Weighing the Week Ahead: Investing in a Time of Turmoil

In the modern media age the world community has comprehensive and detailed knowledge of important news, no matter where it is happening. We have satellite pictures, professional commentary, interviews — and more recently — the individual testimony of hundreds of thousands of participants. Whether through tweets, twitters, social network sites, text messages, or videos, there is plenty of raw information.

While the human and political issues have greater global significance, the investment consequences will have more important personal significance.

Images of riots and revolt make for good television and a scary investment climate. I’ll take a deeper look. First, let us do our regular weekly review of the data.

 

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. I have had great success with my approach, but some will disagree. That is what makes a market!

Last Week’s Data

It was an active week for eonomic data and earnings, and the picture was mixed.

The Good

Major economic indicators continue to show growth.

• Economic growth is improving. The ECRI weekly leading index dropped to a six-week low last week, and the growth index, while still in positive territory also moved somewhat lower. Both are still at reasonably strong levels with no apparent recession risk.
• Risk as measured by the St. Louis Fed Stress Index, edged slightly lower, remaining 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 .052, almost the same as .053 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 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. I am not going to run the chart each week, but I strongly recommend that readers look at the paper. In the 2008 decline there was plenty of warning from this index — no sign right now.
• Q410 GDP was Stronger. The official reading of 3.2% was a touch below expectations and everyone knows that it will be revised, perhaps significantly. The strongest source of growth was consumer spending while inventories were a drag. I have read several analyses with a negative spin. In general these same sources have been wrong about recession chances, wrong about the consumer, and wrong about inventories. In sharp contrast Bob McTeer thinks it is a strong number, precisely because it was achieved in the face of declining inventories. For objective analysis, I also suggest that you read Prof. James Hamilton’s take — a good report, but with plenty of work to be done.
  
• The State of the Union Address. The President has been delivering a market friendly message, as I explained in my SOTU analysis. His approval ratings are back in positive territory. Whether you like him or not, you should be checking out the investment effect.
• Earnings News. The beat rate is still above average and some big international companies are showing good revenues, including those that reflect many aspects of the economy.

The Bad

The bad news continued for two important concerns — employment and housing.

• Jobless claims spiked higher. While weather might have been a factor in changing the seasonal pattern, the overall trend is much lower than needed to reduce unemployment significantly.
• Housing remains very weak. There was a bright spot in pending home sales, but the Case-Shiller pricing is still weak. Check out the analysis and charts at Global Economic Intersection.

The overall conclusion: A continuing economic expansion, avoiding recession, but slower than needed.

The Ugly

The Egyptian revolt and the market impact on Friday get the “ugly” award for the week. While there may eventually be a positive outcome, social upheaval that involves injury and death is a distrubing process.

This will be a key factor for the week ahead.

Our Own Forecast

We base our “official” weekly posture on ratings from our TCA-ETF “Felix” model. After a mostly bullish posture for several months, Felix has turned cautious. Last week we said it was a close call, and this week we shifted to neutral in the weekly Ticker Sense Blogger Sentiment Poll. The poll is now conducted on Thursday night, so it does not reflect Friday trading. Here is what we see:

• 63% of our 56 ETF’s have a positive rating, down from 79% last week.
• 69% of our 56 sectors are in our “penalty box,” up from 46% last week, an indication of significant short-term risk.
• Our universe has a median strength of only +4, down from +14 last week.

The overall picture is significantly weaker. While we remained fully invested in trading accounts, we are watching the indicators quite carefully.

[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

The employment report on Friday will be the most important economic data. It is also the month for the annual benchmark revisions and the introduction of more frequent updates to the BLS method for estimating job creation. I’ll look at this more closely at mid-week, but I am not expecting a strong job gain.

It is the heart of earnings season. We are seeing some stocks moving significantly lower despite reports that seem solid.

In short, there seem to be many ready to sell. We’ll see how many are looking for chances to buy.

Investment Implication

There are two completely different ways to analyze events like the crisis in Egypt.

The psychological approach is pretty obvious. The televised images play into a deep-seated investor concern. The “lost decade”, the tech bubble, the Great Decession, and all of the other worries have conditioned a generation of investors to expect the worst. Many accounts talk about “contagion.” What now? Especially for those who have looked away from the US for their investments?

Technical analysis is one way of interpreting psychology. I always look at the weekly chart show from Charles Kirk. He acknowledges bullish, bearish, and range-trading scenarios, but he is not trying to have it all ways. Charles highlights some specific support and resistance levels to consider, helping you to decide which scenario is most likely. (You’ll earn back the small annual fee in a heartbeat.)

The fundamental approach requires some discipline and detachment. There are obvious impacts on oil prices, a significant negative for the US economy. The Suez Canal carries 10% of world freight and 2 million barrels of oil per day. The key question is whether the crisis will spread, affecting oil production and distribution in the region. This could lead to an oil price spike and could affect investors who are interested in oil investments.

There is also some possible positive outcomes. Leave it to Doug Kass to think clearly about ideas ignored by most others. In this CNBC segment, Kass argues that the most likely outcomes are probably positive for the “risk trade” and negative for gold.

 

 

Like many investment managers I have been looking for a buying opportunity, especially for new accounts. We did a little buying on Friday, but we are waiting to see a little more clarity about the extent of the issues.

It figures to be a challenging week.

A Lighter Note

We do know that the Super Bowl indicator will provide a market positive this year, since both Green Bay and Pittsburgh qualify as old line NFL teams. It has an 85% success rate, something that you should keep in mind when looking at pseudo-scientific market indicators with similar predictive power!