We have a normal week for news with the emphasis on inflation data and business optimism. In recent weeks data has had little bearing on stock price movement. In fact, the opposite has been the case. Whatever happens with stock and bond prices is selectively used to spin the data interpretation.

There are many dire warnings of recession and a complete market collapse. They are hard for most to ignore, especially since these are the grist for nightly news summaries.

I am not worried about these outcomes. Asking myself the best topic to write about this week, I decided a focus on my personal analysis should be more prominent than usual. Rather than relying only on my opinion, and those of some other savvy experts, I will look in more depth at the week’s trading. When I finish, we will be asking: Are you ready for your holiday shopping?

If we get a little bounce in stocks, you will see the punditry, always followers, join in asking this question.

This week’s Investing section has some ideas for your list.

Last Week Recap

In my last edition of WTWA I took note of the big week for news and data. With nothing definitive yet on the G20 meetings, I laid out three possible scenarios. The “middle” choice was “…a ‘cease fire’ on further moves and a general outline on meetings and next steps. Both sides would declare this to be a triumph. Once again, this could still be the announcement given what we know now. In the worst case, I estimate a market decline of about 2%. The first 1% merely unwinds Friday afternoon, so don’t be bamboozled by those spinning the “meaning” of any announcement.”

This was a good call for about a day. My expectation was that this would clear the way for a return to fundamentals. Didn’t happen. A closer look at the reasons will help with planning for the week ahead.

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. She includes a lot of relevant information in a single picture – worth more than a thousand words. Read the full post for more great charts and background analysis

The market declined 4.6% in the four-day week, almost completely wiping out the prior week’s 4.8% gain. The trading range was 6.7% after Monday’s gap opening. The volatility remains very high, which you can see in our Indicator Snapshot section below.

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 an important part of our regular research. This week reflects further softening in all time frames. The long leading indicators remain negative.

When relevant, I include expectations (E) and the prior reading (P).

The Good

• The ISM manufacturing index registered 59.3. E 57.2 P 57.7. (Bespoke).

• Low inflation gives the Fed room to pause. (Ed Yardeni). Tim Duy sees economic strength and expects the Fed to see the same. He has a nice comment on the yield curve inversion issue.
• ISM services recorded 60.7. E 59 P 60.3. The ISM reports that historically this strength has corresponded to economic growth of 4.3%. The full report also includes survey elements and some typical comments.
• OPEC agreed on a reasonable output cut of 1.2m barrels/day. This provides some support for US oil businesses and is not a large effect on consumers. Saudi Arabia joined the agreement in spite of Trump tweets in opposition. (The FT).
• University of Michigan sentiment (Dec preliminary) was 97.5. E 96.8 P 97.5.
  (Jill Mislinski)

The Bad

• Construction spending declined 0.1%. E 0.3% P -0.1%. Steven Hansen (Econintersect) looks beyond the headlines to help in identifying the down-tick in the trend. He uses moving averages to deal with this noisy series and frequent revisions.

• Auto sales for November were 4.01 M. P 4.27 M. The “Ford Truck Indicator” even declined a little. Bespoke notes this as a good read on business and construction.

• Employment data weakened slightly. I am scoring this as “bad” because of the small miss. It was within the error range on all results and viewed as a “Goldilocks” number by some observers.

  • Initial jobless claims increased to 231K. E 225K P 235K.
  • ADP private employment increased 179K. E 192K P225K.
  • Payroll employment grew 155K. 189K E 237K (revised down from 250K) prior.
  • Average hours worked down-ticked to 34.4. E and P 34.5

The Ugly

Scammers preying on the victims of the California wildfires. This SEC warning was highlighted by Econintersect, one of our valued regular sources. Editor John Lounsbury dishes up an eclectic blend of economic research, opinion, and important items from official sources. Many of these are easy to miss without John’s helpful pointers.

The Calendar

The calendar includes several important reports with a focus on inflation data. The JOLTS report will provide more insight about labor market structure and possible tightening. The NFIB Small Business Optimism Index has gained in importance for those tracking business investment and hiring.

As expected, Fed Chairman Powell’s Congressional Testimony scheduled for December 5th was postponed for the national day of mourning. No new date has been determined. If you are starved for Fedspeak, you have a problem. The Fed is in the quiet period before the December FOMC meeting.

Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.

Next Week’s Theme

There are many dire warnings of recession and a complete market collapse. They are hard for most to ignore, especially since these are the grist for nightly news summaries.

Tuesday Market Decline

Continuing Trade Angst

On Thursday evening I took a closer look at the trade news. A major problem is that most deals are loose in original mission, flexible in timing, move incrementally, and involve compromise. This is absolutely normal to a political scientist like me. It is completely foreign to traders. I created a table to illustrate this.

Friday morning provided confirmation for my approach. Chief Economic Advisor Larry Kudlow was interviewed on CNBC. He reaffirmed that there was a specific list of concerns, understood by the Chinese. He said the 90-day period could be extended if there was good progress. The Wanzhou arrest was a “different track.” He also commented on the jobs report. Stocks moved higher as he spoke. Then Peter Navarro spoke on another network, emphasizing the 90-day period.

We got the “death cross” in the S&P 500. This happens when the 50-day moving average crosses the 200-day MA. We highlighted the inevitability of this recently via regular source Georg Vrba. Price Action Lab Blog updated this story on Thursday. Despite all this advance warning, we got a further market decline from “technical traders.” Is this really an important warning? It has a great name and was obviously important to some. Price Action Labs does a test: Based on 28 trades since 1960, win rate is 32% and overall return is less than 3%, resulting in an annualized return of about 0.05%. See the full post for tests of a strategy combining this with the opposite indicator – the Golden Cross.

At the end of the day, CNBC interviewed Navarro. He seemed reasonably upbeat about trade prospects, emphasizing the atmosphere at the G20 meeting and the specific list of issues. He was not very threatening about the 90 days.

More Sources

I make my own decisions, but I certainly pay attention to informed opinion. Knowing how to identify real experts is an important part of critical thinking and analysis. I received a wonderful report from JP Morgan’s quant team, which I cannot quote here. I’ll just say that the conclusions are a strong fit for what I have been writing, and there is plenty of good quantitative evidence.

Russell Investments’ senior portfolio manager, Doug Gordon. A messy correction, not the start of a bear market.

Billionaire investor Leon Cooperman. “I could be dead wrong, but my position is based on no recession, inflation not a problem, the Fed is far from hostile, bonds are not competitive with stocks, earnings are growing, employment is growing.” Watch the video to see his key concerns.

A JP Morgan analyst blames the disconnect between stock prices and the economy on “fake news.” He notes a “reinforcing feedback loop.”

Ben Levisohn (Barron’s) writes about excessive panic. “Those who can’t remember the past are condemned to draw the wrong conclusions.”

Eddy Elfenbein sees underlying economic strength and a bond market that is “vetoing the Fed.”

How Should We Make Decisions?

Is it important that Administration officials disagree about trade policy? We have known this from the start. Do we really think they will become threatening and cut off negotiations in 90 days if there is good progress? Are you dumber than a computer program geared to short-term trading profits?

Today’s Final Thought will add a few more implications for investors.

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

Short-term trading conditions remain unfavorable. This is mostly a reflection of volatility, not a prediction of market direction. There is always a risk/reward balance to consider in your trading. When conditions are technically challenged, we watch trading positions even more closely. Each of our models has a specific exit strategy. The technical health rating may drop enough for a complete trading exit. It got close to that level recently.

Long-term trading has retreated slightly from the highest risk level. Those who emphasize technical analysis have emphasized the “damage” done to charts by the sustained correction. Our methods show that a clean bill of technical health will require some time.

Fundamental analysis remains strongly bullish. Earnings are great, prices are lower, and there is even less competition from bonds. We reduce fundamental positions (as we did in 2011) when we get a warning from the recession or financial stress indicators, not merely as a reaction to technical signals. This leads me to a “neutral” overall outlook.

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.

Georg Vrba: Business cycle indicator and market timing tools. None of Georg’s indicators signal recession. Here is the latest update on his unemployment rate recession indicator.

Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis. With the current economic concerns, it is time for another look at the Big Four.

Guest Commentary

“Davidson” (via Todd Sullivan) looks at his data and concludes as follows:

Employment growth continues to trend higher and vehicle sales continue to be maintained at levels reflecting replacement and new additions characteristic of a strong and steady economic expansion. I use the Household Survey because it is the only estimate including the self-employed, higher by 233,000 in this report. Inflation as measured by the 12mo Trimmed Mean PCE has actually fallen a little from slightly over 2% to 1.9%. Another positive! Employment demand as evidenced by Job Openings, Temp Help and the Chemical Activity Barometer(CAB) indicate further expansion ahead.

Read the full post for several interesting charts including this one:

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. This week we looked at market volatility from a trading perspective. As usual, we discussed some recent picks from our trading models. Our ringleader and editor, Blue Harbinger, provided fundamental counterpoint for the models, all of which are technically-based. The models have a much different approach to volatile markets than that which I recommend for investors.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility.

Best of the Week

If I had to pick a single most important source for investors to read this week it would be my new acquaintance David Moenning’s first rate analysis of Tuesday’s trading. I drew upon this in my analysis of the week ahead, but please read the entire post. Here is an important point from his work:

My guess is there were no “people” making trades between 12 noon and 12:32 pm EST on Tuesday. I seriously doubt that John Q Public and his wife Nancy had gotten on a call and decided to move their 401K’s to cash Tuesday afternoon. No, this was computers executing orders – at the speed of light.

To be sure, this type of trading has been going on since the beginning of time. Heck, I’ve run many strategies over the years that bought and sold based on a specific level being hit. But nowadays it isn’t just one order being executed by hand. No, it’s hundreds, even thousands of orders being executed at the same time.

Stock Ideas

Barron’s has several articles with stock ideas. These are all good ideas for those needing help with a holiday shopping list. Don’t wait on Santa, though. You have to step up and buy these yourself.

    Netflix (NFLX) and Palo Alto Networks (PANW) – growth at a discount.

    A Home Builder Stock That’s Just Too Cheap to Pass Up.

    Caterpillar (CAT) – punished by fearful investors despite bright prospects.

Morningstar has an update on their “Ultimate Stock Picker” lists – buys and sales. The full article provides more tables and detail, but here is the conviction buy list.

Personal Finance

Gil Weinreich’s Asset Allocation Daily is consistently both interesting and informative. Each week he highlights stories of interest for both advisers and investors. He also provides insightful commentary on important topics. Be prepared for something that cuts against the grain. This week he asked one of my favorite questions: Whose Advice You Shouldn’t Listen To. He writes as follows:

If someone could have told you in advance that Disney (NYSE:DIS) would be make an offer to purchase 21stCentury Fox (NASDAQ:FOX), is that the sort of actionable advice you’d be interested in? If that same soothsayer could have provided you advance notice that Donald Trump would become president, would that be worth something to you? If that very same source was so attuned to the subtleties of economic thought as to have foreseen Bengt Holmstrom’s 2016 selection as Nobel Prize laureate in economics, would it interest you to follow this source in your own financial decision making?

You have to read the post for the answer.

Abnormal Returns is an important daily source for all of us following investment news. I read it religiously. His Wednesday Personal Finance Post is especially helpful for individual investors. This week’s edition featured sales of financial products. My favorite was Ron Lieber’s (NYT) thorough treatment of an indexed annuity sale to an eighty-year old prospect. The sales technique involved the tried-and-true steak dinner approach. The story is both entertaining and valuable investment advice.

Watch out for…

Nvidia (NVDA). Chuck Carnevale is concerned about the valuation, even after the correction.

Final Thought

This week’s installment is a little more personal than usual, designed to fit the circumstances. I sometimes wish that each reader could sit with me during a market day, although news is usually on TIVO and mute. Maybe I should pick a day and do one of those “live blogs.”

While watching closely is part of our business, it is not a useful practice for individual investors. Why so?

In times like this there is a significant diversion between the opinion of Mr. Market and the conclusions from fundamental analysis. (If you are unfamiliar with Ben Graham’s wonderful allegory, check it out here). We have a perfect example of Mr. Market as an emotional and irrational character over-reacting to almost-meaningless tweets and statements.

If you are tempted to sell just because the market is going down, you are falling into the classic trap for investors. Mr. Market is “there to serve you, not to guide you.” Do you want to sell because some computer program identified “flattening yield curve” in a news piece? I did some buying this week.

What to Expect

The current selling is not really atypical. Every new client has an interview with me. I review some examples and say that 15-20% declines come with the territory for investors. Anyone who claims to have a proven record of predicting corrections while otherwise investing normally is suspect. Trying to narrow this range severely limits your returns. I try to avoid the larger drawdowns through risk control methods on each program. None of these are strictly price-based.

If you understand that 20% decline will happen in the normal course of events, you must decide how much of a decline on your brokerage statement you can accept. You know that you do not need to sell at these prices, but it can still be disturbing. Each person has a “number.” If you are upset about a paper loss of $50,000 for example, just multiply by 5 to determine how much you can invest in stocks. This method is more tangible and effective than the silly questionnaires you often see. If your positions are too big, you will be overwhelmed in a normal market decline, selling at exactly the wrong time.

When Will This End?

I do not know and neither does anyone else. Some analysts see signs of bottoming. We shall see.

Why is the algorithmic trading permitted?

This is a good question. Michael Lewis’s Flash Boys has an excellent discussion of the financial incentives for trading firms and the exchanges who profit from more volume. There are special rules to facilitate such trades. Why does the SEC permit this? Or triple inverse funds? Or various products dangerous to investors?

The most we can do right now is to avoid placing too much importance on these market moves.

What to do

Even if there is more selling, it is a good time to get more aggressive in your positions.

• If you have been out of the market, here is the fear that you have waited for.
• If you are overweight in conservative stocks or bonds, consider rebalancing.
• If you have been overcome with fear, you need to do some portfolio de-risking. Use the method I suggest above to right-size your portfolio.

You are not playing poker. There is no reason to go “all in.” With bonds and bond equivalents expensive, and stocks cheap, nudge your portfolio in the right direction.

I’m more worried about:

• Brexit. There is a lot of uncertainty before the EU’s vote.
• The debt ceiling, despite the two-week delay. The Administration under-estimates the effect of a government shutdown. This will be the first test of compromise.

I’m less worried about:

• Trade issues. Good progress is all we can expect. Significant China problems are decades old. It will take more than 90 days, but good progress is likely.
• The Fed balance sheet. This has been a perennial source of concern for the doomsters, none of which even know the daily trading volume in the Treasury market. Hint: The Fed’s QE unwinding has a minor effect if done gradually. We might get 60 bps or so on the ten-year – which would increase the slope of the yield curve.
• Mortgage rates. These declined with the ten-year. The sound of silence from housing worriers…..