Weighing the Week Ahead: Why is the Market so Quiet?April 23, 2019by Jeff Miller

of NewArc Investments, Inc.The economic calendar is light so attention will again focus on Q1 earnings reports. Non-financial news will, no doubt, takecenter stage. The biggest market story seems to be the lack of action, as shown in our updates below. That might be finefor 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 confirmationof recent economic data. There was a lot of competition from important non-financial news, but the earnings stories gotplenty 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 packsa 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.

Personal Note

I was delighted to learn that my company, NewArc Investments, Inc. and I were in the top 25 of Advisor Perspective’s list ofVenerated Voices. We are honored to be in such impressive company.

Noteworthy

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.

Page 1, © 2020 Advisor Perspectives, Inc. All rights reserved.

#10 probably explains the changing demographics of those wanting to friend me on Facebook. Mrs. OldProf, glancing overmy shoulder, commented that they did not look like the typical bridge player.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must bemarket 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 haveimproved to positive, as has the nowcast. Short-term indicators remain negative. NDD is watching the data to see if theweakness will spread or whether it reflects a rebound from the “mini-recession” caused by the government shutdown.

The Good

The Empire State manufacturing index registered 10.1, beating expectations of 9.0. The Philly Fed index of 8.5missed the consensus of 11.0. I am analyzing the usefulness of various economic indicators and did a post onregional Fed measures here.Leading economic indicators increased 0.4%, in line with expectations but an improvement over February’sreading of 0.1%.Mortgage purchase applications are strong.

Page 2, © 2020 Advisor Perspectives, Inc. All rights reserved.

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 briefcomment of my own. Marc Chandler analyzes the data and notes that many will be skeptical. James Picernoanalyzesthe 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 aboutthe -0.2% decline in February. The ex-auto result of 1.2% was also strong, beating expectations of 0.7%.Earnings Season

Q1 now looks like a YoY growth of 3-4%. There are still some downward estimate revisions, but at a slowerpace. Check out the always valuable analysis from earnings guru Brian Gilmartin.

Page 3, © 2020 Advisor Perspectives, Inc. All rights reserved.

Earnings beats are good, revenue beats weaker than normal, and the stock reaction to a beat is better thanaverage. 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 ofsuch an approach.

The Bad

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 weatherrelated. (Calculated Risk)Wholesale inventories grew only 0.2% in February. (E 0.4%) The January result was also downwardly revised from1.4% to 1.2%.Business inventories were also a bit light, in February, increasing 0.3% versus an expected 0.4% and January’s0.9% gain.Rail traffic is still in contraction, although there is some improvement. Steven Hansen emphasizes annual changesin the four-week rolling average of the “economically intuitive” traffic, GEI). New Deal Democrat suggests that thewidened Panama Canal is changing freight patterns, resulting in less rail traffic and more trucking.

Page 4, © 2020 Advisor Perspectives, Inc. All rights reserved.

Housing starts for March were 1139K (SAAR) with 1247K expected. February was revised downward from 1162K to1142K. Building permits were a bit better than starts, but also slightly missed expectations. Calculated Riskcomments on the results, suggesting that starts for 2019 will be down slightly from 2018, but nothing like thecomparisons so far. New Deal Democrat observes that the starts do not reflect the rise in purchase mortgageapplications.

The Ugly

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 lookfor and how to react.

The Calendar

stPage 5, © 2020 Advisor Perspectives, Inc. All rights reserved.

We have a light economic calendar with a focus on housing data and sentiment. The 1 Quarter GDP advance estimatewill focus attention on the overall economy, but it is “old news” and will be revised twice. The important stories for investorswill come from corporate earnings. Fed speakers are in the quiet period. I expect plenty of Mueller report discussion, ofcourse, 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 ofsignificant market moves, the pundits and TV producers are scratching their heads, asking:

Why is it so quiet?

Background

For those of us who follow markets closely, one good method is to monitor reports from people like Bob Pisani and ArtCashin. 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:

Lethargy

The market has acted tired of late, unable to sustain rallies on good news. This is feeding a sense thatthe market is ripe for a consolidation phase, which translates into a lack of conviction among buyers andsellers 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:

1. Everyone is on vacation.2. Markets are uncertain, lacking any ideas for direction.3. Investors are too complacent, satisfied to hold positions in spite of the many obvious risks.4. The market is cautious – unwilling to take advantage of opportunities.5. 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. Imonitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.

st

Page 6, © 2020 Advisor Perspectives, Inc. All rights reserved.

Short-term and long-term technical conditions continue at the most favorable level. Our fundamental indicators haveremained 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 ofhigher 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.

Georg Vrba: Business cycle indicator and market timing tools. The most recent update of Georg’s business cycle indexdoes not signal recession.

Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis. With updates onindustrial production and retail sales, it is time for an update of their extremely useful chart of the Big Four. These are thekey indicators used by the NBER in generating official recession dates.

Page 7, © 2020 Advisor Perspectives, Inc. All rights reserved.

Since a recession requires a significant pullback in these indicators, the picture looks pretty good – although not as muchas late last year. We will watch for the delayed update on income and spending with great interest.

Guest Commentary

B of A (via Bloomberg) notes, Inverted Yield Curve Is Waning as a Recession Gauge. While yield curve inversion is a partof our recession warning toolkit, I provided a heads-up about the market over-reaction. Many “newbies” to recessionanalysis read an article or two and went on TV. One of the biggest challenges for the individual investor is to distinguishbetween apparently expert commentary from big-name, confident sources, and actual research results. Here is the currentupdate from BofA:

An inverted Treasury yield curve is no longer a reliable signal of recession, and what matters more is the level of thecurve, 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, wecited some great sources and discussed some recent picks from our trading models. Felix rated the top twenty stocks inthe NASDAQ 100 and Oscar did the same for the most liquid ETFs. Pulling this altogether was our regular editor, BlueHarbinger.

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 collecthandsomely.

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 Tradingand 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 scalePage 8, © 2020 Advisor Perspectives, Inc. All rights reserved.

from their intended holding period. Typically this means becoming psychologically attached to shorter-termmovements 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 thepatterns 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.

Stock Ideas

Chuck Carnevale’s sector-by-sector quest for bargains is like reading a book with a new chapter each week. This week’sinstallment takes up retail and the “Amazon effect.” As always, the results of his screen may not be suitable for everyinvestor, but they are always worth considering. His analysis is comprehensive, like a master class in stock valuation andanalysis. 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’spost 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 predictingthe strength. In the post-IPO discussion (which you can get on FATRADER) she has recommended waiting for a pullbackto the 40-45 range. Our group also discussed the rise in the over-the-counter ZOOM Technologies (ZOOM). Be careful outthere!

Page 9, © 2020 Advisor Perspectives, Inc. All rights reserved.

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich’s Asset Allocation Daily is consistently both interesting and informative. Eachweek he highlights stories of interest for both advisors and investors. This week he cleverly uses World Banana Day toprovide 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. EachWednesday’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 worththinking 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 marketcontests, showing why they provide the wrong lessons for students. He then describes a different approach which providesa better simulation of life-long experience. From my long-ago experience I know that simulations can be an effectiveteaching tool, generating enthusiasm and better understanding of key principles. Doing it carefully is challenging butrewarding. 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 usergrowth. 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 theeffects of Medicare for All explains James Picerno. I have been looking at the sector because it is cheap and anyreplacement for the current health care system is years away from passage. The problem is the continual negativediscussion and lack of a near-term catalyst. Barron’s agrees with that assessment and suggests a 12 -18 month timeframe. There are more promising investments at the moment, but it might be a good candidate for those following myEnhanced Yield approach. We are adding some positions this week, and this sort of “value trap” is a good place to search.

Page 10, © 2020 Advisor Perspectives, Inc. All rights reserved.

Final Thought

Explaining a quiet market is the extreme example of media behavior I cite regularly. There is no effort to separate signalfrom noise. Daily variations in the 1% range are the long-term norm. Trying to squeeze meaning out of nothing is a triumphof invention over reason. I don’t need to know someone’s guess about why the Dow “moved triple digits” and I certainlydon’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 asimple adjective makes for a good story. Markets can be tired, fickle, facilitating or unhealthy if you are willing to ascribehuman traits. Treating trading as a sporting event – bulls against bears – is another trick. You get to define a line of keyresistance, 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 arelative, or a market crash prediction. Some are systematic and logical. There is no way to aggregate these many differentmotives and feelings.

On a given day, most people do not change their positions. Their time frame is longer. Despite this, they may be temptedto act on the news of the moment, turning amorphous ill-defined worries into action. Instead of reaching their plan, theymay find themselves in the position of the self-employed day trader, deep in debt, who wagered $85,000 on Tiger Woods towin 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 toohigh, 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, ispressuring 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 thegrowing problem of government debt.

I’m less worried aboutPage 11, © 2020 Advisor Perspectives, Inc. All rights reserved.

Brexit. As is often the case, governments are reluctant to drive over a cliff. Deadlines are flexible. Some remainpessimistic that the needed political changes can be achieved. (CFR).Recession concerns, especially as we move past Q1 data and get some stability.

© NewArc Investments, Inc.

Page 12, © 2020 Advisor Perspectives, Inc. All rights reserved.