Weighing the Week Ahead: Old Worries, New Worries

For the investor, there is always something to worry about.  If worries meant “Do not invest!” no one would ever own stocks.

Interpreting worries is a continuing challenge for most.  Here at “A Dash” I emphasize objective indicators in my weekly look at market conditions.  If you find yourself switching around, or making excuses for dropping a favorite measure, it is a warning sign.

‘Tis the Season

It is the season for making forecasts.  I joined a group of my favorite blogging colleagues in the Bespoke Roundtable.  The questions were excellent.  I will amplify a few themes in the coming days.  Meanwhile, here are some interesting takes from sources that I follow closely.

• A list of worries from Credit Suisse (via The Pragmatic Capitalist).  These are all things that I plan to watch, and you should also.  Credit Suisse currently expects that all are manageable and forecasts a 13% gain in the S&P 500 next year.

• A list of things to quit worrying about from The Reformed Broker.  This is an excellent article.  I will add that preoccupation with the themes Josh recommends against would have cost you plenty in 2010.

We should all be compiling our lists.

1. What is a real concern?
2. What is an illusion?
3. How should we measure the things that really count?

With this in mind, let us turn to the data.  But first, a little background for readers new to this series.

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

Last week’s data continued the long term story of a slow but solid improvement.

The Good

Economic news continues to beat expectations.

• The ECRI weekly leading index is at a 30-week high and the growth index is at a 28-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.  It is also quite apparent that those who made dubious interpretations of the ECRI indicator were wrong.  I tried to demonstrate their error back when readers could still profit from the knowledge.
• Retail sales, especially in real terms, solidly beat expectations.  I am impressed by the analysis from Bonddad.  I always like sources that use data rather than opinion, and there is a good argument that retail sales lead employment.  My team will take another look at our employment model, since we did not really consider retail sales as a leading independent variable.  Meanwhile, those who have been predicting a “spent up” consumer have been wrong.
• The Philly Fed number was strong.  This is the best of the regional Fed survey indicators, but there is a lot of mystery in the diffusion index.
• Risk as measured by my new source, the St. Louis Fed Stress Index, moved significantly lower during the week.  This measure tracks a lot of market data in the eighteen inputs, so there is something of a one-week delay.  The value moved to .27 from .34 last week, a very nice decrease.
• Congress came through with the tax cut extension.  I have predicted this for nine months, and gradually others have come around.  There were still some skeptics last week, so it has been an ongoing positive for the markets.

The Bad

There was also a bit of discouraging news.

• Jobless claims are a little better but still terrible.  Many pundits incorrectly equate reduced initial claims with job creation.  They are wrong in their reasoning, but might be right in the conclusion.  We need a combination of fewer layoffs and more hiring.  Both should be monitored.
• The housing data were terrible.  I have frequently noted that building permits, terrible last week, are a good indicator.  Paying for a building permit is a serious commitment.  Most of my colleagues do not give enough weight to this series.
• Mortgage rates moved higher.  This is an expected result of higher interest rates — a trend that most expect to continue and may challenge the appetite for buying homes.  In the absence of overall price movements, affordability will be lower.

Our Own Forecast

We base our “official” weekly posture on ratings from our TCA-ETF “Felix” model.  Felix caught most of the recent rally, moved to neutral (but with several trading positions) and turned positive several weeks ago.  The number of sectors in the penalty box, a sign of near-term risk, remains high.  We are continuing our bullish position in the weekly Ticker Sense Blogger Sentiment Poll.   Here is what we see:

• 91% of our 55 ETF’s have a positive rating, up strongl;y from 84% last week.
• Only 39% of our 55 sectors are in our “penalty box,” down dramatically from 84% last week.
• Our universe has a median strength of +33, up from +27 last week.

The overall picture was positive and improving during the week, and we maintened 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

We will have some personal spending data next week, but there is really not much to feature on the economic front.  Most of the “A teams” will be on vacation, so market volatility could be higher.  The lame duck Congress will pack it in.

The year-end volatility may provide some opportunities for long-term investors.  I am using dips to buy for new accounts.  Trading accounts remain fully invested.

The spike in interest rates is also an opportunity for those trying to build a bond ladder.  We need to seize chances when they come.  We are finding some much better opportunities for yield-oriented investors.

In summary, this is a time to get some focus.  Which concerns are real, and which are illusory?  If you have a specific concern, can you measure it?  How will you know when that worry has been lessened?

If you cannot answer these questions, you need an approach that is more driven by data.