Weighing The Week Ahead: Has The Trump Trade Reached The Tipping Point?

  • Dr. Ed Yardeni sees no slowdown in global economic stats. Check out his thorough review.

As usual, I’ll save my own conclusions for today’s Final Thought.

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 worsened this week. In mildly bearish conditions our trading approaches can still be profitable, but that might not be true for everyone. We continue to monitor the technical health measures on a daily basis. If this indicator goes to fullish bearish, we liquidate trading (not investment) positions. We are not quite at that point, but I have rounded the result to “5.” This is not a forecast that the market will decline. It indicates increased difficulty in trading profitably.

The long-term fundamentals and outlook are little changed. Based upon historical data for this indicator, I have increased the 9-month recession probability to the 18% range. I am monitoring, but not yet especially worried. The long-term technical health is 1.5, but I rounded it up to reflect the change.

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools. None of Georg’s indicators signal recession.

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

Insight for Traders

This week we asked, “Are you a contrarian trend follower?” As usual, we discussed some stock ideas and updated the ratings lists for Felix and Oscar, this week featuring midcap stocks. Blue Harbinger has taken the lead role on this post, using information both from me and from the models. He is doing a great job, presenting a wealth of new ideas and information each week.

While my intent is to focus on traders, long-term investors may also benefit. That was especially true in this week’s post.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility. I remind investors of this each week, but now is the time to pay attention.

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Scott Grannis’s review of Fed policy, the QE effects, and where things stand now. This misunderstood topic serves to prevent many financial analysts from a clear view of the fundamentals. The charts and explanations can help you avoid this trap.

To this day there are still legions of observers who argue that what the Fed did starting in late 2008 was simply a massive amount of money-printing, a desperate monetary stimulus that was necessary to avoid a depression, and the economy has been running on fumes ever since. 

Others, myself included, believe that what the Fed did was not monetary stimulus at all. It was simply a rational response to an unprecedented increase in the public’s demand for money and money equivalents, which in turn was the result of the near-collapse of the global financial system and the worst global recession in modern memory. The world was running very scared, so the demand for safe monetary assets was nearly insatiable. Unfortunately, there were not enough T-bills (the classic monetary safe haven) to go around. By deciding to pay interest on bank reserves, the Fed effectively made bank reserves equivalent to T-bills, and that was exactly what the world wanted: trillions more of safe, default-free, interest-bearing assets, and the Fed had the ability to create bank reserves with abandon if need be.

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