We have a big economic calendar jammed into three trading days. The reports are of moderate interest – consumer confidence, personal income and spending, durable goods orders, and new home sales. In the current environment these will not provide market-moving news.

With most of the A-Team taking the week off (and even B-Team players leaving early on Wednesday), trading volume will be lower. Normally this means low volume and little volatility. Perhaps not this time. The field is open for algorithmic trading, which reacts quickly to key words in headlines. Will there be headlines? We should be wondering: Will algos go wild?

Last Week Summary

In my last installment of WTWA, I used the Swiss Cheese model to emphasize the need for multiple strategies to deal with the pandemic. While there was little discussion about this exact point, the pandemic, mask wearing, and social distancing got plenty of attention.

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.

Market Story

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

Sector Trends

Sector movement is another important clue to market trends.

Once again, Juan Luque provides us with some words of wisdom from the Incline trading desk:

A second week of positive Covid-19 vaccine news was not enough to give investors more confidence on the economic recovery. The S&P 500 Index was down 0.77% amid lock down concerns due to the continued increase in positive corona virus cases. With a 4.99% return, the Energy sector was the big winner this week, moving straight upwards towards the Improving sector. This is the second week in a row that the Energy sector shows signs of recovery. The Financials, Industrials, and Materials sectors were slightly up for the week, with both the Materials and Industrials sectors losing strength and descending towards the weakening quadrant. The remaining sectors were down with Utilities being down 3.92%, the most of all sectors for the week, yet it remains in the “shopping list” space in the Improving quadrant.

Comment

The market lost 0.8% on the week with a trading range of gained another 2.2% for the week with a trading range of 2.4%. You can monitor volatility in my Indicator Snapshot, featured in the Quant Corner.

Noteworthy

The Visual Capitalist provides this look at asset class performance since 1985. Those who focus on past performance from the prior year should take a careful look at how that has worked out.

The News Overview

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.

My continuing assessment is that many of the normal economic indicators are not helpful in the wake of the COVID lockdown decline. Too many sources are focused on a change in direction, even if very modest, which has painted an overly optimistic picture. As the economy stalls, expect to see a rapid switch.

Good

Housing

• NAHB Housing Index for November registered 90 versus expectations of 85, which was also the October level.

• Housing starts for October were 1530K beating expectations of 1445K and September’s (upwardly revised) 1439K. Calculated Risk provides analysis and this chart:

• Existing home sales for October were 6.85M (SAAR) better than the expected 6.49M and September’s 6.57M. Calculated Risk notes that this was the highest October sales rate since 2006.

Bad

Employment

• Initial jobless claims increased to 742K, worse than expectations of 720K and much worse than the prior 711K.
• Continuing claims dropped to 6.372M from the prior 6.801M.

The claims data continue at recessionary levels and are worsening.

And the length of unemployment grows longer.

Coronavirus wave

• The number of cases is increasing dramatically, along with the number of deaths. (New York Times Tracking Site).

• The surge in cases includes nearly every state. (ProPublica Interactive State Tracking Site).

• State ability to trace contacts from new cases has hit a new low. Without tracing, it is impossible to learn the source of new hot spots or to prevent the disease spread. My charts normally show interesting variations. This an exception, and an important one. (Test and Trace).

Retail Sales

• Retail sales for October increased only 0.3% versus expectations of 0.5% and September’s downwardly revised 1.6%. This might seem like only a mild negative, but a deeper look is ominous.

• Caution in spending on activities outside the home is increasing.

Ugly

Calendar

We have many economic reports jammed into three business days. Most are of secondary interest. Consumer confidence from both the University of Michigan survey and the Conference Board will help gauge continuing spending willingness. Personal income and spending are interesting for the same reason. New home sales are expected to reflect the recent strength in other housing data.

Markets are open only for a half day on Friday. Expect the few market participants who come to work at all to be heading for the exits before lunch on Wednesday.

Briefing.com has an excellent weekly calendar and many other useful features for subscribers.

Theme and comment

There are many economic reports this week, but nothing to take precedence over the political and pandemic news.

Slowing the pandemic requires some cooperation among leaders as well as people like us. Sadly, there is little sign of that happening. I see ominous economic effects in the absence of some swift policy and social changes.

These factors threaten some dangerous chemistry. With so many on vacation, algorithms will have an open field. The algorithms are trained based upon market reaction to past headlines and key words. Many markets are at support levels.

What might we expect from headlines? Anything positive?

Progress on the stimulus bill? Not this week.

More vaccine news? Hard to top what we have seen in the last two weeks.

What about the negative?

I am not going to list the possibilities since they are so easy to imagine. I do not want to make it worse.

The results of the chemistry is the potential for large, algorithm-driven market moves. Will it be a case of algos gone wild?

Background

Am I making a forecast? It is more in the spirit of the “possible improbables” that get mentioned by famous gurus each year. Or maybe it is warning about something that is usually a modest percentage possibility and has increased to something meaningful. Or maybe it is just my instinct on overdrive.

Current obsessions

“The economy is not the market.” This will be a great topic to revisit next year, since it is a matter of time frame. It is invoked by those who see a recent disparity between economic and market performance.

Quant Corner

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.

Indicators

For a description of these sources, check here. It is time for an update on the Big Four from Jill Mislinski. These are the most important indicators for the NBER determination of the start and end of recessions.

Comment

Technical measures remain above support. Technical analysts are still bullish, but it is close.

My continued bearish posture for long-term investors is based upon both valuation and fears about the continuing recession. As always, I expect good times – but not yet.

Final Thought for Investors

Avoid FOMO (the fear of missing out). Do your own thinking.

My Portfolios

I continue to maintain higher than normal cash levels as a cushion against the continuing recession. It is possible to do this and still meet your goals provided you do not make extreme decisions. I am doing well in all stock portfolios, mostly by selecting less risky stocks.

I sold positions this week as successful holdings in my Enhanced Yield program were called away. I will replace them cautiously.

My conclusions about the economy are high conviction decisions based on well-tested analytic methods.

Most important takeaway

Do not be a hero! Traders should “keep it small” and investors should just wait.

Year-End Planning

If you have not already done a review of your current portfolio – asset allocation, sector exposure, and risk – now is a great time. You can still adjust with tax considerations in mind as well. My recent white paper on this topic provides a method for finding and measuring risk. It provides solid, practical information.

I also recommend looking forward. The world will be different when the economy really turns around. That is the foundation concept for my Great Reset research project. I have almost completed my extension of these principles to REITs.

There is no charge and no obligation for either the Portfolio Risk paper or the Great Reset Group. Just make your request at my resource page.