We have a major week for news – the result of the G20 meeting, Chairman Powell’s Congressional testimony, and all the most important economic reports. In honor of President George H.W. Bush, Wednesday will be a national day of mourning. Many activities will stop for the day, including US trading.
It is a case of so much news, so little time.
We might think of the week as having two parts.
In part one, markets will react to news from the G20 meetings. In part two, attention will turn to the employment data, and the possible Fed reaction.
In my last edition of WTWA I analyzed the plunge in the oil market, showing why it was not a reliable signal for economic strength. Since this was a “holiday edition” it did not include a special theme for the week ahead. That said, my hope is that it helped people avoid the trap of a bogus interpretation of oil prices.
I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski. She includes a lot of relevant information in a single picture – worth more than a thousand words. Read the full post for more great charts and background analysis
The market gained 4.8% and the trading range was about the same at 4.9%. The chart shows the overall strength for the week and the mid-day spike on Wednesday when Fed Chairman Powell’s speech was released. The volatility remains high, which you can see in our Indicator Snapshot section below. Most people do not realize that volatility is not just a function of downside moves.
At the time you read this you will know much more about G20 than I do right now. I am providing planning ideas. If necessary and possible, I will provide an update.
Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
New Deal Democrat’s high frequency indicators are an important part of our regular research. This week reflects further softening in the long leading indicators, which remain negative.
Pump and dump and “legal” front running. This week’s news highlighted several examples.
Spin Warning: Not News
Specific events, isolated or not, are always fertile ground for spinning. David Templeton (HORAN) looks beyond the anecdote and analyzes the underlying divergence between car and truck sales. He notes that consumers are actually paying more for the truck purchases. See the full post for further charts and analysis. If only more people would analyze data instead of rushing to provide confirmation bias.
I made my own small effort on this front with my story about finding a Bears Playbook on a train. Those of you who cannot get enough of that lame OldProf humor might enjoy it. Mrs. OldProf, disappointed that it was not a Chicago Bears document said, “It’s a cute story, but you shouldn’t quit your day job.”
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.
The calendar is huge, including all of the major reports. With the national day of mourning (Wednesday) for President Bush, there will be only four days of trading. I haven’t seen an announcement of a new date, but Fed Chairman Powell’s scheduled Congressional testimony will be postponed. The first part of the week will emphasize the market reaction to the G20 meeting. The latter part focus will be the employment news.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
The news from the G20 meeting will be the most important of the week. It is silly to make a guess about what will happen, although the punditry did just that last week. Once again, we had a raft of newly-minted experts on international relations, negotiating, and the President’s strategy. Some were debating the meaning of Navarro’s presence – bargaining ploy or a bad sign? And yes, those commenting had been Fed experts only a day earlier!
This week’s news and data avalanche presents a unique challenge, especially in a (sadly) shortened week. It is a question of –
So much news and so little time.
What is the best approach in the face of big news? I like to consider possible scenarios and be prepared to react if necessary. This week I will offer my own analysis instead of citing pundits. That said, everything I am mentioning is supported by some expert - -- as is the opposite!
I often criticize those who insist on an explanation for normal market volatility. This week is quite different, both in terms of background effects and the importance of what is ahead. Explanations are needed to help us plan properly.
There are three important market themes.
There are some other worries, of course, but these are the big 3. Only the Fed worry has been satisfied.
Since there will not be an immediate effect on business cycle perceptions, we can focus on the trade war effects. There has been some progress, especially the revised NAFTA agreement. While this was signed at G20, it requires Congressional approval. But what about China, from worst to best?
The worst case would be a Trump implementation of the additional tariffs on China, with little or nothing noted about possible delays. This would involve over $200 billion of imports at a 25% rate, including a range of popular consumer items. That would be just part of the plan.
We seem to have avoided this, based upon early reports. The BBC cites advisor Larry Kudlow as saying that the talks “went well” without providing any details. The South China Morning Post notes post-meeting applause and the concluding group photo with both teams. The report cited only pre-meeting comments, without any hard news about the discussions.
The best case would be something definitive and agreed at the highest levels. This might involve a delay in further implementations or even a partial unwinding in exchange for some Chinese concessions and a firm negotiating timeline. That result is still possible, since it would not be announced casually after a dinner meeting.
The middle case might include a “cease fire” on further moves and a general outline on meetings and next steps. Both sides would declare this to be a triumph. Once again, this could still be the announcement given what we know now.
In the worst case, I estimate a market decline of about 2%. The first 1% merely unwinds Friday afternoon, so don’t be bamboozled by those spinning the “meaning” of any announcement. Some expect much worse. (Barron’s)
In the middle case, we might see modest gains. Once again, the first 1% is merely offsetting the shorts who will reestablish positions. In that respect a flat day is actually a positive. That might be accomplished after an opening decline. [Breaking news: the cease fire approach, a 90 day delay, seems to be the result. (Washington Post)
In the unlikely best case, I expect a ten percent rally in fairly short order. Economically sensitive stocks will do even better.
This is a situation where you may still have time to adjust your positions on Monday. If you have been sitting on the sidelines and the news is pretty good, you can scratch off another market worry. Ralph Vince comments, “I don't see Trump and Xi bypassing an opportunity to goose their markets. Expect a statement from both of them, jointly, to the effect of "we're working on a deal, we're getting close, it's complicated, there are lots of issues, but it's coming."
Today’s Final Thought will add a few more implications for investors.
We follow some regular featured sources and the best other quant news from the week.
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.
Short-term trading conditions remain at high alert. The identification as “very bearish” is a reaction to volatility, not a prediciton of market movement. There is always a risk/reward balance to consider in your trading. When conditions are technically challenged, we watch trading positions even more closely. Each of our models has a specific exit strategy. The technical health rating may drop enough for a complete trading exit. It got close to that level recently.
Long-term trading has moved to the highest risk level. Those who emphasize technical analysis have emphasized the “damage” done to charts by the sustained correction. Our methods show that a clean bill of technical health will require more than last week’s rally.
Fundamental analysis remains strongly bullish. Earnings are great, prices are lower, and there is even less competition from bonds. We reduce fundamental positions (as we did in 2011) when we get a warning from the recession or financial stress indicators, not merely as a reaction to technical signals. This leads me to a “neutral” overall outlook.
Bob Dieli: Business cycle analysis via the “C Score.
Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.
RecessionAlert: Strong quantitative indicators for both economic and market analysis.
Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis.
Barry Ritholtz highlights an interesting business cycle depiction from LPL Financial Research. Barry comments:
A long, slow recovery, like the one we had following the credit crisis, can give numerous signals as it matures. We have been experiencing that. Given the corporate profit picture, relatively low interest rates, modest inflation and strong leading economic indicators, it is hard for me to see what has the Recessionnistas all worked up.
The latter stages of an economic cycle — like the one we are in now — can last for several years.
Check out our weekly “Stock Exchange”. We combine links to important posts about trading, themes of current interest, and ideas from our trading models. This week we mused about the possible trading bottom for stocks. We also discussed some recent picks from our trading models. Our ringleader and editor, Blue Harbinger, provided fundamental counterpoint for the models, all of which are technically-based.
Investors should have a long-term horizon. They can often exploit trading volatility.
If I had to pick a single most important source for investors to read this week it would be this investor letter from Bill Smead (Smead Capital Management), Well Known Facts Can Hurt You. He analyzes four widely-shared stock market “facts” and shows the superficial nature of each. This kind of thinking helps you to find good, contrarian ideas. In conclusion, he writes as follows:
What investment implications can we draw from these well-known facts? First, if history is any guide, all things FAANG and glam tech should be avoided for an extended period. Five years of gross outperformance doesn’t get cured by a 90-day correction. When tech is a swear word and insiders are heavy buyers, we will be glad to do our research when those interested are lonely.
Second, those in stock picking who doubt the economic power of 86 million millennials will do so at their own risk. It is very difficult to have anything but a good Main Street economy when that many Americans get into the 30-45-year-old age bracket. We continue to like retailers (Target Corp., TGT), homebuilders (NVR Inc., NVR) and financial institutions (American Express, AXP; Bank of America, BAC; and JPMorgan Chase, JPM) which could prosper from this ten-year secular tailwind.
I like his thinking and analysis and appreciate his thematic approach.
Barron’s highlights 4 Industrial Stocks That Look Ready to Rebound. [Jeff – They are fishing in the right pond].
Along the same lines, Morningstar is “Bullish on Deere.” Think of Deere as a vendor of farming efficiency, helping in a business with low margins.
In the fifth installment of my series on boosting your dividend yield, I wrote about the value of diversification and sector analysis as part of stock selection. The series always includes an actual trade from our program. This week it was Royal Dutch Shell (RDS.A).
Marc Gerstein’s latest screen looks for stocks that have “confirmed personality changes.” The test results may surprise you. He follows up with a separate post on Quanta Services (PWR) a stock whose personality has made the bearish to bullish transition.
Seeking Alpha Senior Editor Gil Weinreich’s Asset Allocation Daily is consistently both interesting and informative. Each week he highlights stories of interest for both advisors and investors. He also provides insightful commentary on important topics. Be prepared for something that cuts against the grain! His Friday Thought for the Day was: “The time is ripe for both the U.S. and China to declare victory in the trade war and call it quits”. His “conversation” between XJ and DT represented an excellent guess about what actually happened.
Abnormal Returns is an important daily source for all of us following investment news. I read it religiously. His Wednesday Personal Finance Post is especially helpful for individual investors. This week’s edition featured financial mistakes. There are plenty of good ideas, but I especially liked two. Adam M. Grossman (HumbleDollar) suggested seven housekeeping things you might do before the year ends. They are good suggestions, and some will not even take very long to do. Second, Tony Isola’s takedown of timeshare companies, Time Sham, provides facts about returns and some shocking stories about the difficulty in trying to sell, even if there is a buyback agreement in place. Did you know that most contracts have perpetuity commitments that pass on to your next of kin?
Morgan Stanley warns (via Barron’s) about ten stocks that could tank. This is interesting, notes Jack Hough, since positive ratings outnumber negative by 10-1.
Kirk Spano, who both finds good stock ideas and warns about bad ones, has changed his mind about Tesla (TSLA). He explains his trade and the reasons. Hint: Leadership.
It is a challenge to plan for the week ahead with breaking news as you write! I was comfortable maintaining positions through the weekend, not because I guessed the result, but because the risk/reward was attractive. This week’s investment advice items are especially good. If you are shopping, take a close look.
Last week’s rally followed the same misleading past as did the earlier weeks of selling. A small piece of information is picked up by algorithms, sets a direction, is augmented by human traders, and then “explained” by the punditry. This process exaggerates the meaning of stock market moves. “Davidson” (via Todd Sullivan) writes:
People can’t seem to grasp the fact the stock market does not predict recessions. Hard economic data points do and right now, none are pointing to a recession. The best quote on this is, ” the stock market has predicted 11 of the last 2 recession” . We’ve had 11 10% drops in the S&P 500 since 2000 and only two recessions.
Scott Grannis joins in, with The yield curve is not forecasting a recession. His series of charts provides interesting evidence.
Despite the rally, stocks remain at or below key support/resistance levels. For the October-November process to fully reverse, the market will need to undo the “technical damage.” That might not take much.
Putting it together we have the following:
Maybe investors can expect a visit from Santa after all!
I’m more worried about:
I’m less worried about:
This article was written by
Disclosure: I am/we are long PWR, OHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.