Some expect a massive crash as Fed policy becomes less accommodative. This chart helps to explain why

The economic calendar is normal, with a focus on leading indicators and new home sales. The punditry will be less interested in data than in gauging the Fed’s reaction. Expect most to be asking:

Will we see a new direction from the Fed?

Last Week Recap

My last edition of WTWA, I expected a focus on the continuing political turmoil, especially the market effects. That was a good guess, with the selection of Larry Kudlow as chief economic advisor especially important.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. I especially like the version updated each week by Jill Mislinski. She includes a lot of valuable information in a single visual. The full post has even more charts and analysis, so check it out.

The loss this week included trading range below 3%, lower than recent volatility. I summarize actual and implied volatility each week in the Indicator Snapshot. The actual volatility is going down faster than the VIX>

Personal Note

I continue to enjoy my vacation, but I am never completely away. I am including some current themes I see as important. I’ll be back in the office on Monday.

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!

The news, both economic and policy effects, was market-friendly.

The Good

  • Inflation data. Not threatening at either the wholesale or retail level.
  • Michigan sentiment. A pop to 102 on the March preliminary reading.
  • NFIB small business optimism soars even higher, to 107.6.
  • The Larry Kudlow selection reassured markets.
  • The trade policy flexibility has limited market concern — at least so far.
  • Industrial production was solid, growing 1.1% after a decline last month and expectations of a small gain.
  • JOLTs showed continuing labor market strength, in both job openings and the quit rate.

The Bad

 

Feel free to add items in the comments.

  • Housing data missed – new homes and building permits both disappointed.

Noteworthy

Is the world getting better or worse for most people? I was surprised by the results from Our World in Data. The entire article covers background and key questions. Here is a chart that will stimulate your thinking.

 

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

We have a normal economic calendar featuring new home sales and leading indicators. These will both take a back seat to the FOMC rate decision and Chairman Powell’s first press conference.

And of course, there seems to be a new Washington story every day. The market reacts to themes with actual economic implications, ignoring the other controversies.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

The economic calendar is normal. The highlight will be the FOMC decision and Chairman Powell’s first press conference. The strengthening economic data and change in leadership will have the pundits asking:

Is it time for a change or direction at the Fed?

Our go-to source on Fed policy, Tim Duy, concludes that the jobs report gives the Fed cover to maintain a gradual policy.

Nothing in this week’s news changed that.

Expect also the regular chorus of Fed criticism – behind the curve, missed the best chance to raise rates, etc.

And also, those who see any rate increases, no matter the pace or ultimate level, to be a negative signal for stocks.

You will hear all three viewpoints this week, as well as speculation about the remaining opportunities for Trump. As usual, I’ll suggest my own interpretations in today’s Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

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.

The Indicator Snapshot

The indicator snapshot should be helpful in staying the course – not panicing because of some scary headlines. We continue to monitor the technical health measures on a daily basis.

The long-term fundamentals and outlook have been unchanged through the recent bout of volatility.

The Featured Sources:

 

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

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

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

Georg Vrba: Business cycle indicator and market timing tools. None of Georg’s indicators signal recession. His business cycle index, which we use in the Indicator Snapshot, is no longer “on the peg” at 100, but does not indicate a recession.

Doug Short: Regular updating of an array of indicators. Great charts and analysis. It is time for another update of the “Big Four” indicators, which are doing a little better than in January.

 

Insight for Traders

Our discussion of trading ideas has moved to the weekly Stock Exchange post. The coverage is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. Each week we explore a topic of current interest, drawing upon trading experts. This week we asked, “Are you trading the energy sell-off?” You can compare your own approach to our trading models and see the updated the ratings from Felix and Oscar. Blue Harbinger has taken the lead role on this post, using information both from me and from the models. He is doing a great job, presenting a wealth of new ideas and information each week.

While my intent is to focus on traders, long-term investors may benefit from a better understanding of what the issues are for traders.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility! I remind investors of this each week, but now is the time to pay attention.

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Chuck Carnevale’s discussion of the lithium stocks and attendant risks. As always, Chuck combines his typically sharp analysis with the use of his advanced tools. Those reading his work always get both a lesson in investment analysis as well as some great ideas—or maybe a warning.

This is especially important. In my vacation conversations with many intelligent non-professionals I learn what they are doing. So many find a concept that is attractive and buy a stock that seems exciting without reference to value.

By contrast, we played the electric auto story by buying a nickel ETN, avoiding the fully-priced lithium. And we did it only for our “aggressive” program.

Final Thoughts

 

Many top investors and noted pundits have been on the wrong side of the market for many years. Instead of re-examining their methods, they kept searching for new explanations. The Fed was a favorite. No matter what the policy, that was the sole reason that markets remained elevated.

Those who cling to that viewpoint necessarily expect a massive stock decline as Fed policy becomes less accommodative. This chart helps to explain why.

By contrast, I have strictly followed the indicators described here each week. We look at expected earnings and the ability to get a return greater than inflation (and better than bonds).

Most importantly, I emphasize risk control. I do not endorse buy-and-hold or an all-weather portfolio.

No one can time the market, but everyone should pay attention to risk.

Interest readers can request my free papers on managing risk and the top investor pitfalls. I describe what I do, and you can apply the same principles. These are available for free from main at newarc dot com.

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