Weighing the Week Ahead: Stormy Weather on the Way?

Includes: DIA, QQQ, SPY
by: Jeff Miller

How much attention should you pay to breaking news? Does it matter if your time frame is measured in months, weeks, days, or minutes?

For the trading community there is an obsession about news. The individual investor often tries to use the news to time the market. This is a big mistake.

Here I try to find some nice themes for the average investor as well as an occasional nugget for traders. While we have a nice following on the blog and on Seeking Alpha, I do not follow the rules for gaining popularity. Instead, my approach is to empower investors by highlighting what is really important. While it is more profitable to peddle fear rather than knowledge, I hope each week to make some new friends who appreciate the difference.

This week's story is a complicated brew of economic data, corporate earnings, and politics.

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

The economic data flow picked up last week. The picture was mixed, with a negative lean.

The Good

Major economic indicators continue to beat expectations.

  • Economic growth is improving...sort of. The ECRI weekly leading index had a small decline last week, but the growth index, now in positive territory for a third week, is at a 32-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. Investors should think about the growth index as an acceleration term, while the WLI is a level. The bearish punditry focused on the acceleration term when it was negative. Please check out this interview to contrast the ECRI posture with outsiders trying to interpret their data, especially David Rosenberg.
  • Risk as measured by the St. Louis Fed Stress Index, edged slightly higher, but remained at a very low level. This measure tracks a lot of market data in the eighteen inputs. It is not a poll, nor opinions, nor a collection of anecdotes. We should all pay attention to some real data. The value moved to .163, up slightly from .15 last week. For more interpretation, the St. Louis Fed published a short paper with a very nice chart that helps to interpret this index. The chart (click to enlarge) 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, illustrating past stress periods.


  • Bill Daley is the new Obama Administration Chief of Staff. I understand that there are political viewpoints about this, including those who think it shows favoritism for big banks. When I rate the good, the bad, and the ugly, I take the perspective of the millions of people who have investments in their future. From that perspective, the Daley appointment is market-friendly. Most people do not understand that the Chief of Staff is usually the second most powerful position in government. The President cannot attend to everything. The Chief decides many issues and also determines a lot about what the President sees. Daley's viewpoint will be more business and market-friendly. I am not writing about politics.
  • State tax revenues are moving higher. No one seems to be noticing, but it is a good reflection on the economy. If we held spending constant, we would have a balanced Federal budget in 5-6 years. Check here for evidence and charts. Personally, I expect cuts in spending and entitlement progams.
  • Firms plan more hiring. This is only one survey, but I am seeing several indications like this. It has not really shown up yet in the official data.
  • The ISM manufacturing report registered a strong reading of 57.0. This implies a GDP growth rate of about 5%. It is one of the better real-time indicators, and it has been over 50 for 19 months. Most people do not realize that a reading of 42 is the breakeven point for GDP growth.
  • The dog (is still) not barking. I am not seeing many earnings pre-announcements. Few have taken notice of this so far, and earnings season is upon us.

The Bad

The bad news seemed more important this week.

  • Payroll employment gains were very weak, only about 100K. This growth is barely enough to absorb new entrants to the labor force. It does nothing for those who are unemployed. The apparent decline in the unemployment rate, while helpful for news headlines, is quite deceptive. Too many people are leaving the labor force. The lower rate reflects this trend, rather than more people getting jobs. Calculated Risk and Econbrowser both have great summaries of this problem. There is also a very strong analysis from Roubini Global Economics (full disclosure -- I am a contributor), which cites many different sources:

The December payroll report indicates a labor market gradually on the mend, although the pace of improvement remains cautious at best. While the household survey painted a better picture than in November, the drop in the unemployment rate also driven by a large drop in the labor force. The return of manufacturing payrolls to positive territory, continued gains in services employment, more broad-based gains in private payrolls and a decline in part time employment for economic reasons are positive developments. However, the stall in wages and the workweek and the increase in the duration of unemployment are disappointing. On balance, while the labor market is slowly improving.

  • More Foreclosuregate. The Massachusetts decision is bad news for the market. If banks cannot collect on loans that were freely agreed when made, it is a problem. If delinquent homeowners decide to quit paying and challenge paperwork, that is bad for all lenders, bad for the economy, and bad for the market. How bad is it? Felix Salmon thinks that it is a long tail. Calculated Risk opines, "These issues are curable, but will be costly for the banks. As Tanta frequently argued, the upfront "cost savings" would be paid for in arrears! This does not appear to be a systemic risk." We'll soon learn how significant this is, but the early indication is modest.

There were not as many negative stories last week, but they are more important.

The Ugly

The ugliest news of the week was the Arizona shooting story -- an attack on a Member of Congress and the death of several government officials and innocent spectators. You might not think that this is a market story, but it soon will be.

This incident has already changed the week's agenda for Congress and has the potential to change the nature of political debate. This will happen not out of principle, but because the most aggressive tactics are suddenly unseemly vote losers.

For the moment, let us all hope and pray for the best. We need more responsible commentary and debate.

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:

  • 88% of our 56 ETF's have a positive rating, up from 82% last week.
  • Only 21% of our 56 sectors are in our "penalty box," down slightly from 23% last week.
  • Our universe has a median strength of +18, down from +23 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

I expect this to be a confusing week with a forecast of stormy weather. Political leaders will be reacting to a story that everyone can understand, emphasizing more security and more temperate discussions. There is no way to interpret this news as positive, at least on a first take. There will also be negative stories on the foreclosure developments.

Many of the big political themes with market revelvance will be "on hold."

There will be a deeper look into the negative consequences of very divisive rhetoric and those who sell it. I expect that this examination will eventually reach the Internet "investment" sources that profit from selling fear.

Can we expect a backlash against fear? I think so.

The actual economic data includes the following:

  • Inflation (not very important in the absence of a spike)
  • Factory orders and capacity utilitzation -- a "B" report, important if there is a big move.
  • Sentiment, initial claims --- important for me since these are part of my employment model.

To summarize, the economic data may be less important than the politics of fear and the Obama economic team changes. Watch closely for any earnings pre-announcements. So far the dog has not been barking, which is a bullish sign.

My Posture

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.

Important Advice

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.

Full Disclosure: Long JPM and GS, and buying more