Weighing the Week Ahead: Why is the Market so Quiet?
The economic calendar is light so attention will again focus on Q1 earnings reports. Non-financial news will, no doubt, take center stage. The biggest market story seems to be the lack of action, as shown in our updates below. That might be fine for you and for me, but not for the punditry. They are all scratching their heads in wonderment, asking:
Why is it so quiet?
Last Week Recap
In last week’s installment of WTWA, I suggested that the general focus would be on Q1 earnings and possible confirmation of recent economic data. There was a lot of competition from important non-financial news, but the earnings stories got plenty of play.
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, who packs a lot of relevant information into the weekly chart without sacrificing clarity.
In an amazingly quiet week, the market was unchanged and the overall trading range less than one percent. As always, our indicator snapshot in the quant section below summarizes volatility and the VIX index in various time frames.
I was delighted to learn that my company, NewArc Investments, Inc. and I were in the top 25 of Advisor Perspective’s list of Venerated Voices. We are honored to be in such impressive company.
Education is one of the best ways to fight fraud. Pricenomics asks, What Kind of Online Fraud is Growing the Fastest?
The post includes the expected provocative charts including this one.
#10 probably explains the changing demographics of those wanting to friend me on Facebook. Mrs. OldProf, glancing over my shoulder, commented that they did not look like the typical bridge player.
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!
When relevant, I include expectations (E) and the prior reading (P).
New Deal Democrat’s high frequency indicators are an important part of our regular research. Long-term indicators have improved to positive, as has the nowcast. Short-term indicators remain negative. NDD is watching the data to see if the weakness will spread or whether it reflects a rebound from the “mini-recession” caused by the government shutdown.
- The Empire State manufacturing index registered 10.1, beating expectations of 9.0. The Philly Fed index of 8.5 missed the consensus of 11.0. I am analyzing the usefulness of various economic indicators and did a post on regional Fed measures here.
- Leading economic indicators increased 0.4%, in line with expectations but an improvement over February’s reading of 0.1%.
- Mortgage purchase applications are strong.
- Initial jobless claims hit another new low of 192K versus expectations of 208K.
- Upbeat reports from China provided encouragement about the state of worldwide economic growth. The Daily Shot, a regular morning read for me, had a nice chart pack covering several key indicators. I drew upon this for a brief comment of my own. Marc Chandler analyzes the data and notes that many will be skeptical. James Picernoanalyzes the data as well as the trade deal potential.
- Retail sales for March jumped 1.6% trouncing expectations of 0.9% and offering some relief for those worried about the -0.2% decline in February. The ex-auto result of 1.2% was also strong, beating expectations of 0.7%.
- Q1 now looks like a YoY growth of 3-4%. There are still some downward estimate revisions, but at a slower pace. Check out the always valuable analysis from earnings guru Brian Gilmartin.
- Earnings beats are good, revenue beats weaker than normal, and the stock reaction to a beat is better than average. John Butters (FactSet) has comprehensive coverage.
- Companies related to the overall economy look better than most. Honeywell (HON) is one example (Barron’s) and United Rentals (URI) is another. We’ll have better sector information over the next two weeks.
- David Templeton (HORAN) writes, The Tax Cut And Jobs Act Is Distorting 2019 Estimated Earnings Growth. He astutely suggests a 2019 versus 2017 comparison, annualizing the change. This chart shows the value of such an approach.
Industrial production for March declined -0.1% versus expectations of a 0.2% gain and a prior of 0.1%.
The Architecture billings index dipped to 47.8 in March from 50.3 in February. The AIA wonders if this is weather related. (Calculated Risk)
Wholesale inventories grew only 0.2% in February. (E 0.4%) The January result was also downwardly revised from 1.4% to 1.2%.
Business inventories were also a bit light, in February, increasing 0.3% versus an expected 0.4% and January’s 0.9% gain.
Rail traffic is still in contraction, although there is some improvement. Steven Hansen emphasizes annual changes in the four-week rolling average of the “economically intuitive” traffic, GEI). New Deal Democrat suggests that the widened Panama Canal is changing freight patterns, resulting in less rail traffic and more trucking.
Housing starts for March were 1139K (SAAR) with 1247K expected. February was revised downward from 1162K to 1142K. Building permits were a bit better than starts, but also slightly missed expectations. Calculated Risk comments on the results, suggesting that starts for 2019 will be down slightly from 2018, but nothing like the comparisons so far. New Deal Democrat observes that the starts do not reflect the rise in purchase mortgage applications.
The Notre Dame Cathedral fire. And the controversy of the aftermath.
North Korean saber-rattling is a distant second place.
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.
We have a light economic calendar with a focus on housing data and sentiment. The 1st Quarter GDP advance estimate will focus attention on the overall economy, but it is “old news” and will be revised twice. The important stories for investors will come from corporate earnings. Fed speakers are in the quiet period. I expect plenty of Mueller report discussion, of course, but this is not a financial story.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Next Week’s Theme
The light calendar puts the daily focus on earnings reports, but the market story may well be different. In the absence of significant market moves, the pundits and TV producers are scratching their heads, asking:
Why is it so quiet?
For those of us who follow markets closely, one good method is to monitor reports from people like Bob Pisani and Art Cashin. Trader attitudes govern the first reactions to events. You need not agree with them, but it is useful to know.
Another source is the excellent subscription service from Briefing.com. Here is part of a report from Friday morning, identified as one of the four key catalysts driving trading:
- The market has acted tired of late, unable to sustain rallies on good news. This is feeding a sense that the market is ripe for a consolidation phase, which translates into a lack of conviction among buyers and sellers alike.
- At its high yesterday, the S&P 500 was up 24.1% from its December 24 low and up 16.4% year-to-date.
Do you find it surprising that quiet trading needs explanation? Here are some oft-suggested reasons:
- Everyone is on vacation.
- Markets are uncertain, lacking any ideas for direction.
- Investors are too complacent, satisfied to hold positions in spite of the many obvious risks.
- The market is cautious – unwilling to take advantage of opportunities.
- And most frequently, quiet times are ominous – a lull before the storm.
The trader perception, as usual, becomes the news. Do you favor one or another of these reasons?
I’ll offer my own conclusions 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 continue at the most favorable level. Our fundamental indicators have remained bullish throughout the December decline and rebound. The C-Score reflects the increase in headline inflation, despite slight steeping in the yield curve. I am watching this closely, including analyzing signs of possible confirmation of higher recession odds. We remain well within the warning period.
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.
Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis. With updates on industrial production and retail sales, it is time for an update of their extremely useful chart of the Big Four. These are the key indicators used by the NBER in generating official recession dates.
Since a recession requires a significant pullback in these indicators, the picture looks pretty good – although not as much as late last year. We will watch for the delayed update on income and spending with great interest.
B of A (via Bloomberg) notes, Inverted Yield Curve Is Waning as a Recession Gauge. While yield curve inversion is a part of our recession warning toolkit, I provided a heads-up about the market over-reaction. Many “newbies” to recession analysis read an article or two and went on TV. One of the biggest challenges for the individual investor is to distinguish between apparently expert commentary from big-name, confident sources, and actual research results. Here is the current update from BofA:
An inverted Treasury yield curve is no longer a reliable signal of recession, and what matters more is the level of the curve, Bank of America economists Ethan Harris and Aditya Bhave said in a note.
This conclusion is not sufficiently explained. Most importantly, it was not explained in advance.
Cullen Roche has some Hard Truths for the Inflation Truthers.
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 asked about the current time frames of fellow traders. As always, we cited some great sources and discussed some recent picks from our trading models. Felix rated the top twenty stocks in the NASDAQ 100 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 Dr. Brett Steenbarger’s A Formula for Trading and Investing Disaster. Here is the key concept:
Many problems of trading and investing have a simple source: People follow the markets on a different time scale from their intended holding period. Typically this means becoming psychologically attached to shorter-term movements up and down and not holding positions as initially intended. The general rule is that, as pattern-recognizing beings, we will find patterns in whatever time frame we follow. When our egos become attached to the patterns we perceive, we act on what we see at the moment and fail to maximize our trades and investments.
Read the full post for ideas on how to avoid this disaster.
Chuck Carnevale’s sector-by-sector quest for bargains is like reading a book with a new chapter each week. This week’s installment takes up retail and the “Amazon effect.” As always, the results of his screen may not be suitable for every investor, but they are always worth considering. His analysis is comprehensive, like a master class in stock valuation and analysis. Here are the candidates that made it through the initial screen and get deeper treatment in the article.
How about some non-US dividend ideas? Lyn Alden Schwartzer makes an interesting case for Canadian banks.
Stanley Black & Decker combines solid earnings growth and a reasonable, growing dividend. Check out William Stamm’s post for details.
Kirk Spano updates his accurate call on Kinder Morgan (KMI), adding to his bullish case.
Too late for Zoom Video Communications (ZM)? Beth Kendig was all over this story before the IPO, accurately predicting the strength. In the post-IPO discussion (which you can get on FATRADER) she has recommended waiting for a pullback to the 40-45 range. Our group also discussed the rise in the over-the-counter ZOOM Technologies (ZOOM). Be careful out there!
Seeking Alpha Senior Editor Gil Weinreich’s Asset Allocation Daily is consistently both interesting and informative. Each week he highlights stories of interest for both advisors and investors. This week he cleverly uses World Banana Day to provide a lesson in finding investments that much the duration of your need.
Abnormal Returns always provides interesting ideas on a wide variety of topics. I am a subscriber, and I read it daily. Each Wednesday’s edition includes a post focused on personal finance. This week I couldn’t decide on a favorite. Christine Benz (Morningstar) explains What You Can Learn From Your 2018 Tax Return. This is practical and timely advice. It is well worth thinking about right now while the experience is fresh in your mind.
Tadas also highlights an excellent article by Tony Isola, Teaching The Right Lessons. He describes typical stock market contests, showing why they provide the wrong lessons for students. He then describes a different approach which provides a better simulation of life-long experience. From my long-ago experience I know that simulations can be an effective teaching tool, generating enthusiasm and better understanding of key principles. Doing it carefully is challenging but rewarding. Read the full post for details about the game and how you can give it a try.
Watch out for…
Pinterest. Beth Kendig warns about the low revenue per non-US user. Unfortunately, that is the major source of user growth. I’ll look for her follow up on this story with great interest. For now, be cautious.
Health care stocks. UnitedHealth (UNH) reported good earnings but the price collapsed after the CEO warned about the effects of Medicare for All explains James Picerno. I have been looking at the sector because it is cheap and any replacement for the current health care system is years away from passage. The problem is the continual negative discussion and lack of a near-term catalyst. Barron’s agrees with that assessment and suggests a 12 -18 month time frame. There are more promising investments at the moment, but it might be a good candidate for those following my Enhanced Yield approach. We are adding some positions this week, and this sort of “value trap” is a good place to search.
Explaining a quiet market is the extreme example of media behavior I cite regularly. There is no effort to separate signal from noise. Daily variations in the 1% range are the long-term norm. Trying to squeeze meaning out of nothing is a triumph of invention over reason. I don’t need to know someone’s guess about why the Dow “moved triple digits” and I certainly don’t need an explanation when there is no movement at all.
Despite the lack of meaning from this “news”, many investors are falling victim to the trap (identified above) by Dr. Brett.
One trick used by commentators is the personalization of markets. Making the result of millions of individual actions into a simple adjective makes for a good story. Markets can be tired, fickle, facilitating or unhealthy if you are willing to ascribe human traits. Treating trading as a sporting event – bulls against bears – is another trick. You get to define a line of key resistance, e.g., “If the bulls can’t take it past 2810, the rally will fail.”
It is challenging but much more useful to think of markets as the interaction of millions of participants. Each has motives, an agenda, a plan, and maybe rules to follow. Some are emotional – worried about a news item, politics, advice from a relative, or a market crash prediction. Some are systematic and logical. There is no way to aggregate these many different motives and feelings.
On a given day, most people do not change their positions. Their time frame is longer. Despite this, they may be tempted to act on the news of the moment, turning amorphous ill-defined worries into action. Instead of reaching their plan, they may find themselves in the position of the self-employed day trader, deep in debt, who wagered $85,000 on Tiger Woods to win the Masters. That worked this time, but it is easy to imagine a different outcome based on the bounce of the ball.
Extreme changes in your asset allocation can lead to desperate recovery efforts. If you feel that your personal risk is too high, just nudge your normal stock allocation a bit lower.
And also, some longer-term items on my radar.
I’m more worried about:
- Oil markets. Administration policy, pushing China and India to enforce sanctions against Iran and Venezuela, is pressuring oil markets. This could undermine the low inflation outlook that has prevailed. (NYT).
- Post Mueller report politics. Needed compromises cannot happen with such intense partisanship. This includes the growing problem of government debt.
I’m less worried about
- Brexit. As is often the case, governments are reluctant to drive over a cliff. Deadlines are flexible. Some remain pessimistic that the needed political changes can be achieved. (CFR).
- Recession concerns, especially as we move past Q1 data and get some stability.