The new investment year starts with a backdrop of lower financial stress, better economic prospects, but two large and nagging concerns. Housing is a continuing drag. Employment is improving, but far too slowly.
Stock prices have been stronger despite these headwinds, but it is important to watch the weekly data. In this series I try to encourage a focus on data rather than anecdotes.
Regular readers know that I do not switch indicators to fit a pre-conceived viewpoint. I also register a specific market viewpoint each week. This must be a pretty dumb combination, since most of the top-rated sources do exactly the opposite!
Let me start with the background, and then move on to the most recent information.
Background on "Weighing the Week Ahead"
There are many good services that do a complete list of every event for the upcoming week, so that is not my mission. Instead, I try to single out what will be most important in the coming week. If I am correct, my theme for the week is what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
In most of my articles I build a careful case for each point. My purpose here is different. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. Others will disagree. That is what makes a market!
Last Week's Data
As most observers expected, we have had a couple of pretty quiet weeks. Last week's data continued the pattern of slow but solid economic improvement and lower risk.
Economic news continues to beat expectations.
- Economic growth is improving. The ECRI weekly leading index is at a 33-week high and the growth index, now in positive territory for a second week, is at a 31-week high. The ECRI said several weeks ago ago that a near-term recession was off of the table. Each week we have more evidence that they are correct.
- Risk as measured by the St. Louis Fed Stress Index, again moved lower during the week. This measure tracks a lot of market data in the eighteen inputs. It is not a poll, nor opinions, nor a collection of anecdotes. The value moved to .15, the lowest value since April. This continues a nice, multi-week decrease. Earlier this year the St. Louis Fed published a short paper with a very nice chart that helps to interpret this index. The chart does not reflect the recent continued decline in stress, but it identifies the dates for important recent events. The paper also has a longer version of the chart (click to enlarge), illustrating past stress periods.
- Weekly initial jobless claims finally moved below 400,000 to 388K. The overall level is still not what we need, but once again the direction is good.
- Investor sentiment moved lower. I demonstrated last week why sentiment concerns are overblown, but if you disagree, you should be less concerned this week.
- The dog (is still) not barking. I am not seeing many earnings pre-announcements. It is something I will be watching closely in January.
The bad news once again relates to housing. The actual data were mixed, but that does not reflect the entire story.
- Pending home sales were up a misleading 3.5%. The prior month was revised lower. The year-over-year data show a decrease of 5%, so the "headline number" was deceptive.
- The Case-Shiller price index showed another decline, providing support to the "double-dip" housing thesis.
The housing story has a lot of complexity. The most discouraging news for me was the forecast from Calculated Risk: Prices to decline 5-10% in 2011. There are a number of sources of the 'perma bear' flavor who now have turned to housing as the reason to be pessimistic about 2011. I seek widely for information, but I downplay sources that shift from indicator to indicator, always looking for something that fits their outlook.
In sharp contrast, Calculated Risk covers economics with a focus on housing and admirable objectivity. CR was one of the first sources that I highlighted when starting my blog. I have exchanged data and discussion via email with Bill, and some day I hope that we will meet in person. Calculated Risk was recently recognized (once again) as one of the top economics blogs. Nice going! (I encourage readers to endorse this choice in the comments). Perhaps Bill will come to the Kauffman gathering in a few months. Calculated Risk served as a pioneer, as illustrated in this blast from the past about Tanta's contribution, helping all bloggers get more credibility. At this site in 2008 we also had our own recognition of Tanta.
To summarize, I am emphasizing the more objective CR coverage of housing, in preference to some other sources.
I have a number of remaining questions about housing data. Most importantly, I note that the economy and markets have improved even in the face of the housing headwind. Most of the economic skeptics over the last two years have argued that this was impossible. They have been quite wrong.
It raises the question:
If we finally get stability in housing, what will this mean for the economy?
Our Own Forecast
We base our "official" weekly posture on ratings from our TCA-ETF "Felix" model. Felix has captured most of the three-month market rally. This was reflected both in higher overall ratings and a lower penalty box number. We are continuing our bullish position in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:
- 82% of our 56 ETF's have a positive rating, down from 88% last week.
- Only 23% of our 56 sectors are in our "penalty box," down from 32% last week.
- Our universe has a median strength of +23, down from +28 last week.
The overall picture is a bit weaker, but was positive during the week, and we maintained a 100% long posture.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly email list. You can also write personally to me with questions or comments, and I'll do my best to answer.]
The Week Ahead
This week should be a lively source of important new data. We will get the ISM report on Monday, with a lot of interest on whether it will show the same gains as the Chicago PMI. The non-manufacturing version comes out Wednesday. These are good inputs for employment.
The FOMC minutes are out on Tuesday. Some may try to read deeply into those tea leaves, but I recommend waiting until Chairman Bernanke's testimony on Friday.
The big news of the week will be Friday's employment situation report. I will do a preview mid-week, but most are looking for a gain of about 140,000, a big improvement over last month.
I also expect the market to trade based upon various questionable interpretations of the first hour, first day, first week blips in the market averages. There are many who see these as indicators for the entire year. I know -- this seems silly, but rest assured you will see it. Be forewarned.
For new investors I am establishing a signficant position right away. We see attractive current prices in many stocks. While prices have moved higher, earnings have increased even more rapidly. We have buy targets in other names. I recommend this combination strategy for investors who need more equity exposure.
In my recent articles providing my best recommendations for individual investors, I warned about scams, and I provided some tips for 2011 planning. It is important to have a plan for risk control. If you missed these articles, I recommend taking a few minutes for a money-saving review of scams and 2011 risks.