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Weighing The Week Ahead: Any Help From Housing?
By: Jeffrey A. Miller   Monday, May 14, 2012 5:57 PM
Bob has graciously offered a recent report as a free sample for our readers.

The big news on the recession forecasting front this week came from the ECRI, which is clinging by a thread to their recession forecast from last September.  They are now acting like the forecast was for June, 2012 and that we cannot possibly know the real verdict for six months after that.  In the meantime they have changed their methods, blaming seasonal adjustments.

It is about time to face the facts, since the indicators they follow  have probably improved.  Everyone in the financial world makes mistakes.  The real pros accept responsibility, figure out what went wrong, and move on.  Take a look at their recent CNBC appearance (via Business Insider), the Bloomberg appearance (via Doug Short - with great charts) and the analysis at The Bonddad Blog and decide for yourself.

We follow the excellent work of Georg Vrba, who has a top-rated coincident recession indicator as well as a successful stock/bond asset allocation model.  Here is his most recent comment:   

"My own composite short leading economic indicator, which has the highest score of all indicators so far tested, does not support the notion of a recession anytime soon."

I listen to Georg, and you should, too.

  Indicator Snapshot 051112

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. Four weeks ago we shifted from bearish back to neutral. The last several weeks have been pretty close calls. The ratings have dropped off 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

Before the US week even gets started we'll have updates on the progress (or lack thereof) in forming a coalition government in Greece. 

We will have a number of economic reports that are probably of secondary significance -- retail sales on Tuesday along with the CPI.  On Wednesday we see industrial production and capacity utilization.  On Thursday we have the more important initial claims data.  Any of these reports could have a significant effect, so I will be watching closely.

Throughout the week we get regional Fed surveys, which add little information to my own assessment unless there is a dramatic move.

The Facebook IPO will continue to be a big story.  People like to follow what they can understand, and they think they know Facebook.  There is an important difference between understanding a product, and evaluating a business model and stock valuation.

Trading Time Frame

We have been fully invested in trading accounts, with 1/3 of our position profitably in bond ETFs.  It was still a losing week.  Felix finds the current dip to be an attractive buying opportunity, 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 have long experience with this program, which does not try to call market tops and bottoms.

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

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.

Final Thoughts on Housing

The housing story has been a multi-year drag on the economy.  Even switching to neutral would add a point or two to GDP.  This week's economic data feature housing.  This might start to get interesting given the recent surge in building permits.  Calculated Risk has suggested that we might be seeing some bottoming in housing.  Our own ETF model supports this idea, so we are watching carefully.  Here is a provocative chart from CR:

StartsLongMar2012

Hardly anyone expects any strength from this source, so it is (yet another) contrarian play.

And a Warning

I continue to worry about holdings in bond funds.  Check out the excellent analysis from Tom Brakke, which shows in a single chart both the temptation and the threat to those buying bond funds.

12-0511-bad-bet-730x394

 

I urge you to read the article carefully.  If bonds are right for your portfolio, you should consider buying individual bonds instead of bond funds.



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