Weighing The Week Ahead: Building A Transition Portfolio

Chart, Trading, Courses, Forex, Analysis

We have a moderate week for data, featuring housing, sentiment, and unemployment claims. Most important will be the report on personal income and spending.

Attention will remain focused on vaccine progress and the pandemic, as well as the progress through Congress of a stimulus package.

With markets near record highs, many investors are wondering about the safety of their portfolios. With growing hope for a full economic recovery, it is wise to ask: Is it time to build a “transition” portfolio?

Last Week Summary

In my last installment of WTWA, I described a special letter I received from Mr. Market. It was brimful of optimism, an explanation of what to expect if everything goes right. It was fun for me to write and I hope readers found it useful.

Since we are about to get the annual letter from Mr. Buffett it will be interesting to contrast his thoughts about the market.

Key Charts

I always start my personal review of the week by looking at some great charts. This provides a foundation for considering news and events. Whether or not we agree with Mr. Market, it is wise to know his current mood.

I am featuring Jill Mislinski’s chart of the market week. Her approach combines several key variables in a simple readable format.

Sector Trends

Sector movement is another important clue to market trends.

Juan Luque from Incline’s trading desk provides a helpful interpretation of the sector moves.

The S&P 500 finished the week down for the first time in three weeks. The Energy sector was up 4.5% followed by the Financials sector at 3.78%. Both sectors continue moving along the leading quadrant. Materials and industrials were also up 1.92% and 1.42% respectively. The remaining sectors posted losses for the week. The Utilities sector was the worst performer this week posting -2.76% weekly loss and remains in the lagging quadrant. The second and final sector in the lagging quadrant is the Consumer Staples which was down almost 1% for the week.

Comment

The market lost 0.7% on the week with a trading range of only 1.7%. You can monitor the actual volatility versus the VIX over several time periods in my Indicator Snapshot, featured in the Quant Corner below.

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.

I carefully sift through many articles, so that you can see the most relevant information for individual investors. Most of these have links to specific posts, but that is difficult for one very prolific writer.  If you like the several charts included from https://thedailyshot.com/ you should check out the massive full slate.

Good

Corporate Earnings

With 83% of the S&P 500 reports in, 79% have beaten estimates. The size of the beats, at 14.6%, is the fourth highest level in more than a decade. (John Butters, FactSet). Surprisingly, the companies with positive surprises have not been rewarded with a higher stock price.

Coronavirus and Vaccine Distribution

I am delighted to include this topic in the “good news” section.

  • Many of my regular data sources reflect the reduction in new cases. This chart from STAT shows the decline in the rate of new cases, back to the November levels.

  • My own favorite indicator is the percentage of positive tests. I calculate this from other sources and maintained my data since June. The rate for the last month was 5.9%, the best level since November. The target for this metric is <3%.
  • State-by-state analysis shows the wide disparity in the testing results. States seem to have given up on a tracing program. If you go to the site and mouse over the map, you can see the results for each state. My state is still over 15%. Here is a static version of the map.

  • Vaccine progress is very encouraging.

Source: Bloomberg

Economic Rebound

  • Industrial production for January increased 0.9%, beating expectations of a 0.6% gain, but below December’s downwardly revised 1.3% increase.
  • Housing starts for January increased 1580K (SAAR) missing expectations of 1607K and lower than December’s 1680K — but….
  • Building permits, a leading indicator for housing starts, increased registered a SAAR rate of 1881K, much higher than expectations of 1670K and December’s 1704K.
  • Best of all, retail sales for January increased 5.3%, crushing the expectations of a 0.8% gain and December’s -1.0% change.

We know that part of the spending is fueled by government stimulus and assistance payments. Home refinancing including a “cash-out” has increased dramatically since the start of the epidemic.

Bad

Employment

  • Initial jobless claims increased to 861K missing expectations of 775K and up from the prior week’s 848K (revised up from 793K). Here is a chart to help with perspective.

  • In contrast, the “high-propensity” business applications show improving prospects for business formation. (This classification requires, among other things, a stated date for the beginning of wage payments). The Census Bureau no longer does a seasonal adjustment, resulting in this chart.

The Daily Shot version provides a more helpful chart design, comparing the early-year seasonally strong period with those of prior years.

Ugly

The Texas winter storm emergency leaving more than 4.5 million customers without power and a death toll which officials say is probably larger than the 70 known cases. The Texas Tribune.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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