Weighing The Week Ahead: What Did We Know — And When Did We Know It?

We have a huge economic calendar and the first of three scheduled Presidential debates. The employment report will be the last one before the election, so I expect it to get special attention. Most of the other important economic data will also be reported during the week.

The data provide an opportunity for investors to assess what they can reasonably conclude about the state of the economy and investment prospects. We should all be asking,

What do we know ……and when did we know it?


Last Week Recap

In my last installment of WTWA, I emphasized the investor need for evidence on key elements of the economy. I also noted that this attention to data might well be overtaken by politics and the Supreme Court vacancy.

I was half right.


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 large range of Friday trading.

Chart

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The market declined 0.6% on the week. Despite the choppy look of the chart, the trading range was only 3.5%. I provide regular updates of historical and expected volatility in my Indicator Snapshot (below).

The weekly sector chart shows the sources of the action.

Some readers asked whether we could do this chart in a longer time frame. Here is one for twice the length of time, 26 weeks. Let me know which you prefer or whether I should alternate.

My trading team has passed along more information about the source of this chart. I know that many readers like it, so you may with to read some blog posts by Julius de Kempenaer. I especially recommend his 9/21/20 edition, Daily Rotations Look Erratic.

Juan Luque, the member of our trading team who works most closely with these trends is back this week with his current interpretation.

In this week’s longer range RRG -we went from 13 to 26 weeks- the trends’ clockwise paths are easily seen. The energy sector looks like the most beaten down as it failed to move into the leading quadrant and fell back down into the lagging one. We can also see that the weakness in the sector is more than just a few weeks. The financial sector seems like the most promising as it moves towards the leading quadrant. The health care sector shows weakness while the utilities, consumer, and real estate get closer to the improving quadrant.   The sectors showing improving strength represent the “shopping list,” as Mr. Kempenaer, creator of the RRG, would refer to it.

(The sector names are here. The Bloomberg symbols add “S5” at the start of the name. The small square is the current value and other points are the history).

Noteworthy

Jeff Desjardins of The Visual Capitalist considers the trend toward EV’s. This graphic combines two key questions:

  1. How far can you go on a single charge?
  2. How much will it cost?


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 remains concerned about consumer spending in the absence of more Congressional emergency aid. And of course, the lack of progress on COVID-19 issues.

There are now many “competitors” on the high-frequency indicator front. There is an important difference between most approaches and that of NDD. He developed a method that created a logical variation in time frames and tested his choices. The efforts I now see most commonly scoop up any report that is relatively contemporary and plugs it in. There is no vetting, checking of methodology, or testing against prior eras. It is a demonstration of one of my key data principles: When there is a large appetite to know about something, the market will uncritically accept whatever is offered. The chart below, for example, is interesting in a general way, but a challenge to extrapolate to the broader economy.

The Good

  • MBA Mortgage Applications rose 6.8% versus last week’s 2.5% decline. (Calculated Risk).

  • New home sales for August increased to a SAAR of 1011K, beating expectations of 875K and above July’s 965K (revised up from 901K). Calculated Risk observes as follows:

This was well above consensus expectations, and this was the highest sales rate since 2006. Clearly low mortgages rates, low existing home supply, and low sales in March and April (due to the pandemic) have led to a strong increase in sales.  Favorable demographics (something I wrote about many times over the last decade) and a surging stock market have probably helped new home sales too.

Part of the improvement is the result of builders’ adaptation to demand.

  • Existing home sales for August recorded a 6.00M (SAAR), in line with expectations but an improvement of July’s 5.86M. Calculated Risk notes that future comparisons will be challenging, since 2019 sales improved with lower interest rates. Here is an interesting chart that shows multi-year comparisons.

  • Continuing jobless claims improved to 12.580M, better than the prior week’s (upwardly revised) 12.747 M.
  • Fewer mortgage loans are in forbearance. (Calculated Risk). It is now the lowest level in five months.

The Bad

  • Initial jobless claims increased to 870K, worse than expectations of 825K, but in line with the prior week’s 866K.

  • Durable goods orders for August increased 0.45, worse than expectations of 0.9% and much worse than July’s (upwardly revised) gain of 11.7%.
  • Mortgage serious delinquency rate increases. Calculated Risk writes that it is the highest since 2013.

Corporate executives and officers at S&P 500 companies were busy unloading shares of their own firms over the last four weeks. The selling picked up so much versus buying that a measure of insider velocity tracked by Sundial Capital Research pointed to the fastest exit from stocks since 2012.

While factors other than valuations can influence insiders’ decisions to sell, the action from this cohort — likely the most-knowledgeable about their own businesses — is hardly encouraging news in a market where the S&P 500 is heading for its worst September since the global financial crisis. The index’s 2.4% plunge on Wednesday extended its retreat from the Sept. 2 record to 9.6% and left it little changed in 2020.

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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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