Weighing The Week Ahead: How To Watch The Information Avalanche

The calendar is massive, and it comes at a crucial time. I have never seen so much fresh information in a single week: the biggest economic reports, the heart of earnings season, and an FOMC meeting. And that is without any Washington surprises.

It is a week where we should be paying special attention. Even though the pundits will report story-by-story, astute investors should wonder: What can we learn from this avalanche of new evidence?

Last Week Recap

In last week’s installment of WTWA, I asked why the market was so quiet, reviewing several possibilities. This was indeed a topic of significant discussion during another quiet week. Also, as I predicted, some jumped on the idea of a lull before the storm. As I wrote on Twitter, if you seek omens, you will find them.

One example was some research highlighted by one of our favorite sources, Josh Brown. He featured an award-winning paper about forecasting a volatility tsunami. First the author explains:

In the paper, I discuss the common volatility environment of dispersion (think standard deviation) becoming very low ahead of many eventual spikes higher in the VIX. While not every period of low volatility dispersion precedes a major move higher in volatility, most previous spikes we’ve experienced in the last ten or so years have followed a steep decline in volatility standard deviation.

I am struggling to see how expecting mean reversion from an extreme level is helpful. It is especially difficult when it has happened some of the time in the last ten years. I guess that means we should not be surprised if it does not happen again right now.

And then the author concludes about the current measures:

This tells us that it’s not just the large cap S&P 500 stocks that are experiencing a degree of over-confidence as expressed by the Volatility Index, but also the other major U.S. equity indices as well.

As I explained last week, stocks do not experience human feelings. A balanced market means that the aggregated demand and supply from millions of investors are in balance. Maybe Josh would consider an op-ed piece on this issue.

Another came from Fortune, a favorite source for wealthy investors. The authors describe five numbers to watch to spot the next recession. The lede and the emphasis is on the length of time since the last recession, “soaring” market volatility, and market highs. No wonder people are scared witless. There is no economic support for the indicators cited, nor any record of success in such forecasts. It is disappointing that the magazine did not make an effort to find those with long-term success records on this subject.

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, who packs a lot of relevant information into the weekly chart without sacrificing clarity.

In another quiet week, the market gained 1.2%, most of it in a single day. The trading range was only 1.5%. As always, our indicator snapshot in the quant section below summarizes volatility and the VIX index in various time frames.

Another way to consider the volatility is by checking out the number of days with a change of more than one percent. 2017 was so abnormally low that it seemed to change expectations. 2019 is on pace to be another low-volatility year, including some weeks with hardly any change.

Personal Note

I will be at a conference in Scottsdale for the next few days. If any readers in that area would like to meet, please send me a message. It is a crowded schedule, but there are some gaps. I also look forward to seeing some of those I regularly cite in these posts.

Noteworthy

Those who share my views on pseudo-experts will enjoy this article. Researchers looked for “the ability to play the expert without being one.”

Study participants were asked to assess their knowledge of 16 math topics on a five-point scale ranging from “never heard of it” to “know it well, understand the concept.” Crucially, three of those topics were complete fabrications: “proper numbers,” “subjunctive scaling” and “declarative fractions.” Those who said they were knowledgeable about the fictitious topics were categorized as BSers.

Read the full article for some surprising findings, and some that you might expect. Here is one on English-speaking countries.

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).

New Deal Democrat’s high frequency indicators are an important part of our regular research. Indicators in all time frames have turned positive, some only marginally. NDD’s working hypothesis remains that we are seeing a rebound from a “mini-recession” from the government shutdown. He will not be convinced of the rebound’s prospects without more data.

The Good

  • New homes sales for March were 692K (SAAR), better than E 655K and P 662K. Calculated Risk calls it a “solid start” to the year and expects the gap between existing home sales (affected by foreclosures) and new home sales to continue to decline.

  • Durable goods orders for March increased 2.7%, solidly beating expectations of 0.9% and February’s decline of -1.1% (revised up from -1.6%). I always take note when an increase is in addition to an upwardly revised prior value. (MarketWatch). This is an important read on business investment.
  • Mortgage delinquency rates decreased in March – down 5.3% compared to February and 2.0% year-over year. (Calculated Risk).
  • Q1 earnings surpassed expectations on nearly all metrics. The earnings decline for the quarter has decreased to -2.3%, from -3.9% last week. Revenue growth is now 5.1%. These are both beating expectations by more than the five-year average. (FactSet).
  • Michigan consumer sentiment improved to 97.2, slightly better than E 96.7 and P 96.9.
  • Q1 GDP surprised with a gain of 3.2% versus expectations of 1.9% and last P of 2.2%. News shows and political leaders celebrated the headline number (NYT), but markets were fussier. Chief among these was the increase in inventory accumulation (contributing over one percent) and reduced imports (which were affected by potential tariff timing). Without these effects economic growth was only 1.5%. (Barron’s). Despite the news stories, stocks did not rally on the news and interest rates actually moved lower. I enjoyed lunch with Bob Dieli on Thursday, and this scenario was just as he predicted. His subscribers can see the details. This left me well-prepared for an early analysis at FATrader. The story was pretty well reported on Twitter and financial media.

    New Deal Democrat had a slightly different negative take, emphasizing his long-leading indicators in the report.

    “Davidson” (via Todd Sullivan) suggests looking at trends in Real Private GDP. This takes out some artificial government accounting and provides a measure on private activity. He concludes:

    But, the data reveals that an expansion in the Private economic activity the past 18mos has definitely accelerated. The Real Trailing Twelve Mos Private GDP is definitely significantly higher than the trendof 3.00% since early 2009. Today’s report of 3.51% confirms all other economic trends I monitor and is something expected in GDP data.

    The development of Real Private GDP is to remove the skewed perception many derive from the widely reported and in my view misinformed GDP data. GDP includes discretionary govt spending which comes from taxation and govt borrowings based on the Private economy. It is a form of double counting the underlying strength or weakness when govt spending tends to rise and fall somewhat along economic trends. Total Govt Expenditure&Inv does not include the mandatory payments from Social Security or Medicare and etc.

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