Weighing The Week Ahead: A Delicate (And Temporary) Balance

Despite plenty of news, there was little market reaction. In a summer week including many vacations, we have a modest economic calendar but plenty of earnings news. I expect the punditry to be asking: What will disrupt the balance of news?

Opinions about the balance are quite diverse, as a recap of last week shows.

Last Week Recap

In my last edition of WTWA I suggested “Anything Goes,” because there were so many varied events – all important. There was much discussion over the Trump/Putin summit, lots of good earnings news, two days of testimony from Fed Chairman Powell, and plenty of economic reports. And how did the market react? Not much, at least not in the overall indexes. Once again, a big week for news had a very modest effect on stocks. The punditry expressed surprise before offering their profound explanations. It was humorous to watch. Some were surprised that the news had not pushed stocks higher, and some were amazed that stocks had “shrugged off” the turmoil to hold ground. The job of pundit is easier when there is a clear move for which you can find post-hoc explanations.

My observation that it would be difficult to guess a single theme was pretty accurate. The Helsinki Summit story got continuing headlines, although the market implications are murky.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week let’s look at the futures chart from Investing.com. Since futures trade outside normal market hours, you can see the overnight effects. The “N” tags are points where there was significant news. The interactive chart lets you see the specific news and add technical indicators of your choice. Futures have a different lead month on a quarterly cycle. Right now, trading is in September futures. The value differs a bit from the S&P 500 index value. The futures owner does not collect dividends but earns interest on the funds not used for actual stock purchases. There is an active arbitrage between these values.

The market was virtually unchanged. The week’s trading range was less than 1%, lower than the last few weeks and much lower than the long-term average. I summarize actual and implied volatility each week in our Indicator Snapshot section below. Volatility is back below the long-term range.

Personal Note

We have special thanks this week to Dr. Brett Steenbarger, whose diverse skill, writings, and experience place him among the top thought leaders in our business. It is always nice to get recognition for your work, and especially when it is based upon precisely what you are trying to do. His recent article mentions “A Dash” along with some other great sources. Please take Brett’s suggestion. Use his leads to find new sources, and links to even more.

Important Trivia

Brian Gilmartin tees up a good question with an interesting comparison of conditions of the 1990’s with those of today. He provides a strong, data-based comparison.

As it happens, Eric (my star summer intern) and I were working on a similar concept. I’ll provide a separate post later, but for now please try these questions:

  1. How many of the stocks that were “top ten” in the S&P 500 for 1990 are still there.
  2. What stock had the best performance?
  3. That stock is no longer in the top ten. Why not?

Answers in the conclusion. The message for investors is to beware of buying the top in the current winners. An equal-weighted average of the top ten has underperformed the overall market in every subsequent period …until now. Will things be different this time? If you are an index fund buyer, this is what you are getting. Just three stocks have been responsible for 71% of S&P 500 returns and 78% of Nasdaq 100 return.

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.

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

Some important indicators, including retail sales, homebuilder confidence, and business inventories, were in line with expectations. Bespoke takes a deeper look at revisions and updates their interesting “bricks to clicks” measure.

The Good

  • Industrial production rose 0.6% in June (E 0.5% P -0.5%, downwardly revised from -0.1%) Downward revisions in the prior month throw off the interpretation of changes in the current month. That is why these noisy series are best viewed with a rolling multi-month period.
  • Leading indicators were up 0.5% (E 0.4% P 0.0% downwardly revised from 0.2%). (Conference Board).

  • Initial jobless claims hit another new low, 207K. (E 220K P 215K). Bespoke notes that this is the lowest level since December 1969.
  • LA port traffic is higher, but some of the increase might be a race to avoid the impending tariffs. (Calculated Risk).
  • Earnings season shows strength. Whether you look at beat rates, revenues, comparisons to last year, or estimate revisions, the story is strong. (Factset). Here is the sector look so far.

The Bad

  • Hotel occupancy is down. Calculated Risk has been monitoring this story – a record pace for 2018 until recently.
  • Housing starts for June posted a SAAR of 1173K, (E 1318K P1337K). Calculated Risk notes the disappointing numbers. He argues that it was just one month, concentrated in multi-family which is especially volatile. He also believes that existing home sales will move sideways while new home sales, more important for the economy, will increase.
  • Building permits also missed with a SAAR of 1273K (E1330K P1301K). New Deal Democrat sees the data as suggesting a housing and GDP slowdown.
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Henry L. Morgan 2 years ago Member's comment

Good read.