Avoiding High Risk Entries

by Tom Aspray

In my market analysis, often an ETF or stocks are not included because there is no favorable risk entry point. A poor entry level generally causes the worst losses whether you are an investor or trader.  Even if your buy or sell setup does happen to fail, a good entry point can be the difference between a small and a large loss.

In trading, and teaching technical analysis for three decades, I have also come to realize that each person has to find a method that suits them individually. One of my favorite entry methods is to buy at a Fibonacci retracement level after the weekly and daily analysis have confirmed a low. But some are not comfortable using Fibonacci analysis in their trading.

As I discussed in detail (Profiting From Fibonacci Entries & Exits), establishing a long position as a market corrects to between the 38.3% and 50% support levels is a very good way to obtain a low risk entry level.

Successful investing or trading is all about risk control as taking a 15-20% loss can be disastrous to your portfolio. This type of loss is generally the result of either not calculating the risk before you take a position or not using a hard stop.

In my recommendations, I use a number of different methods to determine both the entry as well as the exit levels. Some are based on the action of indicators but others are not quantified but come through many years of experience (Finding High-Probability Entry Levels).

In this week’s trading lesson, I want to look at how you can use the relationship between price and an exponential moving average with starc bands to determine when the risk is too high to buy or sell.

Often when a stock or ETF is in a solid intermediate-term trend, it can provide a number of good trading opportunities for those who are more active. In my Charts in Play column, I generally try to stay with the intermediate-term trend and therefore do provide shorter-term trading advice. The exception is when a position reaches a high risk level and I will recommend taking a partial profit.

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Trading the same market repeatedly gives you the advantage of becoming very familiar with both the price and volume behavior. One stock I had been watching since the bear market low was Alcoa, Inc. (AA), which had peaked above $40 in 2007.

Though the stock had several rallies since the early 2009 lows, a strong weekly bottom was not completed until last year. The chart shows that AA finally was able to move above its ten month downtrend, line a, on Friday, October 18, 2013. The price action was confirmed by the relative performance as it also overcame its resistance (line b) at the same time.

The volume also supported prices as it started to increase in September with over 200 million shares trading the week of October 11. This was the highest weekly volume in two years. The breaking of the OBV’s major downtrend, line c, suggested bullish accumulation. The OBV was soon in a clear uptrend, line f, and has confirmed each new price high through August 2014.

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Two weeks after the base was completed, AA traded well above its weekly starc+ band for three consecutive weeks. This was a sign that the stock was in a high risk buy area. On the daily chart, in addition to the starc bands and the 20-day EMA (in red) I have included the spread between the closing price and its 20-day EMA. It is expressed as a % of the close and I will refer to it as the EMA Osc.

Just two days after the weekly bottom was confirmed (October 22), AA closed 10% above its 20-day EMA as well as above its daily starc+ band. Those considering the long side would have needed to use a stop under the recent lows, which would have been a risk of approximately 15%.

Over the next two weeks, the upper band was tested several times (circle 1). On November 4, AA made a new daily closing high at $9.92 with the EMA Osc closing at 9%, which still too high a reading to buy.

Just three days later, the EMA Osc had dropped to -2% indicating that AA closed 2% under its 20-day EMA (point a). It traded below its 20-day EMA for eight consecutive days with a low of $8.78. Those who bought when AA was below the 20-day EMA could have used a stop under the low of $8.54. This was the weekly price low of the week when the bottom was confirmed.
By the latter part of November, AA was in a clear new uptrend and by the end of the year was again testing both the weekly and daily starc+ bands (circle 2). The EMA Osc reached a high of 8%, indicating that those who wanted to buy should wait.

Just nine days later, the Osc dropped to -1.5, as AA declined almost a dollar from its high as the daily starc- band (point b) was tested. This decline took the stock below the lows of the prior fourteen days and would have likely stopped out any new long positions.

Alcoa quickly reversed to the upside and during the week ending January 24, the stock hit a high of $12.32. It closed above the daily starc+ band for three days in a row and was also above the weekly starc+ band at $11.89.

The stock was clearly in a high risk buy area as the monthly starc+ band had also been overcome.  The bullish signals from the multiple time frame analysis favored buying on a correction. I recommended going 50% long AA at $10.86 and 50% at $10.24 with a stop at $9.88.

The low on February 10 was $10.83 so both buy levels were hit. On that day, AA closed 2% below its 20-day EMA and stayed below if for several days before turning higher. The daily starc+ band was not tested again until April 1 as the EMA Osc reached a high of 6.5%.

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Walt Disney Co. (DIS) has been recommended twice in 2014 and let’s start by looking at the technical action in late 2013 and early 2014.  The relative performance was in a strong uptrend (line c) from the late 2012 lows. In early January, DIS hit a high of $76.69 and came very close to its weekly starc+ band (point 1).

This new high was accompanied by an upside breakout in the RS line, which moved through the resistance at line b. The weekly OBV had also made a new high with prices and was already in a solid uptrend. Therefore,a pullback was considered to be a buying opportunity.

As I said at the time:

• DIS peaked early in January at $76.84 and hit a low last week of $71.12, which was a drop of 7.4%. It did close above the quarterly pivot at $72.01.
• The quarterly projected pivot support is at $67.49.
• The insert of the weekly chart shows that DIS has closed lower for the past four weeks and is now close to its 20-week EMA at $70.60.
• A doji was formed last week and a close this Friday above $73.63 will trigger a high close doji buy signal.

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It is important to note that in early February, DIS had also come close to its weekly starc- band and the daily chart shows that the starc- had been tested several times over a three week period. The EMA Osc dropped to a low of -4.55 on February 3, which, so far, has been the lowest reading of the year.

It was recommended as a buy that day as I advised going 50% long Walt Disney Co. (DIS) at $71.44 and 50% at $70.24 with a stop at $68.23 (risk of approx. 3.7%). The following day it traded as low as $69.88.

Three days later, DIS gapped higher in reaction to its strong earnings. The close that week at $75.67 did trigger a weekly HCD buy signal. After seven days on the upside, the EMA Osc had risen to 5% as DIS closed at $79.23. The stock continued to move higher in early March but as it made its high of $83.65 the Osc only rose to 4.7%. This was a sign that the upside momentum was weakening.

At the time, I was turning more cautious on the market so I sold 1/3 of the position at $80.50 and was stopped out of the remaining position at $78.57 for an 11.8% profit.

The correction from the high of $83.65 lasted for over five weeks (see Fig. 3) as DIS was pulling back from its weekly starc+ band. The weekly technical outlook was still clearly positive as the RS line and OBV both made new highs in March.

On April 15, DIS made a low of $76.31 and in that’s week trading lesson I noted that there were signs that the correction could be over. “The weekly chart shows a quite orderly correction from the March high that has taken prices back to the still rising 20-week EMA at $76.24 this week. DIS looks ready to close the week above the quarterly pivot at $77.86 with monthly projected pivot support at $77.02. The uptrend from last September’s low, line e, is now at $74.34.”
The EMA Osc dropped to -3.4% at the early April low and I recommended going 50% long at $78.29 and 50% long at $77.16 with a stop at $74.13 (risk of 4.6%).  Six days later, DIS dropped back to a low of $76.88 (point 1) as the EMA Osc reached -1.7%.

DIS has stayed strong every since but we are now holding only 1/3 of the original position. The strong daily uptrend can be compared with the readings of the EMA Osc as short-term peaks have often corresponded to readings of +3.0% as was the case in July, point 2.

On the other hand, pullbacks often dropped the closing price just slightly below the 20-day EMA. On August 7, DIS dropped to a low of $86.17 with the Osc at -0.74 and the stock has since rallied sharply from this low.

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In using the EMA Osc, it is essential that you have confidence in your view of the stock or ETF major trend.  The decline in early February was sharp enough to cause many that were planning to buy at the end of 2013 to stay on the sidelines.  The low on February 3 was accompanied by a very oversold reading of 3.42 in the ARMS Index (TRIN).

The EMA Osc on the Spyder Trust (SPY) dropped to -3.6% the same day. By the end of the next week it was at 1.9% and by early March it had reached 2% as the SPY closed at $188.26. Those that were considering buying would have needed to use a stop at least under $183.75, which was the March 3 low.

Though on an approximate risk level this was not too bad, the Osc readings suggested it was still high risk. The readings from the EMA Osc can also be used as a momentum tool as when the SPY made a further new high of $189.70 on April 4, the Osc was only at 1.7%.

One can compare the higher highs in price, line a, with the lower lows in the EMA Osc, line b. The correction from the highs was quite sharp as SPY dropped down to its daily starc- band. The Osc had a low of -2.2% suggesting that the risk level had declined significantly.

The rally in late May and early July caught many by surprise and those who decided on June 4 to chase the market may have wanted to know that the close was 2.1% above its 20-day EMA. This meant that it was overextended and SPY was also close to the daily starc+ band.

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US labor markets Q&A

by Sober Look

The media is generating a great deal of noise around the US labor markets and it's worth going through some key facts, issues and trends. Let's do it in a Q&A format for clarity.
Q: What's the deal with Friday's unexpectedly poor payrolls report?
A: Friday’s payrolls report was clearly a disappointment - far below expectations. However some have attributed the weakness (at least in part) to notoriously unreliable August seasonal adjustments as well as to the New England’s Market Basket labor mess. If that’s indeed the case, we should see this reverse in September.

WSJ: - A management fight and worker revolt at a New England grocery store chain helped drag down U.S. payrolls during the month of August, the Labor Department said Friday.
Though it’s not named in the closely watched jobs report, the company almost certainly is Tewksbury, Mass.-based Market Basket, a family-owned chain that operates 71 stores across Massachusetts and New Hampshire.
The June dismissal of popular chief executive Arthur T. Demoulas, amid a long-running battle with his cousin Arthur S. Demoulas, led to weeks of turmoil as workers demanded his return, a battle covered in detail by the Boston Globe. At one point in August, thousands of part-time workers had their hours cut, some to zero.

Q: How is the jobs recovery going on a longer time scale?
A: The current labor market recovery is the longest on record but clearly not the strongest. Given the latest trends in job openings (see chart), the labor markets improvements are likely to continue, albeit slower than in past recoveries. Under the circumstances that's a good outcome.

Source: @NickTimiraos @EricMorath

Q. What's going on with falling labor force participation?
A: US labor force participation for ages 25-54 has leveled off. This is the key index to watch for signs of stabilization in participation instead of the overall working-age population measure.

Q: Isn't long-term unemployment another major problem for US labor markets?
A: The number of US long-term unemployed is falling quickly but is still higher than at any time prior to the Great Recession. This tells us that the healing process has ways to go.

Q: Are wages stagnating in the US?
A: US wage growth remains anchored at 2% per year - with remarkable stability. Of course as discussed before, wages for many skilled workers are rising much faster than 2% while pay for unskilled labor continues to stagnate or is even declining.

Q: Where are the jobs coming from?
A: Here are the latest job creation numbers by sector.

Source: RBS

One final note. Comparing current labor markets to 2006 or similar periods (such as this chart on temp labor) is not always a productive exercise. It assumes that in 2006 things were somehow “normal” and the period can be used as a benchmark for the current situation. It could however be argued that the current environment is closer to “normal” because 2006 was an aberration driven by the credit/real-estate bubble. As much as some miss those good old days, we are unlikely to see such an environment return in the near future.

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Sell Financial Stocks - and Bonds

By: Fred_Sheehan

The news sounds reassuring: "U.S. bank regulators plan to adopt rules on [September 3, 2014] forcing big banks to hold more assets that they could sell easily in a credit crunch, a requirement that is closely linked to the experience of the 2007-2009 financial crisis." It is possible the rules will work.

However, no formula will capture rising or falling confidence in a financial company at some future date. We are vectoring towards another 2008. Confidence, on the part government and Federal Reserve officials, financial institutions, and the public, are intertwined. When financial institutions are afraid to lend to each other liquid assets will be held for dear life.

There are two topics in store. First, changes to financial institution bankruptcy law may prompt a bank run. Second, depositions in Starr International Company, Inc. v. United States [the AIG lawsuit - see: "David Boies vs. Citizen Ben S. Bernanke," and "The Professor Who Did Not Save the World"] should awaken investors to our "policy makers" disintegration when we needed a leader. (It is significant when the bureaucratic meritocracy rose to positions of leadership, it changed its role to that of "policymakers." That it did not and does not want to lead is the reason it is spent.)

In the discussion about financial institution bankruptcy (topic number one), it is well to keep in mind consequences are magnified by topic number two. As a footnote, it is inconceivable the government and Fed models, such as those used to calculate the September 3, 2014, bank liquidity rules, include an exponential factor that kicks in when the combined worries of a Dodd-Frank "call" and a heavy-handed government rescue mission hit simultaneously.

The changes to financial firm bankruptcy are not new. They are part of the Dodd-Frank legislation. After taking a poll (of three) it was agreed investors and bank depositors are not conscious of the changes. ("Conscious of" - banks may have sent notices, 10Ks and certainly security offerings served notice, but memories fade.)

Since this is not new, a summary will be brief. It is also a transcription of Paul Singer's description at the Grant's Interest Rate Observer conference in April 2012. Singer is CEO of Elliot Management Corporation and a lawyer. He explained: "Dodd-Frank radically changed bankruptcy law to enable the FDIC to seize financial companies which are thought to be in danger of default. Prior law for decades required, of course, actual default or a voluntary filing by management. The seizure process in Dodd-Frank takes two - count them - two days, and is essentially unreviewable and unappealable. The FDIC is also ordered, pursuant to Dodd-Frank, to toss out management and seek damages from people, including third parties, who are 'responsible' for the financial condition of the troubled company. It also enables the FDIC to transfer assets willy-nilly out of the corporate entities where they reside, thus making the analysis of one's counterparty impossible, and to discriminate among classes of creditors similarly situated if the FDIC thinks it will fulfill some higher good.... Thus creditors, counterparties, clearing customers and trading partners of financial companies which become troubled, post Dodd-Frank, have only one rational response to potential trouble or perceived trouble, given the opacity and leverage I have mentioned before: instantly stop trading, sell claims, pull assets, basically run for the hills."

Now, for the bad news: The depositions in Starr International v. United States show a government that did not wait for Dodd and Frank to muster 10,000 pages (and counting) of bureaucratic snooping. In the pinch, Secretary of the Treasury Hank Paulson, Fed Chairman Ben Bernanke and (then) New York Federal Reserve President Tim Geithner acted willier and nillier than (we may hope) the FDIC will behave, and without legal authority (as you will read below), during the 2008 financial crisis.

The public view was described last week by Reuters: "The bailout saved AIG from [the possibility of] filing for bankruptcy. The Federal government took 92% of AIG's shares in return for $152 billion that the Fed and Treasury eventually pumped into the insurer." [Bracketed comment in Reuters dispatch added. - FJS]

Reading "The Plaintiff's Corrected Proposed Finding of Fact," it looks as though the bailout forced AIG into an unnecessary bankruptcy; hence the bracketed insertion in the Reuters description above. This is the Plaintiff's case, of course, and protests will be aired on the witness stand starting in late September.

Note #1: the wording from the Finding of Fact is sometimes what a layman may call "telegraphic;" I have left it as is. Note #2: Only a handful of the Findings of Facts are discussed below. There are well over 100. The legal case may address others.

Returning to the scene of the confusion, then-New York Federal Reserve President Tim Geithner described the drama (in deposition) on September 15, 2008: "Of the twenty-five largest financial institutions at the start of 2008, thirteen had either failed (Lehman, WaMu), received government help to avoid failure (Fannie, Freddie, AIG, Citi, BofA), merged to avoid failure (Countrywide, Bear, Merrill, Wachovia), or transformed their business structure to avoid failure (Morgan Stanley, Goldman.)"

The United States (as stated in the lawsuit) would not hear of outside parties that were willing to bridge or supply capital needed by AIG. Quoting the Finding of Fact: "Sovereign wealth funds, including the Government of Singapore Investment Corporation (GIC) and the Chinese Investment Corporation (CIC) expressed interest in investing in AIG."

Specifically, "The Chinese Investment Corporation (CIC) expressed interest in investing in AIG. Defendant discouraged the CIC and representatives of the Chinese Government from assisting AIG. At 12:25 p.m. on September 16, 2008, [it was relayed to Secretary of the Treasury Hank Paulson].... CIC was 'prepared to make a big investment in AIG, but would need Hank to call [Chinese Vice Premier] Wang Qishan.' The Chinese 'were actually willing to put up a little bit more than the total amount of money required for AIG.'" [Italics added. - FJS]

"On September 16, 2008, [Under Secretary of International Affairs David] McCormick spoke to Paulson about the Chinese interest in investing in AIG. McCormick then told [Taiya] Smith [Paulson's deputy chief of staff and executive secretary] that Treasury "did not want the Chinese coming in at this point in time on AIG."

"Later that day, Smith met with Chinese Government officials in California during Joint Commission on Commerce and Trade in Yorba Linda, California. During that meeting, 'all [the Chinese officials] wanted to talk about was AIG.' Smith spent one or two hours explaining what was happening with AIG. She conveyed the message that Treasury did not want the Chinese to invest in AIG." [Italics added - FJS]

Senator Hillary Clinton took time off from her presidential campaign to save the floundering insurance company: ""On September 17, 2008, United States Senator Hillary Clinton called Paulson "on behalf of Mickey Kantor, who had served as Commerce secretary in the Clinton administration and now represented a group of Middle Eastern investors. These investors, Hillary said, wanted to buy AIG. 'Maybe the government doesn't have to do anything,' she said.'" Paulson told Senator Clinton, 'this was impossible unless the investors had a big balance sheet and the wherewithal to guarantee all of AIG's liabilities.'"

Since the price of oil was descending from its recent high of $150 a barrel, it was worth investigating whether they had "a big balance sheet." As for "the wherewithal to guarantee all of AIG's liabilities," Paulson had no idea what the liabilities were worth - he could not explain to counsel why the government seized AIG: "Paulson: The 'taking of equity in companies that receive government assistance' is 'a punitive condition.'"

Several outside parties were calculating values, but from the evidence, no one within "The United States" did so. None of the witnesses could tell David Boies where the "79.9% of AIG shareholder's equity" - the original figure wrought - came from. (Geithner: "I am not certain I understand the reason why it was not more than that. I don't know why it was not less than that." Paulson: "I didn't focus on how that number was determined, although I clearly focused on the number and remember discussing it." FRBNY: "did not conduct an independent analysis regarding the appropriate terms for Government assistance to AIG." Bernanke: A. "I don't know." Bernanke left as he entered - a space-cadet, paper-shuffler.)

There were, however, several parties that calculated the value of "AIG," from different perspectives and for different reason.

For instance: "According to BlackRock, an independent advisor working on behalf of AIG, 'Collateral posted to counterparties under the CDS in the portfolio is over $29 billion, far in excess of the projected net cash flows in BlackRock's stress case.' BlackRock estimated that AIG's projected net cash flows for the life of the CDS contracts, discounted at LIBOR, ranged between negative $7.3 billion in a base case and negative $15.2 billion in a stress case."

Also, "New York State Superintendent of Insurance Dinallo testified that even 'if there had been a run on the securities lending program with no Federal rescue, our detailed analysis indicates that the AIG life insurance companies would not have been insolvent'" [Italics added. - FJS]

In addition: "KKR's [Kohlberg, Kravis - FJS] Derrick Maughan provided sworn testimony that if 'AIG, the company, or the Fed as lender of last resort, had wished they could have stabilized the company through Government invention support [sic], and then introduced private capital.'"

There were other avenues offered to prevent AIG's nationalization: "BlackRock 'presented three options for FRBNY to consider.... [This included] counterparties cancelling their credit default swaps and selling the underlying CDOs to an FRBNY-financed SPV, for total consideration of par, comprised of previously posted collateral, cash, and mezzanine note in the SPV'; the obligation to perform under the credit default swaps 'transferred from AIG to an SPV guaranteed by the FRBNY'; and creation of an 'SPV to purchase the underlying CDOs from AIGFP's counterparties, in connection with a termination of the related credit default swaps'"

Apparently, no option matched nationalization. New York State was ready to save AIG. "Around noon on September 15, 2008, New York Governor David Paterson announced that he had 'directed' the New York State Insurance Department to permit AIG to access approximately $20 billion in liquid assets from certain AIG insurance subsidiaries. He also urged the federal government to be involved in some type of arrangement, whereby AIG would have the necessary resources and bridge loans to tide AIG over until it could resolve its liquidity problems."

"On September 16, 2008, Dinallo reiterated Governor Paterson's offer to allow AIG to upstream $20 billion from its insurance subsidiaries. Geithner responded, "No, we're good." As a result, Dinallo was 'led to believe definitively that we were no longer part of the fix.'" "Good" at what?

If you ever watched Chairman Bernanke brush aside Congressional inquiries about the Federal Reserve exceeding its authority during testimony, he would invoke Section 13(3) of the Federal Reserve Act. This always shut the congressman up, even though, on at least two occasions, he leaned back for a Fed staff member to remind him the number of the section: "13(3)."

In the Finding of Fact, Paulson and Geithner are quoted far more than Bernanke except for some hysterical recollections, including: "September and October of 2008 was the worst financial crisis in global history, including the Great Depression." That could be true, but is a wild assertion without support (which Bernanke has never in his life supplied), a successful tactic that guided Time magazine to name him Thing of the Year.

On the other hand, Tim Geithner offered a more convincing assessment, that "2008" was "the worst financial crisis since the Great Depression." Chairman Bernanke accomplished a rare feat. He was a less reliable witness than Tim Geithner.

Another example of Bernanke's fevered understanding: "Of the 13 most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two." He said this at least once before, when he testified during the FCIC investigation. After the FCIC transcript was released, it was noted this was a ridiculous comment. Yet, he persists. If the government approached every financial institution's potential insolvency as it did AIG, the government would have owned 6,000 banks in three days' time.

One findingshows AIG's nationalization - the government acquiring equity ownership from shareholders - was an ad lib operation by the trio. The finding states: "The Federal Reserve had no authority to purchase or hold equity," the facts include (there are many more):

Geithner: "Under section 13(3) of the Federal Reserve Act, the Fed is prohibited from taking equity or unsecured debt positions in a firm".

Bernanke: "The Federal Reserve is authorized under the Federal Reserve Act to extend credit in various forms, but is not authorized to purchase equity securities of financial institutions."

Bernanke: "We had only one tool, and that tool was the ability of the Federal Reserve under 13(3) authority to lend money against collateral. Not to put capital into a company but only to lend against collateral."

Paulson, referring to the Federal Reserve: "They legally couldn't do preferred. They legally could only make a loan."

"FRBNY General Counsel Thomas Baxter wrote to Federal Reserve General Counsel Scott Alvarez confirming "we agree that there is no power" for the Federal Reserve "to hold AIG shares."

"FRBNY's independent auditor Deloitte: "FRBNY cannot legally control a commercial company, and therefore it is not appropriate for them to consolidate an entity it cannot legally own."

Another Finding eliminates the only other legal conduit for AIG's nationalization. "In September 2008, Treasury had no authority to purchase or hold equity." Some of the many facts that confirm Bernanke, Paulson, and Geithner broke the law. Nay, they trampled our protection from tyranny with jackboots. Facts follow:

"The "Treasury Department as of September of 2008 had no budgetary authority to invest in equities, securities of any financial institution."

"FRBNY counsel to Federal Reserve Board officials on September 17, 2008, concerning 'Issues with regard to the NY Fed/Treasury's equity participation in AIG,' Treasury 'consider[s] themselves legally unable to assume ownership. This leaves the NYFed as Treasury's place to house the equity position.'"

"September 17, 2008 report of Treasury's external counsel at Wachtell: 'Treasury legal is telling, as per doj, that they cannot hold voting shares.'"

"TARP Chief Investment Officer Jim Lambright: In 'September when the Fed extended the credit facility, the government didn't have an equity tool.'"

"Board of Governors Legal Division: "'We understand that the Treasury lacks the legal authority to hold directly voting stock of AIG.'"

"Paulson: 'Q. And prior to TARP's approval, Treasury did not have the authority to purchase equity, either. Right?

A. Correct.'"

Given the cleavage from reason by our policy makers (one last, irresistible Fact: no one from AIG was allowed in the room during its nationalization), consider: (1) interests you may hold in financial institutions and (2) Paul Singer's description of the now legal means to redistribute those interests. Financial firms are more leveraged than is generally understood. Sell their securities.

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Weighing the Week Ahead: Which Stocks are Best for the 2014 Homestretch?

by oldprof

In the absence of major economic news and events, the punditry usually tries to squeeze a little more juice out of old themes. The Fed reaction to the employment report will, no doubt, get some attention, but there are interesting corporate stories this week. Between the Apple iPhone announcement on Tuesday and the start of the Alibaba road show, there is news to fill the vacuum before late-week economic data.

Going out on a limb a bit, I expect this week’s market focus to be: What stocks have the best potential for the rest of 2014?

Prior Theme Recap

In my last WTWA I expected that the news would focus on economic growth – especially jobs — and the Fed reaction. This was an accurate forecast of the theme, but the disappointing jobs report removed any suspense about Fed policy.

Naturally 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. That is the purpose of considering possible themes for the week ahead.

Calling All (Young) Writers

The Financial Times and McKinsey and Company have joined to offer the Bracken Bower Prize for the best proposal for a book on the challenges and opportunities for growth. A prize of £15,000 will be given for the best book proposal. It is also a good way to attract a publisher for your idea. Entries close on September 30^th. More information is available here.

This Week’s Theme

As I noted in the last WTWA installment, the holiday-shortened week included an avalanche of economic data and crises from around the world. We have the following elements:

• A light economic calendar
• Little fresh fodder for the pundit favorite – second-guessing the Fed

• Big corporate news

  • Apple iPhone and other new products
  • Alibaba and the biggest IPO ever (see Myles Udland at BI for details and Josh Brown for more on founder Jack Ma)
• Fund managers who are lagging in their YTD performance (see Steven Russolillo at WSJ for a good analysis)

If ever there was a time to talk about stocks, this is it. As he so often does, Josh Brown highlights the key issue. He is writing about fund manager performance and the rolling story of the “year of the stock picker.” He explains as follows:

For obvious reasons, this is not what the majority of active managers are able (or willing) to do in the mutual fund complex. That kind of activity is better left for traders who want to chop their own money to pieces, not for pros who have a responsibility to others.

I have some trader friends who are doing really well this year in the stock picking arena so far this year – they’ve focused on areas like tech and biotech that have been chock full of winners. It can be done. Just not by the majority of people – even among the best and the brightest. While the majority of stock picking mutual fund managers struggle, their more highly compensated brethren in hedge fund land aren’t doing much better, with the average fund up just 2 percent year-to-date – but that’s just par for the course.

This is great insight into how professionals think about the market and time frames. Should you do the same?

As usual, I have a few thoughts to help with that question. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
2. It is better than expectations.

The Good

There was a lot of very good news.

• Progress (?) in Ukraine. There is a lot of posturing from Putin. The story of a cease fire deal was announced and then withdrawn, leading to some modest swings in overnight futures trading. The final version (so far) is that an outline has been agreed upon. Skeptics think that this was designed to upstage the Obama speech to the NATO summit. I have no illusions that we are close to an ultimate resolution here, but this kind of news is how you measure progress. We’ll know it is working when sanctions are reduced, something that would be a big boost for stocks. (Gregory L. White and Olga Razumovskaya at Market Watch have a good account).
• Factory orders had a record gain in July. (Reuters).
• Auto sales beat expectations with a run rate of 17.45 million versus 16.6 million. (See Scott Grannis for charts and analysis). The F150 truck sales indicator was a bit lower, perhaps because of the model changeover. Bespoke has that story and an updated chart.
• ADP private employment showed solid gains of 204K. This should be treated as a useful and independent measure of job growth. That is how it plays out in the long run.
• The Beige Book showed a continuing pattern of economic improvement. (The GEI account is a nice summary).
• The ISM manufacturing beat expectations, hitting a three-year high. Bespoke has the story and charts:

• ISM services (59.6) hit another new high, including all-time records on some components. Scott Grannis looks at the internals from this, including charts for key questions.

The Bad

There was also some negative news, including the most important data of the week.

• Immigration reform is again delayed. Political accusations are flying, but that is not our interest. We simply note the market-unfriendly news. (See The Hill and here).
• Gasoline prices edged higher. The weekly change was 0.4 cents per gallon, but the increase for 2014 is 12.5 cents. (See GEI).

• The employment report missed expectations. I am scoring this as “bad” even though the market reaction was muted. Stronger economic data would be market-friendly, and this was an important “miss.” The report was a disappointing exception to the rest of the week’s news. There were plenty of negative accounts of this story, and they have gotten plenty of play. It is important to keep perspective. Calculated Risk has a great table of the worst months in the best years of job growth. Here are some other aspects that you might have missed from other sources.

  • The report is an outlier from all of the other current data. New Deal Democrat summarizes using his regular review of weekly indicators, but this was a popular interpretation. People seem to forget that the sampling error alone on this report is +/- 100K.
  • The “internals” do not make the case stronger. If there is sampling error, it affects everything, including the sub-categories.
  • For those who parse everything in terms of Fed policy, this confirms the current Yellen posture on labor market slack and time until the first rate hike. (Jon Hilsenrath at WSJ).
  • Those who claim to know the direction of revisions are blowing smoke. Revisions come as late-reporting firms check in and with “concurrent seasonal adjustments.” Anyone who has a method for predicting the direction of revisions should publish it. Mostly this is an excuse for people who did not like the original number.
  • Despite what you may have seen, the part-time/full time employment story is benign. Bob Dieli’s regular monthly employment update (subscription required) covers the story effectively. Most part-time employment is voluntary. Here are two key charts:

The Ugly

Our “ugly” list for the last few weeks remains unfortunately accurate. We had headline news from all conflicts with plenty of violence and death competing for our attention. The Ebola crisis, cited a few weeks ago, continues to worsen. We may have to accept these as the “standing ugly list” so that we can consider new issues.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts.  Think of The Lone Ranger. No award this week. Nominations are welcome.

Quant Corner

Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.

Recent Expert Commentary on Recession Odds and Market Trends

Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (almost three years after their recession call), you should be reading this carefully. Doug includes the most recent ECRI discussion, which has been consistently bearish, despite the blown call on the recession. This now includes a fresh warning about inflation.

Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.”

RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. Dwaine’s “liquidity crunch” signal played out as projected. This week he highlights his HILO Breadth index which he has designed to pinpoint bottoms and to warn of protracted corrections. Current readings imply an opportunity that usually shows up only once a year. Check out the full post for a description and charts.

Georg Vrba: Updates his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. For those interested in hedging their large-cap exposure, Georg has unveiled a new system. Georg now has another new program, with ideas for minimum volatility stocks for tax-efficient returns. He also has new advice for those seeking a safe withdrawal rate, now featuring the use of put options to protect against extreme events.

The Week Ahead

After last week’s avalanche of news, we have a more normal week for economic data and events.

The “A List” includes the following:

• Initial jobless claims (Th). The best concurrent news on employment trends.
• Michigan sentiment (F). Good concurrent read on employment and spending.
• Retail Sales (F). Any change from recent weakness?

The “B List” includes the following:

• JOLTS report (T). Increasing importance for insight into the level of structural unemployment. Also watch the quit rate.
• Business inventories (F). July data, but relevant for GDP revisions.

Breaking news from Ukraine and Iraq has become a part of the investment landscape, nearly impossible to handicap on a short-term basis.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix remains bullish. Uncertainty remains high but is moving lower. This generated some fresh buy signals in equity ETFs. Our Felix trading accounts are once again fully invested. Broad market ETFs are also positive.

You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.

Insight for Investors

I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here. In addition, be sure to read this week’s final thought.

We continue to use market volatility to pick up stocks on our shopping list. We do this because we also sell positions when they reach our (constantly updated) price targets. Being a long-term investor is not the same as “buy and hold.”

Here is our collection of great advice for this week:

Abnormal Returns, famous for helping investors distinguish between signal and noise, has a great piece of advice: Don’t watch the market intra-day. He tells a great story about Billy Beane from Moneyball, and then underscores the significance:

You are in a very real sense the general manager of your portfolio. You have the ability to make decisions about it at any time. The problem that Beane identifies, and tries to offset, is that emotions will always get in the way of making sound decisions. Managing money is difficult enough. Don’t let the daily noise cause you to make errors along the way.

Many seem to agree, since CNBC ratings have hit a 21-year low.

The real “smart money” is looking past the obvious worries. Last week we highlighted a report with some unusual information from

Blackstone Advisor Byron Wein reports on a series of lunches he hosted, something he does every year. If you missed this one last week, please check it out.

In a similar vein, Barron’s reports their latest survey of the “10 top stock market strategists.” Their basic take? The stock market rally mostly reflects improved earnings and a small increase in the multiple. Stocks are not over-valued and remain attractive compared to alternatives. They expect selloffs to be limited. See the entire article for a list of their favorite picks. On a sector basis, they favor cyclical choices over the defensive names, just about the opposite of YTD performance from this table:

And here is a list of suggested stocks from Goldman Sachs, one of the cited sources (via Clayton Browne at Value Walk).

Speaking of market valuation, most of the popular sources seem to emphasize a couple of indicators that never show stocks to be fairly valued and have little application in the investment process of most professionals. (When is the last time you saw anyone recommend a stock based upon the Q ratio?) Abnormal Returns has a refreshing look at several different valuation approaches and charts, offered without commentary.

Stock ideas. My firm monitors hundreds of stocks, with about 100 on our watch lists at any given time. We have about fifty positions, split into three categories: Low risk with good dividends (which we use for Enhanced Yield), Value plays or growth at reasonable price (which we use for our theme-based long stock program), and some “high octane” ideas that have great potential, but higher volatility. Each approach is strong, but the objectives and time frames differ. I have often mentioned names from the first two methods in past posts. Today I want to highlight a new source, John McCamant, Editor of the Medical Technology Stock Letter. I have used his work for many years and had the opportunity to meet him in person on my recent trip to SF.

I understand that investors prefer free information, but that often limits you to widely-covered mainstream stocks. I use a combination of sources. With permission, I am quoting from John’s most recent newsletter. It includes an overview of the current biotech sector. The recent issue explains why the InterMune (ITMN) buyout has implications for the entire sector. It updates a model investing and trading portfolio. There are breaking news segments on various names (including a few that I hold) and also information about a new idea (which I am considering). Here is the scoop on Nektar Therapeutics.

On A Roll As BAX-855 Hits Phase III Endpoint; Movantik Approval Next

The registration trial met its primary endpoint as BAX – 855, a long-acting Advate for hemophila A, controlled and prevented bleeding, routine prophylaxis and perioperative management for patients (>12 years old)

John has a “buy under” price of 13 and a target of 20. While I never buy a stock for takeover potential (and neither does he) that extra kicker is in play on this name. There is a free newsletter available for those interested.

Don’t spend so much time on monthly or seasonal averages. Cullen Roche puts it strongly, saying that historical monthly stock data is “useless.” I agree that the average seasonal move is modest compared to other important factors. Most of those trying to trade these “trends” have simply missed out on the bulk of the rally.

Some are not seeking opportunity because they are worried about possible market declines. If that is your situation, you have plenty of company. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. You can get our report package with a simple email request to main at newarc dot com. Also check out our recent recommendations in our new investor resource page — a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love and use feedback).

Final Thought

I have two main ideas – why managers lag this year and what to do now.

This year has surprised many, including me, on one front — interest rates. I expected a stronger economy to increase the slope of the yield curve. This would help financials and reflect cyclical strength. While I had technology and health care exposure, the interest rate thesis has not yet worked.

This means that many managers will be moving to new ideas, reflecting new perceptions about current prospects. Why wait until the calendar turns? The biggest factor is that the European economy and ECB policies seem to be holding down US interest rates – not the rapidly tapering QE.

The question is whether the thesis is wrong or delayed. I think it is some of each.

The future depends upon the economic cycle. As part of my presentation at the SF Money Show I highlighted the most important takeaway: This economic cycle features a short and steep decline but a long and gradual recovery. Ignore those who try to make comparisons with the averages. The recovery will continue to frustrate those who have been left behind. (I’ll post more about the specifics from the presentation. I need to figure out how to translate from verbal to writing, and also to adjust the length).

Barely had I returned when I saw that Morgan Stanley now thinks that the expansion could last for another five years and reach to S&P 3000. Here is their chart of the business cycle:

I congratulate their team on discovering this important information, but it does raise the question about why it took so long. At the start of 2013, they were calling for a market increase of about 2.5% — only off by 30% or so. Their cycle indicator is a back-tested method with proprietary inputs. Who knows how it will work in the future, or whether they will still be using it a year or two from now.

Meanwhile, please compare with this article, written at the start of 2013. I called it “the most exhaustive and challenging piece I have written.  It was worth the effort because understanding the business cycle is crucial to making great investment decisions.  To get the full benefit, I urge readers to spend some time reading the background links and watching the videos.” It included Dr. Dieli’s version of the business cycle chart, which has one important comparative strength. It is not the result of a back test. He developed it decades ago and has used it in real time. Please compare and see how it has worked over time.

You can also check out my 2010 piece (and follow ups) on Dow 20K.

While I have no fixation on the calendar, I constantly re-evaluate current ideas and theses. The stage of the business cycle is my blueprint for the months ahead. It should also be yours.

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Sweeping the reflections

by Mark Andrews

Pagare per vendemmiare in Toscana da Sting rende quasi più brutta Fields Of Gold

by Alessandro Morichetti

Non ti basta aver fondato i Police e scritto canzoni memorabili come Message in a bottle, Fields of gold, Russians, When we dance e cento altre. Non ti basta aver millantato ore e ore di sesso tantrico, avere una moglie molto bella e possedimenti di tutto rispetto. Non ti basta nemmeno avere l’età di mio padre ma meno rughe di mio nipote.

No, tu sei Sting e puoi anche permetterti di far pagare per vendemmiare a casa tua in Toscana presso la tenuta Il Palagio. In fondo, perché non pensarci prima? Circa 260 euro al giorno per raccogliere olive e uva in una tenuta di 900 acri e godere del paesaggio splendido che la Toscana sa regalare.

Notizia ripresa anche dalla Nazione: “Ha guadagnato milioni dalla musica rock - scrive il Teleghraph – lo scorso anno ha cominciato a affittare cottage toscani a 6mila pound alla settimana”. Ora l’ex leader dei Police, “il cui ultimo tour ha fruttato 358 milioni di pund”, è deciso a trasformare la tenuta del 16esimo secolo vicino Firenze, comprata in stato di abbandono, in un business. Al momento è un’azienda che fa miele, olio e vino cosiddetto ‘biodinamico’. La produzione è così abbondante che la moglie di Sting, Trudie Styler, ha aperto un negozio in cui vende  olio, vino, ortaggi, frutta e insaccati.”

E bravo Sting, businessman mai domo. Ma no, tranquillo: pagare per vendemmiare non rende affatto più brutta Fields of gold. Come potrebbe?

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