We have a huge economic calendar, a Fed meeting, and the biggest week of earnings season. And don’t forget the geopolitical and domestic political issues. Can there really be a single theme for the week ahead?

Perhaps not, but it does provide a unique opportunity. The information caters to several different investment approaches. Which will come to the fore? Pundits may not find the right question, but astute investors should be using this week as…

A test of their investing acumen.

We should consider the important data, but that is not enough. Data analysis requires context and a strong method.

Last Week Recap

In my last (bonus) edition of WTWA I interrupted my mini-vacation to review the recent developments. I noted that the average investor (who didn’t take Econ 101 or doesn’t remember it) was getting a real-time lesson in economics. That captured the week’s stories as well as anything. We are gradually seeing evidence of impulsive policies.

The Story in One Chart

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.

Stocks declined 0.22% with plenty of daily movement. The trading range was 2.1%, calmer than in recent weeks. You can see the volatility results and comparisons in our indicator snapshot (below).

To put the post-Christmas period in perspective, let’s look at a longer-term chart from Jill.

Whether the trend seems bullish or bearish depends mostly upon your time frame. A key question is what has changed in the last month?

Noteworthy

The U.S. Energy Information Administration has published its annual energy outlook, featuring some projections to 2050! The forecasts make and describe certain key assumptions. This is great reading for anyone interested in energy trends. Here are the key takeaways from the report.

• The United States becomes a net energy exporter in 2020 and remains so throughout the projection period as a result of large increases in crude oil, natural gas, and natural gas plant liquids (NGPL) production coupled with slow growth in U.S. energy consumption.

• Of the fossil fuels, natural gas and NGPLs have the highest production growth, and NGPLs account for almost one-third of cumulative U.S. liquids production during the projection period.

• Natural gas prices remain comparatively low during the projection period compared with historical prices, leading to increased use of this fuel across end-use sectors and increased liquefied natural gas exports.

• The power sector experiences a notable shift in fuels used to generate electricity, driven in part by historically low natural gas prices. Increased natural gas-fired electricity generation; larger shares of intermittent renewables; and additional retirements of less economic existing coal and nuclear plants occur during the projection period.

• Increasing energy efficiency across end-use sectors keeps U.S. energy consumption relatively flat, even as the U.S. economy continues to expand.

There are plenty of interesting charts. Here is a sample.

The News

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’s update shows a continuing decline in the short-leaning indicators, which remain negative. The long-leading forecast continues its recent rebound.

Earnings

We must take note of the earnings results for the week, but I won’t call them either good or bad. The beat rate was good, but the size of the earnings beats (3%) was below the five-year average. Revenue beats were also below that measure. (FactSet).

So far, the earnings reports seem consistent with the economic data – growing, but at a slower pace.

When relevant, I include expectations (E) and the prior reading (P).

The Good

• The shutdown ends at least for now. The myriad personal and economic effects will end.
• Initial jobless claims declined to 199K. Bespoke notes that this is the lowest level since 1969. [Jeff – investors should realize that this will not continue forever. Slightly higher levels do not presage an imminent disaster.]

The Bad

• Leading economic indicators declined 0.1% in line with expectations, but down from November’s gain of 0.2%. Some of the elements were estimated because of the shutdown.
• Existing home sales for December were at a 4.99 M annual rate, missing expectations of 5.25M and a prior of 5.33M. Calculated Risk observes that single-family housing starts are the most important housing series for the economy. The government shutdown delayed that data. Bill sees existing home sales as “reasonable.”
• The Chemical activity barometer (measured via a three-month moving average) declined 0.3% in January. While this is still an increase of 0.8% year-over-year, it is a sharp decline from the last few months. Calculated Risk sees this as a leading indicator for industrial production, as shown by the chart below.

The Ugly

This week’s “ugly” news was going to include more stories about stressed government employees, including those plagued by predatory payday lenders (400%? Really?), and program recipients. We’ll take the good news at face value for now, and I am delighted to change course. This was another real-time lesson for the average citizen. Many of us don’t think much about just what we expect from government and how many people are employed doing it.

Trying to distinguish essential from non-essential is nearly impossible at the margin. Requiring people to work without pay is not acceptable.

The Week Ahead

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

The calendar is the biggest of the new year. We have key reports on income and spending, consumer confidence, and the PCE index. January’s employment report and the ADP private employment release will be the most important.

That is enough for any normal week but wait. There’s more. The FOMC’s rate decision on Monday will include a press conference. While no change is expected everyone will be watching closely for confirmation of a kinder and gentler Fed.

And by the way, it is the biggest week of the earnings season.

Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.

Next Week’s Theme

There is so much information of various types that next week defies a specific theme. It is both more useful and more educational to consider two (of many) elements of successful investment analysis:

1. A strong and proven analytical technique.
2. Interpreting data – especially what is important and what is not.

If you use these principles as a framework, next week will provide a great test.

What is your investing acumen?

Background

Last night, with mute on as usual, the subheads told me that the Pundit-in-Chief had a “game plan” for the week ahead. He was describing what to watch for in each earnings report, noting that this was a crucial week. He opined (in the subhead) that this week might determine the future market direction.

I confess to frustration and a touch of anger. Where has he been for the last month? Like a typical individual investor, he seemed to trail market developments, claiming that stock behavior implied an economic collapse. The financial punditry has emphasized the “message” from stock weakness. The Pundit-in-Chief took the lead (with a reprise of his famous rant) insisting that he had special information about the problems faced by many companies. The decline in stocks became “evidence” that the economic and earnings data did not tell the entire story. In the Q3 earnings season, stocks missing expectations declined significantly. Those beating expectations had only modest gains.

The idea of an objective look, considering both economic data and actual earnings reports, is something that a good investor (like regular readers of A Dash) has been doing for weeks.

But it is never too late to get back on the right track. Let’s take a look at the analytical methods and data for the week ahead.

Compare this to the more sophisticated analysis from Brett Steenbarger, Making Sense of the Market’s Split Personality. Among a list of great points, he notes the difficulty in using technical indicators when the political decisions can be game changers. He also emphasizes the herd behavior of investors.

Michael Gayed (Pension Partners) takes a different look at the market message, including the accompanying news narrative. He explicitly considers the recession implied by market stories. Read the whole post and look at the chart, but here is the key point:

But remember that narrative tends to follow price.If equity markets are strong, it must mean we are in an expansion to most participants.If weak, the opposite.  Price can be wrong, which makes any narrative that follows it wrong too.

And finally, the media treatment of news continues the emphasis on worries. The Davos reports featured asking prominent people (who have no expertise in recession forecasting) what they think. The Goldman CEO said his team saw 50% by the end of 2020, but it was possible that the economy would keep on chugging. What do you suppose was the headline? Stories about growth slowing in China gave no background, nor the resulting GDP growth level (north of 6%).

Even the WSJ’s Sober Look column, one of my regular reads, seems to be seeing something bad every day.

Let’s turn to the major analytical methods and key data.

Methods

• The message of the market. A decline in stocks is supposed to be the best read on the state of the economy. It does not depend on any government data and is never revised. Commodities are seen as key indicators.
• Corporate earnings – with some emphasis on “quality” earnings, “organic” growth, revenue growth, and no financial engineering.
• All Fed, all the time. The many who missed the last ten years of the market rally blame the Fed. Everything is interpreted through the prism of Fed policy.
• The list of geopolitical concerns – China, Brexit, Iran, N. Korea. There is never a dull moment.
• The domestic worries – tomorrow’s tweet, the shutdown, extreme partisanship, investigations, and a new surprise every week.
• Economic data. Revised as more information is available, making it more accurate (eventually). Open to competing interpretations. Thought to be biased by some.

We’ll see data of all sorts next week. It will be interesting to see if some of the methods align.

I’ll add my own conclusions. in today’s Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

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.

The Indicator Snapshot

Short-term trading conditions remain at “neutral.” This is not yet enough to signal an “all clear” for our trading methods. Finding the right trading environment is important. Patience is an essential part of trading success.

The technical background for long-term trading has improved significantly. It is a “4” in the chart, but 3.5 is closer.

Fundamental analysis remains strongly bullish. Earnings are excellent and the risk indicators are low. The overall investment climate has improved to “bullish.”

The Featured Sources:

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.

Georg Vrba: Business cycle indicator and market timing tools. None of Georg’s indicators signal recession. Here is the latest update on his BCI indicator.

Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis.

Guest Contributor

James Picerno provides an update on Q4 GDP, drawing upon a nice range of forecasts.

Insight for Traders

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 asked fellow traders to comment on whether the current trade was based upon “bear momentum.” We also provided advice from expert traders, and an update from our Holmes model, the only one that has not gone to cash. We also provided sector ratings from Oscar and Felix, featuring the S&P 500. Our ringleader and editor, Blue Harbinger, provided fundamental counterpoint for the models, all of which are technically-based.

Insight for Investors

Investors should embrace volatility. They should join my delight in a well-documented list of worries. These are the best opportunities.

Best of the Week

If I had to recommend a single, must-read article for this week, it would be Chuck Carnevale’s analysis of the opportunities presented by the recent market decline. As usual, Chuck provides a lesson in how to approach the market, how to pick stocks, and how to use his valuable research tools. Remember the commercials urging you, “don’t leave home without it” with reference to a particular credit card. I find myself thinking about it when I read a post from Chuck. Don’t buy a stock without it is a good way to describe the value of FAST Graphs.

This is the first installment of a planned series. The resulting ideas are screened for both value and debt levels. This process identified six candidate from 366 in the Commercial Services subsector. I recommend planning some time each week to follow these ideas.

And ideas they are. Chuck properly warns as follows:

I would also like to remind you that what I am presenting here are attractively valued research candidates. However, as this series of articles unfolds, you will discover that they come in all sizes, shapes and flavors. Consequently, even though they all may be fairly valued, that doesn’t simultaneously suggest that they are suitable for every investor.

Stock Ideas

Kirk Spano analyzes oil price changes in light of the Iran sanctions and the Trump Administration’s changing policies. One of the few people commenting on oil who considers both supply and demand, Kirk’s data-based approach identifies the factors behind higher prices and the stocks that will benefit.

Intel (INTC)? Barron’s thinks it is a bargain.

Climate change? If you are not worried, move on to the next paragraph. If you are, read the Barron’s cover story to find the companies most exposed to this threat.

Personal Finance

Gil Weinreich’s Asset Allocation Daily is consistently both interesting and informative. Each week he highlights stories of interest for both advisors and investors. This week I especially appreciated his discussion about problem solving. It is an apt focus for the week ahead as well as recent events.

Abnormal Returns is an important daily source for all of us following investment news. I read it religiously. His Wednesday Personal Finance Post this week emphasized the value of preparation – the upfront work that will help in much of your common activities. He features Trent Hamm, who begins with this quotation:

“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” – Abraham Lincoln

As always, there were many good links, but I especially liked Hillary Hoffower’s data-based discussion of the difference between wealth and income.

Watch out for…

More scams – especially aimed at the elderly. Your grandson is not in jail in Miami. The IRS does not need payment from you via Home Depot gift cards. In fact, the IRS does not reach out via telephone. The people at the door are not going to enable you to get a free roof via your insurance.

Don’t let them in the house. And don’t send money in any form. Phone a friend if you are unsure.

Final Thought

For anyone investing over the last month, the dispassionate economic approach has been best. Here is my take on each:

• The market message may be important for traders, but not for investors. Investors should know what their stocks are worth. Selling them because the emotional “Mr. Market” is selling condemns you to a path of chasing – buying high and selling low.
• Corporate earnings are the fundamental valuation method for stocks, as long as one considers interest rates. Stick to the numbers rather than someone’s slip of the lip or an analyst report.
• The Fed is important at certain times, but the omnipotence is vastly over-rated. Explaining everything by looking to the Fed means that, lacking a strong method, you are grabbing a popular one.
• Geopolitical concerns are always with us. The problems are easy to list. Solutions are more difficult to imagine or to understand in the aftermath. Few really expect a US/China trade agreement, so it will be huge when it happens.
• Domestic political news. This may be the most dangerous. Everything is made into conflict and a crisis. A key question is whether the news is really relevant to financial markets or just “filler” for a slow day. Do not expect to see complete and comprehensive solutions. Compromise and negotiations take time. If you wait until it is over, you have waited too long.
• Economic data provides the most objective information, but you need to know what is important. Especially, you should emphasize risk.

This list is not that difficult. It is mostly about what not to do. If you understand that the economy is “chugging along” at a reasonable pace with no recession on the horizon, you are most of the way there. Next, look for economically sensitive stocks that have been thrown under the bus by analysts playing amateur economist.

And finally – Do not depend on FAANG or other winners from last year.

Investors who are thinking ahead should be prepared for a change in market leadership.

[If you are confused by all of the noise and having trouble finding winners, you might want to request some of my papers for individual investors. Ask for my recent “client-only” paper on Lam Research. This company and many others will do just fine if the economy is merely reasonable. We can also generate extra income from stodgy stocks. Just send an email to main at newarc dot com]

I’m more worried about:

• Delays in planned business investments. We are a long way from “talking ourselves into recession,” but it is an economic drag.
• Brexit. There is little progress. The effects will involve another real-time experiment.

I’m less worried about

• Trade issues. The various small leaks are what we would expect from slow and gradual progress.
• The shutdown. I know the “compromise” is temporary, but I expect it to lead to a conclusion.