INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,961
Monday, September 30, 2019 9:14 a.m.
The Street tends to shrug off a lot of things that could end up hammering stock prices: war, recession, a bear market resulting from overvalued stocks facing an earnings recession that can be worsened by a recession, and now the potential for the impeachment of the nation’s president.
That’s what a 10-year long bull market can do to the people who benefitted the most – corporate management and Wall Street.
At some point, the BIG money will hit the silk and it will be straight down 12% to 16% before investors can say ouch. That’s just the first leg down.
That’s because the Fed, Street and Administration have propped this market up with hype about the economy and the magic of interest rate cuts !
Investors are being conned ! There are no new eras ! Bear markets happen !
All it takes is for several major institutions to break ranks and sell and others will follow.
The impact will be instantaneous as computer algos, mostly programmed to track the same bullish metrics, will get the sell at the same time.
The hype will continue in an attempt to prop the market hopefully through 2020 election year.
Impeachment a real possibility, and that will lead to more divisiveness and stifle consumer and investor confidence.
This one has the potential to get real ugly.
Stock markets recover from bear markets, so why not wait it out ?
For one, over the last 46 years we have had three bear markets with the S&P 500 dropping 50%. Many investors got shaken out near the bottom not to return until long after the market lows. Those who held on didn’t see portfolios regain losses for years.
Depending on one’s tolerance for risk, a cash reserve of 80% is justified
I do not like this market, even though odds are good the Fed will hype the market and/or the administration will release optimistic projections about trade. Odds are good that any rally from here will fail. The Fed has lost its clout about rates and why would China cave to trade concessions with Trump’s power sapped by the prospect of impeachment ?
Minor Support: DJIA:26,626; S&P 500:2,920; Nasdaq Comp.:7,841
Minor Resistance: DJIA:26,950; S&P 500:2,973; Nasdaq Comp.:7,943
Friday Sept. 27 “Street’s Arrogance to Risk to Precede the Fall ?”
Naturally, current events surrounding Donald Trump and the prospects for the U.S. House initiating impeachment proceedings flashes back to the early 1970s when President Nixon was the subject of the same thing.
Nixon took office in Jan. 1969. Incidents leading to the House Judiciary Committee passing three articles of impeachment: obstruction of Justice, abuse of power and contempt of Congress were filed on July 27, 1974. On August 8, 1974, President Nixon resigned, but was later pardoned by President Ford.
Perhaps the formation of the White House “plumbers” unit in the fall of 1971, intended to plug leaks in the White House set the stage for a series of shocking events between the White House and Congress and the press, including the formation of the Senate Watergate committee, high level resignations, coverups, payoffs, erasures of tapes, the “Saturday Night Massacre”, and a Supreme Court ruling.
Ironically, Nixon was re-elected on November 11, 1974.
A bear market (1/1/73 – 10/4/74) intervened taking the S&P 500 down 50%; a recession started in November 1973 and ended in March 1975.
Contributing to this chaotic era was the Yom Kippur War (Oct 6 -26) and OPEC’s oil embargo (Oct. 1973 – Mar. 1974) and a four-fold increase in the price of oil. Wild stuff !
Just how this will play out this time in uncertain. We are in the early stages of a recession, which the Fed acknowledges and is responding to with rate cuts.
A bear market may have already started, and who knows, maybe another mid-east oil crisis if war breaks out between the U.S. and Iran.
The market is historically overpriced. The prudent thing to do here is to have a healthy cash reserve (30% to 85%) depending on one’s tolerance for risk.
The new normal for corrections is the flash crash, a near vertical plunge in prices as highly leveraged institutions stop buying, worse yet – start selling with the result being a 12% – 16% plunge followed shortly after by a failed attempt to rebound, then another huge plunge.
So far, the Street is ignoring the risk, perhaps in denial after being spoiled by a 10-year bull market.
Today’s market will start on the upside with algo-buys automatically nibbling at lower prices over the last 8 days, but bulls must push up beyond DJIA 27:306, S&P 500:3,021 and Nasdaq Comp. 8,243 to get the market moving upward again.
While impeachment is grabbing the headlines, the bulls are hoping for good news on U.S./China trade talks October 10.
Thursday Sept. 26 “Market Takes a Pretty Good Punch, but……”
Looks like a jousting match between Trade talks and impeachment proceedings to determine which dominates the direction of stocks.
While there is enough weakness in certain economic indicators to warn of recession, the Street doesn’t care (yet).
All recessions to date have been accompanied by bear markets.
Expect news releases about improved U.S./China trade prospects anytime the market slides down. Absent that, the Fed will step in to stabilize the market, it’s the new norm.
The other side of the coin is the market will respond to bad news on trade, as well . For some reason, the Shanghai Composite stock index dropped sharply yesterday, which may suggest uncertainty about upcoming U.S/China trade talks.
The market is demonstrating it can take a pretty good punch what with recession talk, trade uncertainty and now impeachment.
But at some point, the market will keep going down. It will happen out of nowhere, because the Street’s algos will get a sell all at the same time and whoooosh.
What to do depends on one’s tolerance for risk. Anyone needing funds from their investment account near-term better have a healthy cash reserve. Senior citizens not in a position to ride out a bear market should also have a good cash reserve.
YES, with more unsubstantiated hype about trade, the market can (likely will) move higher, but that only extends the market’s overvaluation. Corporate earnings are down this year and estimates for 2020 are being slashed by the Street.
Wednesday Sept. 25 “Street Doesn’t Care About Impeachment, Just Trade.”
Axios reports the Street wants a trade deal, more importantly it points out that the S&P 500 has risen 3% month to date, all the while U.S. Treasury prices have fallen (yields risen) suggesting an increased investor appetite for risk.
To-date, U.S. equity ETFs have seen an $18 billion inflow of money while bond ETFs have experienced a slowing in new funds.
This pattern reverses much of what happened earlier in the year when equity ETFs (excepting February) were hit with net selling and bond ETFs net buying.
What’s going on ?
It could be the Street is front-running the Stock Trader’s Almanac’s “Best Six Months” (November – April), a highly consistent, time-tested pattern for market timing – buy November 1 – sell April 30.
The pattern is challenged by three issues – a trade deal or not, recession, and the move by the U.S. House to impeach President Trump.
Good news/bad news on a U.S./China trade deal has triggered short-term buying and selling, but political news has little impact except for big buying when Trump was elected in anticipation of lower taxes and deregulation.
The U.S. House is only in the preliminary stages of deciding if it will pursue impeachment of Trump, so I doubt this news will have much impact near-term.
Global recession is real, but the U.S. economy is taking its time to make the slide. Acceleration of that trend would tip the market into a full-fledged bear market or nasty correction.
What does all this mean ?
You know the answer – have a major cash reserve even though odds favor higher prices via institutional buying ahead of the “Best Six Months.”
When this overpriced/ aging bull market cracks it will do so without warning.
Tuesday Sept. 24 “So Far, Market Has Gone Nowhere in 20 Months”
Aside from rebounds from corrections, the DJIA and S&P 500 have gone nowhere in 20 months ! The Market rebounded this month after a 6.8% correction in August but is once again running into sellers, this time in the DJIA 27,300 (S&P 500: 3,025) area.
It needs a major piece of good news on trade to break out to new highs, but even that may not be enough to trigger another leg up in the market.
The Fed waved what it thinks is its magic bull wand, but its second cut in the fed funds rate begs the question – “why” ?
Europe continues to slide toward recession, as does U.S. manufacturing.
InvesTech Research warns of excessive valuation in the S&P 500’s Price/Sales and Price/Earnings Ratios , both well in excess of prior market tops.
Additionally InvesTech refers to the Buffett Indicator of Market cap to GDP which is close to 80% above its norm and challenging the 2000 dot-com bubble high.
EVERYTHING I AM SEEING HERE IS PHONY – a house of cards built on subterfuge, manipulation, lies at the top, greed and delusion about values and the economy/stock market being bullet proof from a horrendous crunch.
When the truth outs, it will be straight down 12% -16% in a Powell Minute.
What really, really frosts me is the hype by the Fed, Administration and the Street to suck investors in at these overvalued levels.
Monday Sept. 23 “Bubble Trouble – Fed Mismanagement”
Well, we are back in the Fed-micro-managing mode, which features low interest rates and possibly a return to QE.
As a rule, this is good for the stock market.
Here’s what few economists and Street pros are acknowledging.
Earlier this year, the Fed reversed its policy from one designed to prevent the economy from overheating to one of propping it up. At first this took the form of verbal promises to cut rates if needed to one of actually cutting rates twice.
PANIC ! That, or just over zealous intrusion by the Fed on the marketplace.
This kind of stimulus is normally employed when the country is in a recession and the stock market in the crapper.
So, what if the economy goes into recession ? That has never happened without a bear market, which in this case could be a hummer, since stocks are at all-time highs and historically very over-valued.
The Fed will not have any tools in its kit to employ the bring the economy out of recession and stocks out of a bear market.
Bottom line: longer recession and bear market.
All this attempt to keep a business expansion going has the potential to create a huge bubble in stock prices, perhaps greater than the 2000 bubble which was followed by a 50% drop in the S&P 500 and 78% drop ion the Nasdaq Composite.
Be ever so careful here. If this bubble inflates it will be tough to resist going all in, which would simply be the human thing to do.
Friday Sept. 20 “How Much Risk Can You Afford”
Politico’s Morning Money featured an article this morning, “Economists see sustained low growth, but no recession.”
The article quoted economists from the IMF, World Bank, central banks, rating agencies, mainstream economists, Fitch’s Global Sovereign Group, and the OECD, all giving reasons for continued growth albeit at a slower pace.
At the end, Politico adds this addendum, “Be smart: Economists almost never see recessions coming. Ahead of the global financial crisis [2007 – 2009], economic leaders from the Fed, Treasury Department and major retings agencies gave no warning of what was to come.
This time may be different. However, the question for investors is, can they afford to be wrong after 10 years of economic growth and a bull market that is by historic standards vastly over valued ?
The question for reasonable investors, how much risk can you afford – 10% – no sweat …..20% – “ugh”…. 30% – horrors….40% ?
Nasty corrections happen , bear markets happen, and most of the time they strike when just about no one expects them.
What No One on Wall Street Wants to Hear
>We are in the late innings of an economic expansion, so a recession is a good bet. The current expansion started in June 2009, has lasted 122 months, the longest in history, twice as long as the average length of 11 cycles since 1945.
> Of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months. The unemployment rate is 3.6% which was hit in May. Technically, we won’t know when the start of the current recession is official for months after the fact, since that conclusion is reached by the Nat’l Bureau of Economic Research (NBER) and they consider host of economic indicators.
>Bear markets lead the beginning of recessions by 3 to 12 months. The current bull market at 126 months is 4.2 times the average of the last 15 bulls going back to 1957
>Nine out of the last 10 recessions have occurred with a Republican in the White House.
Investor’s first read.com
A Game-On Analysis, LLC publication
Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.