Weighing the Week Ahead: Perception versus Objectivity

In the ongoing debate over market prospects, confirmation bias is probably the most powerful force.

We all look at fresh evidence, but it is a challenge to do so with an open mind.  Each weekend I prepare for the upcoming market action with a look at the week ahead.  I am helped by our sector-oriented trading models.  I view the models as wise advisors, focused on data, and operating without emotion.

Some market participants rely upon technical analysis to provide objectivity.  This has always bothered me, since it is difficult to backtest or otherwise evaluate this advice.

A Little Ruse

When I made the career change from college professor to investment research, I did a lot of research and data analysis.  One day, my boss described a suspicion about our lead technical analyst.  My boss was a shrewd person with both imagination and a fine sense of humor.  He asked our technical analyst to evaluate the stock charts of a number of unnamed companies.  The verdict was pretty bullish.  Next, he asked me to create a second group of charts;  each was a fake, the exact inverse of the real chart.  After a week or so he asked our analyst to interpret these charts.  Once again, all bullish!

This was long before the popularity of the behavioral finance work, but it did prove an important point for us.

A Lesson for All

The little ruse is a universal lesson.  In my regular review of the week, I would like to emphasize how we all see what we want, regardless of the methods we choose.  In so doing, I am including (with permission) some insightful stock charts from Carter Braxton Worth, the Chief Market Technician for Oppenheimer.  His entire report is available here.  If you want to see more of his work, reach out to your Oppenheimer representative.  If you need to find a contact, send me an email and I will put you in touch with a wise and valued friend from Oppenheimer.

But, first, a little background for those 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.

Last Week’s Data

Last week’s call was pretty accurate — thin volume and focus on politics.  With the holidays over and the “A Teams” returning, this week will be more important.

In my weekly review I am going to combine my traditional analysis of data (fundamental analysis) with a look at the technical perspective.

The Good

• Initial jobless claims declined to 451,000, a substantial decrease and the lowest level since early July.  For many this relieves the fears from the spike to 500K, perhaps influenced by Census jobs and unusual seasonal factors.

• There has been an increase on job openings, now exceeding 3 million.  Many people who do not look at data would be surprised at this.  The JOLTS report deserves more attention.

• The trade balance returned to recent norms.  This implies higher GDP.

• The ECRI indicators rose to 122.0, the highest level since August.

• Basel II requirements are in line with expectations and provide time to comply.

• There is a positive technical picture.

The Bad

• Initial jobless claims remain at an unacceptable level.  Since some states did not have complete data in a week shortened by Labor Day, it was necessary to make estimates from existing data.  Many in the blogosphere see this as suspicious.

• The ECRI growth indicator remains at a level never before seen in the published series without a subsequent recession.

• Leading economists have reduced their economic outlook for the rest of 2010.

• Basel II requirements show that the European stress tests did not reflect capital needs.

• Technical indicators are negative.

The Mixed

There is a third viewpoint — economic data suggesting slow growth.  It is neither a “double-dip” nor a robust recovery.  Improvement in employment is slight, but corporate profits continue to grow.

Technical indicators are neutral, showing a trading range.

The Week Ahead

The upcoming week features many economic reports, mostly of lesser significance.  I have modest interest in the Philly Fed report as the early indicator for September.  Capacity utilization has shown solid and consistent growth with little attention.  While any single week of initial claims has a lot of noise, there will be special attention this time because of the skepticism concerning government estimates.

None of this information will be compelling, so I expect more of the same:  We can all see what we want and expect to see!

Our Own Forecast

Our own indicators shifted to neutral from bearish three weeks ago.  We remain
cautious, with most sectors in the penalty box.  This is a recognition
that we cannot have great confidence in most short-term prediction.
When a sector is in the penalty box, we know that forecasting future
moves will be challenging.  Despite this, the picture has improved enough to shift to a bullish posture, our  vote was neutral in the
weekly Ticker Sense Blogger Sentiment Poll.   Here is what we see:

•  78% of our 55 ETF’s have a positive rating, up from 24% last week.
• 93% of our 55 sectors are in our “penalty box,” similar to recent
  weeks.  This means that uncertainty remains high for short-term trading.
• Our universe has a median strength of +18, up from -14 last week.

For trading accounts, we have had a 50-70% exposure during the past week.

[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.]

Conclusion

I hope readers enjoyed this look at how the same information can lead different observers to different conclusions.  In particular, I find that a chart with a few trendlines or labels can have a powerful effect.  Thanks again to CB Worth for the great inspiration and for sharing his work.

Meanwhile, our model looks for a breakout from the range, so that explains why we are edging into more bullish positions.