Weighing The Week Ahead: Investors Need Some Accurate Evidence

We have a light economic calendar with important data on home sales, jobless claims, and durable goods orders. None of these is likely to stimulate higher heartbeats. I expect politics and the election to get plenty of attention in the financial media, especially with an open Supreme Court seat as a new issue.

These are important long-term issues, but the answers (which no one knows anyway) shed little light on key questions we all face right now.

Investors need an evidenced-based assessment of the economic rebound. And then they need to ask if their portfolios are aligned with the answer.

Last Week Recap

In my last installment of WTWA, I took note of market declines and considered whether this might be the “start of something big.” We still do not know, but it is worth paying attention to the most important indicators.

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’s version of the prior week. The callouts also show the range of Friday trading.

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The solid start to the week deteriorated beginning Wednesday afternoon. This coincided with Fed Chairman Powell’s press conference, viewed by many as the cause.

The market declined 0.7% on the week. Despite the choppy look of the chart, the trading range was only 3.0%. I provide regular updates of historical and expected volatility in the Indicator Snapshot (below).

A second chart from Jill helps to maintain our perspective on the current drawdown.

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The weekly sector chart shows the sources of the action.

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I have promised some commentary on this chart from Juan Luque, the member of our trading team who works most closely with these trends. Here is his update:

The Relative Rotation Graph serves as a visual representation of the rotation of instruments around a benchmark. For our regular post we chose the S&P 500 index as the benchmark to see how its sectors outperform or underperform it and to see the direction of the trends in each sector. In today’s graph we can see the industrials strength as it moves into the leading quadrant and the financial sector towards it. It also seen how the construction, info tech, and communication services have continued to weaken and investors might worry in those sectors. It is quite interesting to see energy sector dropping from the improving quadrant to the lagging one instead of moving towards the leading one as all sectors tend to move in a clockwise manner.

(The sector names are here. The Bloomberg symbols add “S5” at the start of the name).

Noteworthy

For the last two weeks I have been worrying about my West Coast friends. They have avoided the worst results of lost homes and costly evacuations, but many have suffered from deadly reductions in air quality. I studied the AQI and found this excellent description form the Visual Capitalist. Read this guide and you will be able to interpret the air quality maps the way I have been.

So many candidates for my Noteworthy section cannot be demonstrated properly in WTWA. The interactive version of this post draws upon several solid sources to look a few decades into the future and look at the impact on various regions. The example in this chart can be sorted by each field. If you choose “Heat” for example, you will see that my new home rates a “10.”

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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 more important than ever. As we look for turning points and the sustainability of the rebound, these are the earliest clues. His latest update shows all three of his time frames remain in positive territory. He expects consumer spending to weaken with the loss of Congressional emergency aid. They key element of change? More action against the coronavirus could lead to a firm expansion next summer.

The Good

  • Homebuilder sentiment for September was 83, well above the 78 reading for August, which was also the value expected by economists. Calculated Risk writes about the record high in this diffusion index.
  • Initial jobless claims decreased to 860K from the prior week’s upward revised 893K, but missing expectations of 830K.

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  • Continuing claims declined to 12.628M from the prior week’s downwardly revised 13.544M

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  • Sea container imports are at record levels. Steven Hansen (GEI) considers the data from various angles and provides this highlight:

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  • Homeowners in Forbearance Plans due to COVID-19 declined, as of mid-September. Calculated Risk shows the significant improvement since the peak in May.

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  • University of Michigan sentiment (Sep. preliminary) was 78.9, beating expectations of 77.0 and much better than August’s 74.1. Jill Mislinski has the best chart on this series.

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The Bad

  • Industrial production for August increased only 0.4%, missing expectations of 1.0% and weaker than July’s (downwardly revised) 0.9%.
  • Mortgage applications declined 2.5% versus the prior week’s gain of 2.9%.
  • Retail sales for August increased 0.6%, below the expectations of 1.0% and July’s downwardly revised 0.9%.

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The control group removes the most volatile sales components.

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  • Housing starts for August registered a SAAR of 1416K, missing expectations of 1489K and lower than July’s 1492K. Calculated Risk observes that YTD starts are up 5.2% compared to 2019. He expects stable but slowing growth. The monthly comparison for 2019 and 2020 is interesting.
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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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