Third Quarter 2010 GDP Revision

The revision to third quarter 2010 GDP was released last week. The original estimate, 2.0%, was revised up to 2.5%, a more "respectable" number than the original. In the first release of each quarter's GDP number, inventories, exports, and imports are all approximated. Subsequent months will use available data to eliminate the "educated guesses" contained in the first estimate. That was the case for today's release. Here is a story discussing the GDP release.

As the official GDP releases represent somewhat "stale" data, we can approximate what they will entail using real-time data from asset markets, which has been a central theme of my classes. To do this, go to StockCharts.com and on the middle right select the PerfChart (this stands for Performance Chart) that deals with the sectors of the S&P 500. To save you time and effort, here is the link.

PROCEDURE:
First, choose a bar chart at the bottom left (second button from the left). Then, move the slider (bottom right) to cover the exact time period you desire. Here, I have used the third quarter of 2010.

ANALYSIS:
Observe which sectors have performed better than the S&P 500 index (i.e., outperformed the overall market). This occurs when the S&P 500 button at the top left of the chart is selected.

For the third quarter of 2010, clearly the most cyclically sensitive sectors outperformed the market, with the exception of Financials. Overall, this is a reflection of the growth that occurred during that quarter. Had the defensive sectors (i.e., Consumer Staples, Health Care, and Utilities) outperformed, this would have signaled a potentially weakening economy.

Can this analysis be used to help predict the GDP report before it is actually released? The answer is yes. Asset markets, one of which is the stock market, are leading indicators, which means they tend to move in advance of changes in other parts of the economy. So, current changes in leading economic indicators tend to signal future changes we can expect to observe in the overall economy.

What is the stock market (and its sectors) telling us about the fourth quarter rate of economic growth? The second chart (click to enlarge) shows market performance since October 1. Other than Energy and Consumer Discretionary stocks (which themselves are cyclical), the remainder of cyclical indicators are performing less well than they did in the third quarter. The apparent message is that economic growth in the fourth quarter will be slower than it was in Q3, or spotty at best in comparison.

There are two things that should be noted. First, there is no indication that economic growth will become negative in Q4. Second, the slowing of economic growth these sectors seem to be indicting also affects the defensive sectors, so they are more negative than they were in Q3. The greater under performance utilities may also reflect an expectation of somewhat higher interest rates in the near term (i.e., (public) utilities like electric companies tend to pay high dividends which become less attractive when interest rates are expected to rise). Part of this no doubt reflects ongoing worries about the US housing market and the economic stability and solvency of several European countries as well (Ireland, Portugal, Spain, Italy, and Greece, sometimes referred to as the PIIGS, using their first letters). Will economic weakness in Europe weaken the recent momentum the US has been experiencing? The market apparently believe that this is likely.

Let me suggest that you continue to follow the sectors as we move farther into the fourth quarter and see what the market is suggesting. We won't get the initial Q4 GDP data until late in January, so this should be informative in advance of the formal data in January (that will be stale at that point).

Picking Stocks to Invest In

As you probably know, there are different sized firms (small, medium, and large capitalization), and there are different emphases among them in ETF's. In this post I focus on growth and value orientations.

To get the symbols for these, I went to the ishares.com web site, which has an easy navigation method. On the left, select the US Market Cap/Style tab. Sub-tabs appear giving the different market cap possibilities, and when you click on one of these, you get the symbols for the market cap and emphasis of that ETF.

You can use these symbols to determine the size/orientations that are outperforming (hopefully) the market using PerfCharts in StockCharts.com. I have done this for you. Click on the following link to get the PerfChart for this.

You will need to convert this to a bar chart, so click on the bar designation below the graph on the bottom left.
- To compare performance to the S&P click on the S&P tab above the bar chart.
- On the bottom right below the graph, drag the bar to select the time period you will investigate. NOTE that the dates you end up with are given in the top left of the graph.

Once this is done, you will be able to see which sizes are performing best, or which orientation is doing better than others. I used the most recent low for the S&P 500 which occurred on February 5. Using this as the starting date (through the most recent date), small cap growth is the most rapidly growing ETF.

As an investor, how can you use this procedure for selecting potential ETF's or stocks to invest in? Obviously, any ETF's that outperform the S&P are obvious choices for you to consider. BUT, make sure you check the technicals of each of these ETF's before you decide whether to purchase shares (using the regular SharpCharts in StockCharts.com).

If you want to purchase individual stocks, what can you do? The answer to this is simpler than it might appear: Get the symbol of the ETF that is outperforming (here JKK), return to ishares.com, and investigate it there. Enter the symbol on the ishares home page or go to the tab to get to that ETF's page. There you will find the primary holdings in that ETF. You can click to find all holdings if desired), and its sector breakdown. If you click on View All Holdings in ishares.com, symbols for each holding are given. Get the symbols for the 10 largest holdings (PerfCharts can only deal with 10 things at a time). Return to PerfCharts, enter those symbols, then determine which individual stocks have outperformed the other ETF holdings.

Once you identify those, the final step consists of charting these and performing a technical analysis of each (or CandleGlance for the entire group). Based on your results, decide which if any you want to purchase (you should also have a sense of where the overall market is going).

Determining Size/Emphasis for Price Momentum

As you probably know, there are different sized firms (small, medium, and large capitalization), and there are different emphases among them in ETF's. In this post I focus on growth and value orientations.

To get the symbols for these, I went to the ishares.com web site, which has an easy navigation method. On the left, select the US Market Cap/Style tab. Sub-tabs appear giving the different market cap possibilities, and when you click on one of these, you get the symbols for the market cap and emphasis of that ETF.

You can use these symbols to determine the size/orientations that are outperforming (hopefully) the market using PerfCharts in StockCharts.com. I have done this for you. Click on the following link to get the PerfChart for this.

You will neeed to convert this to a bar chart, so click on the bar designation below the graph on the bottom left.
- To compare performance to the S&P click on the S&P tab above the bar chart.
- On the bottom right below the graph, drag the bar to select the time period you will investigate. NOTE that the dates you end up with are given in the top left of the graph.

Once this is done, you will be able to see which sizes are performing best, or which orientation is doing better than others. At present, growth is outperforming value.

As an investor, how can you use this information for selecting stocks or ETF's? Obviously, the ETF's outperforming the S&P are obvious choices for investment. BUT, make sure you check the technicals of this ETF before deciding whether to purchase shares (using the regular SharpCharts in StockCharts.com).

If you want to purchase individual stocks, what can you do? The answer to this is simpler than it would appear: Get the symbol of the ETF that is outperforming, return to ishares.com, and investigate it there. Enter the symbol on the ishares home page or go to the tab to get to that ETF's page. There you will find the primary holdings in that ETF (you can click to find all holdings if desired), and its sector breakdown. Then, you can exam the technicals for each graph.

But, as a first step, I recommend getting the symbols for the major holdings, returning to PerfCharts, entering those symbols, then determining which individual stocks have outperformed the other ETF holdings. Once you identify those, THEN move to a graph of its technicals and make a decision (you should also have a sense of where the overall market is going). If you click on View All Holdings in ishares.com, symbols for each holding are given.

Finally, you must appeal to the great oracle of stock market wisdom to finalize your choices. Make sure Jim Cramer approves of the stocks or ETF's that you have selected. Absent Cramer the Omnisient One's blessings, you are probably venturing out into needlessly dangerous territory!