About: SPDR S&P 500 Trust ETF (SPY), QQQ, DIA, SH, IWM, TZA, SSO, TNA
Summary
Economic data has been strong; markets have responded.
A Fed increase is expected, and markets are not worried.
Cash is flowing from bonds to stocks.
Dow 20K is within reach.
Plenty of stocks remain attractive.
The post-election market run has been accompanied by improving economic data and increasing confidence. The result has the punditry asking a question that seemed crazy in January:
Will the Dow hit 20K?
Before reading this week's installment, "Sherman, set the WABAC machine to" mid-year, 2010. The Dow was at 10K and many famous pundits were predicting a fall to 5000. In order to appreciate the psychology of the time, please read my post and especially the comments at Seeking Alpha. You will see some very colorful criticisms of my work! You will enjoy a few good laughs. I'll comment more on this below, but it is a great place to start.
Last Week
Once again, last week's calendar of economic news was nearly all good, supporting the market gains.
Theme Recap
In my last WTWA (two weeks ago), I predicted a period of stronger economic news and the possibility of a more positive market reaction. This is what has happened, but most commentators still are not emphasizing the main theme. It is not all about the Fed.
The Story in One Chart
I always start my personal review of the week by looking at this great chart from Doug Short. He captures the continuing rally and the move to new highs.
Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.
The News
Each week I break down events into good and bad. Often there is an "ugly" and on rare occasion something very positive. My working definition of "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!
This week's news was quite good-almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the "bad" list, please feel free to suggest it in the comments.
The Good
- Rail traffic finally scores a slight positive. Steven Hansen provides the current data, as well as the more negative long-term perspective.
- Senate passes stopgap funding. This is not getting a lot of attention, but it is a big shift from the past eight years, especially 2011, when the last correction came for this very reason. (The Hill).
- OPEC reached a production limit agreement. Whether this will attract cooperation from non-OPEC countries is open to question. We might also ask whether a floor under energy prices is a positive. That said, the oil price/stock correlation has been a factor since the energy collapse. Months ago, I suggested that we were entering a sweet spot for oil pricing. The OPEC participants see a cap of about $60/barrel, which makes sense.
- Jobless claims down ticked, and remain near all-time lows. See Calculated Risk for the story and charts.
- Productivity rose over 3%.
- Michigan sentiment spiked to 98 on the preliminary estimate. LPL shows why this is important.
- Borrowers continue to move out of negative equity on their homes. 384K in Q3 (Calculated Risk).
- ISM non-manufacturing strengthened to 57.2. Doug Short has the story and this chart:
- Factory orders gained 2.7%.
- Sentiment remains neutral to negative which is a short-term positive on a contrarian basis. Bespoke notes that Individual Investors are Still Not on the Bus:
The Bad
- Gas prices rose over five cents. (GEI).
- Interest rate components of long leading indicators are weakening. (New Deal Democrat). This is mostly a positive story, but the long-term interest effects are worth watching. NDD's report of high frequency indicators is a regular read for me, and should be for other frequent traders.
The Ugly
Secret outside influence on U.S. elections. Foreign countries frequently have an interest in the most important elections. There is nothing new or unusual about that. Voters can weigh the opinions and arguments in the same way they use other information. Actions that are secret are another matter, especially when following the "dirty tricks" approach.
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. No award this week, but opportunities abound and nominations are welcome!
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 look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.
The Calendar
We have a big week for data.
The "A" List
- FOMC rate decision (W). An increase is widely expected. The statement and Yellen's press conference may yield hints about next year.
- Housing starts and building permits (F). Softening pace expected in this important sector.
- Retail sales. November data following a very strong October.
- Industrial production. Any improvement in this economic weak spot?
- Initial claims (Th). The best concurrent indicator for employment trends.
The "B" List
- PPI. Interest in inflation measures is increasing, but prices are not.
- CPI (Th). See PPI above. Eventually these will be important.
- Philly Fed (Th). The first look at December data is expected to be positive.
- Business inventories. Significant for Q4 GDP, but little change is expected.
- Crude inventories. Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.
With the FOMC meeting at mid-week, FedSpeak is on mute. Expect plenty more news on possible Trump policies.
Next Week's Theme
The strong data continues, as does the market rise. We still do not see a reflection in forward earnings, but the earnings recession has ended. The Fed is about to raise rates, and no one cares. It is not all about the Fed, and more are learning that. As the market hits new highs, including a big round number on the DOW, the focus this week will be on DOW 20K.
In my 2010 articles I tried to emphasize the right focus for investors. Too many were paralyzed by fear from the frequent disaster predictions. Their upside risk was huge. This section was crucial:
