Weighing The Week Ahead: Stalemate?

The conclusions above are widespread in mainstream media. I have some conclusions of my own in today’s Final Thought.

Quant Corner and 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, featuring the Indicator Snapshot.

Short-term and long-term technical conditions both continue at the most favorable level. Our fundamental indicators have remained bullish throughout the December decline and rebound. The C-Score has stabilized despite a flatter yield curve and increases in headline inflation. I continue to watch this closely, analyzing signs of possible confirmation of higher recession odds. Our methods give us an early warning, helping us to avoid costly “false positives.”

The Featured Sources:

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

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

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

Georg Vrba: Business cycle indicator and market timing tools. The most recent update of Georg’s business cycle index does not signal recession and he has pushed back the date for possible concern indicated by his employment model.

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

Guest Commentary

Professional forecasters in the Philadelphia Fed Survey see lower near-term growth (via GEI). 1.9% this quarter and 2.1% in Q3.

Menzie Chinn analyzes the 5-year/3 month spread. He looks at the current values, which imply a one-year probability of over 40%, higher than we are expecting. He also considers the curve distortions from Fed intervention. While the “reliably bearish” punditry claims this makes recession odds higher, Prof. Chinn correctly notes that the large scale asset purchases have pushed yields lower. He makes an adjustment, with citations for methods and background, and the result is dramatically different – about 6%.

Insight for Traders

Check out our weekly “Stock Exchange.” We combine links to important posts about trading, themes of current interest, and ideas from our trading models. Last week we discussed the news cycle effect on traders, asking whether they traded news cycles or market cycles. We cited some useful sources and discussed recent picks from our trading models. With all of the models back in action, there are more trading ideas and interesting contrasts with a fundamental approach. Felix rated the top twenty stocks in the Russell 1000 and Oscar did the same for the most liquid ETFs. Pulling this altogether was our regular editor, Blue Harbinger.

Insight for Investors

Investors should embrace volatility. They should join my delight in a well-documented list of worries. As the worries (shutdown, Fed policy, trade) are addressed or even resolved, the investor who looks beyond the obvious can collect handsomely.

Best of the Week

If I had to recommend a single, must-read article for this week, it would be The Foundation of Every Proper Investment Plan by Christine Benz (Morningstar). She takes the amorphous goal setting and wealth-building concepts and translates them into a timeline with specific goals and priorities. The advice is clear and specific, but it defies summary. You should read the entire post.

I want to pair that wonderful advice with that of Trent Hamm (The Simple Dollar). In a logical fashion similar to that of Christine Benz, he clearly describes the steps in any financial decision – problem identification, research, and choice. Why is this important? It facilitates action, not dithering. Those who over-analyze seeking optimum solutions may wind up doing nothing.

If you took the steps outlined in these two articles, your investments would be much more likely to meet your goals.

Stock Ideas

Chuck Carnevale continues his sector-by-sector quest for attractively valued stocks. Each post in this series provides both interesting ideas and a lesson in how to perform solid analysis. He has reached utilities, which seems to be the end of the line. Not surprisingly he finds “slim pickings.” This is an extremely important post, describing the intertwined effects of valuation and dividends. Read his article carefully and you will understand this key conclusion:

Investing when overvaluation is manifest reduces your returns while investing when undervaluation is manifest can increase them. Therefore, when growth potential is low, there is little to no margin of error or safety. If you even slightly overpay for a slow growth stock such as a utility, you are very likely to earn unsatisfactory long-term returns. Moreover, you will earn these lower returns at elevated levels of risk. Higher risk and lower returns are the exact opposite of what prudent investors seek.

Bhavneesh Sharma has another interesting biotech idea, CRSPR Therapeutics (CRSP). Because of his experience in medicine, clinical work, and finance, he can spot ideas and explain them in a way you can understand. In this case, most investors know that CAR-T is a promising approach to fighting cancer through gene editing. Bhavneesh provides just enough technical detail. He reports clinical results and briefly touches on corporate financials. Even if you just want to learn more about the topic, this is a good read.

Barron’s highlights seven dividend stocks for “volatile times.” [Jeff – I’m not sure times will be very volatile and some of these names are expensive. That said, the list is worth a look].

But beware. Ploutos provides A Brief History of Dividend Aristocrat Crashes.

Allen Good wonders Why Won’t the Market Shell Out for Shell?
He analyzes improvements in dealing with recent problems and compares Shell (RDS-A) to other integrated oil companies.

Want a cheap stock that is now attracting attention? Barron’s suggests Mosaic (MOS) may be at the bottom after an earnings cut this week. Why? Analyst upgrades after the 7% decline.

Or a sector that remains in the dumps? Barron’s discusses managed care companies.

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Gary Anderson 1 year ago Contributor's comment

The fusion of some Democrats who oppose free trade and Trumo, who hates all trade, is a disaster. It will play out in time. Remember, Trump is implementing his campaign promises. He already said he does not want Beemers and Mercedes on American streets. Wall Street needs to see where this all is going.