For our audience at WSAS I am posting the updated market indicators and the key things to watch in the week ahead.
Those who also want the review of last week’s events and data, including my look at the good, the bad, and the ugly, can check the story out here.
The Indicator Snapshot
It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:
- Economic/Recession Indicators. This week continues two new measures for our table. The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli’s “aggregate spread.” I’ll explain the link to the C-Score next week. The second is the Super Index. You can read more about it in this article, which is merely an introduction. It reflects extensive research and testing, and is well worth monitoring. (The Super Index includes the ECRI approach). I am going to do a complete review of the work very soon. Meanwhile, I think it is important enough to watch every week.
- The St. Louis Financial Stress Index.
- The key measures from our “Felix” ETF model.
The SLFSI reports with a one-week lag. This means that the reported values do not include last week’s market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a “warning range” that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.
Our “Felix” model is the basis for our “official” vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions. We voted “Bullish” this 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 ETF email list. You can also write personally to me with questions or comments, and I’ll do my best to answer.]
The Week Ahead
There will be important earnings reports all week. Eventually that is what matters.
Competing with earnings news we have the data avalanche.
Tuesday is the warm-up with housing price data (Case-Shiller), the Chicago PMI (a hint at the ISM report), and consumer confidence.
Wednesday brings the ADP private employment estimate, which has moved markets and opinions in recent weeks, as well as the ISM manufacturing survey.
Thursday we get news on auto and truck sales, as well as the best coincident read on employment, initial jobless claims. Finally, we get a report on Q4 productivity.
Friday is the big day for employment news (payroll employment, the household survey, hours worked and hourly wages) as well as the ISM services index.
It is a quirk of the calendar that so many important reports hit in a single week.
The European story continues, of course, but the focus has been changing a bit.
Trading Time Frame
Our trading accounts have been 100% invested for several weeks. Felix caught the recent rally quite well, buying in on December 19th. There are now many solid sectors in the buy range. The overall ratings have improved, helping us to stay invested while many have been in denial for the entire rally. This program has a three-week time horizon for initial purchases, but we run the model every day and change positions when indicated. Felix has been more confident than I have been on the trading time frame. This illustrates the importance of watching objective indicators.
Investor Time Frame
Long-term investors should continue to watch the SLFSI. Even for those of us who see many attractive stocks, it is important to pay attention to risk. In early October we reduced position sizes because of the elevated SLFSI. The index has now pulled back out of our “trigger range,” and is declining further. This sort of decline has been a good time to buy stocks on past occasions. Worry is still high, but is declining.
Even though stock prices are higher than in October, the risks are much lower. I am increasing position size for risk-adjusted accounts. (We cut back by about 30%). I am also looking more aggressively for positions in new accounts.
Our Dynamic Asset Allocation model is still very conservative, featuring bonds and other defensive holdings. It is rather like the Nouriel Roubini of our methods. What if things go wrong? Investors should understand that cautious, hedge-oriented positions may be slow to rebound.
To summarize, we continue a conservative posture in most of our programs, recognizing the uncertainty and volatility, but we are becoming more aggressive. For new accounts we are establishing partial positions, using volatility to buy favored names and selling calls for those in the Enhanced Yield program. This program has been working very well, meeting the objectives of conservative, yield-oriented investors. It follows our key precept:
Take what the market is giving you.
Right now that continues to be dividend stocks at reasonable prices with the chance to sell call options at inflated prices. If the stocks do nothing, you can still get almost 10% per year from dividends and call premiums.
This does not work for those selling long-dated calls. It requires some active management, selling calls with a month or two before expiration to capture the most rapid time decay.
The Final Word
For starters, I hope some readers enjoyed my bit of whimsy in the good and the bad……
The continuing story is the disconnect between stocks and bonds. Scott Grannis has a good take with this chart:
He offers this explanation:
In my view, this disconnect reflects a buildup of tension in the market—something is likely to break pretty soon. Bond yields have been depressed because risk-averse investors have been seeking shelter from a potential Eurozone collapse that might trigger another global recession/depression/deflation. But equity prices have been rising because in the meantime, while the world waits for the Eurozone to implode (and we’ve been waiting for at least 18 months now), the U.S. economy continues to improve. Bonds are the doomsday trade, while equities are more realistic about what’s happening right now.
I agree, and that is how I am trading and investing.