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Weighing The Week Ahead: Here Come The Candidates!
By: Jeffrey A. Miller   Monday, May 7, 2012 9:02 AM
Symbols: AAPL
Bob has graciously offered the most recent report as a free sample for our readers.

The big news on the recession forecasting front this week came from The Bonddad Blog's continuing coverage of John Hussman's recession prediction.  (Since the Hussman recession forecasting started relatively recently and relied on tweaking and backfitting, I have not included it in the group that we analyze at "A Dash.")  This sort of "modeling" should not be expected to provide solid forecasts and it is not doing so in real time.  Check out John Hussman's recession index just blew up for the full story.

"The icing on the cake is that the "all clear" signal that Hussman said he would recognize -- the ECRI WLI growth index turning positive -- has also come into existence for the last 3 weeks. I really don't see any wiggle room left. Under the terms he himself set, Hussman's recession index says we are in expansion."

 

Indicator snapshot 050512

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions. Three weeks ago we shifted from bearish back to neutral. The last several weeks have been pretty close calls. The ratings have improved a bit.

(For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list. For daily ETF commentary from Felix, you can sign up for Wall Street All-Stars, where I still have a few discounted memberships available. You can also write personally to me with questions or comments, and I'll do my best to answer.)

The Week Ahead

This is a light week for economic data.  We will start the week with news from the French elections, where Sarkozy is expected to lose.  This is widely projected to be negative for Europe and therefore for US stocks, but it should be reflected in markets by now.  The story will get continuing buzz, especially on Monday.  We will also have election results from Greece, where no majority winner is expected.

There are a number of minor reports early in the week, but I am interested in trade data, jobless claims, and Bernanke's speech on Thursday.  On Friday we'll have the Michigan sentiment index and PPI.  We could see a surprise from either.

We will also have some news from Omaha and the Facebook IPO where Cody Willard sees $100 B as an important dividing line.

Trading Time Frame

We mostly out of the market until late in the week for trading accounts.  Felix likes the current dip, so we are back in the market. The Felix forecast is for a three-week horizon, so it is best not to judge too quickly.  We hae long experience with this program, which does not try to call market tops and bottoms.

If Felix is wrong, it will be back to the penalty box.  For now, we are looking for rebounds in several sectors.

Investor Time Frame

For investment accounts I have been buying on dips in stocks that we like. I tried to explain the most important concept for individual investors in this article about the Wall of Worry. I have had many emails from people who had a personal breakthrough in their investing when they understood this concept. If you missed it, I urge you to take a look.

Investors should not be trying to guess the next market move. Instead, take what the market is giving you. I have been offering this advice for months, and it led to a great quarter for anyone taking heed.  We seem to have another buying opportunity -- especially in tech and cyclical stocks.

If you are really worried, you can imitate our enhanced yield program. Buy good dividend stocks and sell short-term calls. I am targeting 8-9% returns on this approach, and achieving it no matter what the market is doing. You can, too. This has been meeting objectives in spite of the market twists and turns.

Thursday and Friday were excellent days for finding new positions for this system.

Final Thoughts on Politics, Headlines, and Fear

In principle, investors know that the right time to buy is when others are fearful.  In practice, they join in the fear.

Bill Luby, in a nice guest column for Barron's, Be Greedy While Others Are Fearful, writes as follows:

"Fear is good business on Wall Street. For starters, fear helps to encourage impulsive and emotional decisions on the part of retail and institutional investors alike. It is contagious, capable of spreading extremely quickly and can sometimes appear to be unbounded. 

Fear also has been responsible for the development of a wide range of structured products tailored for institutional investors who wish to protect principal, minimize volatility and take other steps to counteract potential risks. The ugly side of fear is that it impels many people to sell at the bottom and wait to get long until markets are near a top. 

These are all good reasons to want to sell fear, but not why I choose to do so.  No, I am short fear because fear is almost always overpriced – and by a large margin."

Successful investing is not reckless, but it is fearless.  To achieve this requires a system and confidence in that system.  I recommend the following:

  • Ignore the political noise and spinning.
  • Note the low level of financial stress -- the European systemic failure is off the table.
  • Note the low recession odds from the best sources.
  • Observe the continuing growth in corporate earnings, and the low forward multiple.

These are all encouraging conditions for long-term investment.  Even conservative investors can own some dividend stocks and sell calls against them.

This is what the market is giving us, and we should take it.

(long AAPL)



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