Long-term investors can gain an edge by taking advantage of behavior like this. This is how I am trading accounts with a longer time horizon.
I know that it would be helpful to discuss some specific stocks. I'll try to talk about Apple--a great example-- in the next few days.
