INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,113
Nasdaq Comp.: 9,910
Thursday, June 18, 2020 9:21 a.m.
November 15, 2019 (DJIA – 28,004) I Called for a bear market to start in January, that the initial plunge would be 12%-18% – “straight down.” It started mid-February, dropped 16.3%, rallied then plunged another 32.8%.
January 20, 2020 (DJIA:29,348) My blog, “INSANITY,” projected a bear market decline of 30% – 45%. The DJIA plunged 38.4% in 21 days.
With the DJIA at 18,591, I wrote that , while I see lower prices later in the year, I expect a big rally with the upside potential of DJIA 22,037 (S&P 500 : 2,617).
With the DJIA at 23,942 (S&P 500) on April 15, I called for an end to rally, up 29% but well short of how far the rally extended. On May 18, I began to warn of Bubble #2
On June 8, the NBER officially set the beginning of the recession thus ending the longest economic expansion of 128 months.
Brief bio: In investment business 57 years, writing about stock market for 52 years, including investment publishers, brokers, research firms, investment bankers, plus my own investment advisories, mostly as independent contractor to maintain independence of analysis. “In the trenches” for every bear/bull market since 1962. Started before quote machines as a tape reader/trader, posting charts by hand. Primarily a technical analyst, but research includes fundamental, monetary, economic, psychological factors. Research recommendations/profiles of hundreds small companies.
Love rough and tumble… telling the story. CNBC-TV, Been writing investors first read.com daily before the open for 11 years. ……………………………………………………………………………………………………………………………………………..
It is imperative that investors assess the level of risk they can tolerate and be sure their level of cash addresses it now, so they are ready for the next leg down whether it comes tomorrow or months from now.
The DJIA and S&P 500 have recovered more than two-thirds of the Feb./Mar. flash crash plunge, the Nasdaq Comp. is a smidge.
This assumes a full recovery form the shock delivered by COVID-19 and the global response to contain it.
As warned here, we are seeing big jumps in economic indicators, as current reports register big gains over depressed numbers in prior months. An example is the 17.7% jump in May retail sales over April. Versus a year ago, the change was a minus 6.1%. There will be more like this, but they will not indicate a full recovery.
While the Administration no longer recognizes COVID-19 as a threat, consumers just may with spikes in hospitalizations in Texas, Florida, Arizona and Arkansas.
Coming out parties abound, but all it takes to muffle an economic recovery is a reluctance of consumers (70% of GDP) to go out.
Bear in mind, a good part of the March 23 to current rebound was short covering, traders who sold short expecting a second leg down only to be forced to buy-in when the market refused to decline, as the Fed continued to assure the Street it had their back.
I was right about a bounce with my March 24 blog saying I expected a big rally starting today (DJIA: 18,591, S&P 500: 2,237, Nasdaq Comp.: 6,860).
At the time I indicated I expected the market to renew its bear market plunge after a rally of about 17%. WRONG. It kept rising.
The Fed must see an enormous risk to the economy if it doesn’t intervene in every way possible. Why else would it relentlessly announce measures to head off a financial crisis the latest being its plan to buy corporate bonds.
We will get a better read after November 3.
I still hold to my belief we will see another leg down heading into August -October and an election where the President and Republican Senate may get ousted.
The Street was ecstatic when Trump was elected, I expect it to become fearful if he is beaten, since it stands to result in an increase in corporate taxes on favored treatment of corporations and high earners.
It appears (hope I’m wrong), the stock market has been managed (manipulated) over the last 18 months with the objective of re-electing Donald Trump and maintaining Republican control of the Senate. Why else has there been so much Fed intervention before COVID-19 and after ?.
I think the Fed managed the stock market during Obama’s administration, but to a far less extent. Too much power in the hands of a group that is narrowly focused and diversified. Markets should trade freely. It’s the only way to get a true picture of what conditions are.
I believe flash crashes (new normal) are caused by institutional investors and traders stepping away from the market when they see trouble of overvaluation, not by heavy selling. The dearth of buy support enables stocks to drop vertically.
The selling comes after a big decline.
It will happen again – Beware ! The next time could be as bad as in February/March.
Wednesday June 17, 2020 (DJIA: 26,289) “The Fed – Too Much Unchecked Power ?”
CNBC’s Jim Cramer warns investors don’t fight the Fed and don’t fight the “tape.”
Don’t fight the Fed is one of the first maxims I encountered years ago, though I find myself fighting it today. Just because they have unchecked power, does not mean they are always right.
My problem is not with preventing a collapse of the economy (depression), but with NOT warning about asset bubbles the bursting of which can crush portfolios for years. The Fed wants to have it both ways – an economic recovery and booming stock market. Hopefully, this is not about the November elections.
The Fed created Bubble #1 (Dec. 2019 – Feb. 2020) and I am afraid it is creating Bubble #2 now.
By “the tape,” Cramer is referring to the direction of the market as reflected in charts and if anyone still pays attention – the ticker tape. Both favor the bulls ! The tape isn’t what it used to be before being totally dominated by institutional investors. Today, 80% of listed stocks are held by the to 20% of its investors with money managers making most of the decisions.
The tape may be bullish, but if institutions suddenly stop buying, the vacuum of support results in a sudden freefall, a flash crash for which there is no warning.
Years ago, when institutions had less of an impact, corrections were more gradual affording savvy investors a chance to ease out of the market.
This is why I have urged a cash reserve for years. Realistically, the size of the reserve depends on one’s tolerance for risk.
It will be too late to protect one’s portfolio when “they” pull the plug.
The Fed does not want the stock market to decline. The latest example of this was its announcement coincident with an 8% drop in the S&P 500 that it would be buying corporate bonds instead of bond ETFs. It’s announcement triggered a rally.
On another subject. As I warned weeks ago, economic data released now will compare very favorable with prior month data, since that data was severely depressed.
An example is retail sales which jumped 17.7% in May from April. Compared with a year ago, sales are down 6.1%. I always like to look at “raw” data. Percentage changes vary based on starting dates. This is a great way to manipulate results to suit one’s preference.
Tuesday June 16, 2020 “Fed Keeps Inflating Bubble #2”
The buzz on the Street now is there is too much SPECULATIVE activity by the “little investor.” Generally small investors are wrong at turns because they are more prone to emotionally rush in at tops and bail out at bottoms.
With little else to do when cooped up in their homes, individual investors have taken to trading stocks on commission-free platforms like Robinhood.
Reportedly, these COVID campers are doing well, which in itself is a warning sign. It shouldn’t be easy for the inexperienced investor to make money, since they do not have access to in-depth research or privileged information.
But, as I have observed at numerous market tops, the less you know the more money you can make, until the plug is pulled after which the less experienced keep buying until the market gets close to a bear market bottom when they then sell out fearful the market is going lower..
Citigroup’s Tobias Levkovitz sees investors starting to “chase performance,” referring to the “fear of underperforming (FOMU)” as a bigger driver of buying than fear of missing out (FOMO).
FOMU stands to apply more to institutions which are in competition with others for money management funds.
CNBC’s Jim Cramer described the current market environment as rampant speculation.
Many of the smaller investors are marching to the drumbeat of Dave Portnoy, a sports betting guru turned stock picker at least until someone cries “play ball.”
Portnoy has 1.5 million twitter followers, so he has enough impact to help fulfill the dreams of riches for his minions, or lead them to the slaughterhouse.
My wish is for the former, but fear the latter.
Well the committee for the re-election of Donald Trump is back to work.
Headed up by Fed Chief Powell, the Fed once again has demonstrated stock market timing second to none with yet another stimulus. This time it’s its plan to buy corporate bonds in the secondary market when prior to this it was just in the primary market. It was enough to goose a stock market that was in full rope-a-dope just a day ago.
Soooo, what if Powell just looks like a Trump toady. What if he is relentlessly pressing for one form of stimulus after another because his catbird perch enables him to see a devastating DEPRESSION if drastic measures are not employed ?
That is a better reason for taking some cash off the table than loading up on stock, especially with the market more overvalued than at any time in history.
If that’s not all, Powell will be giving Congress his semiannual update on the economy today and tomorrow !!!
Powell owns the 2019-2020 stock market bubble which was pricked in February leading to a 35.6 % plunge in the S&P 500 in 21 days.
He also owns the recovery from that plunge, Bubble #2, which started on March 23 and stands to be pricked before the fall.
Powell wants to have it both ways. He wants to save the economy from a depression but wants to prop the stock market up, probably until November.
It is not going to work. If the economic outlook is as grim as the Fed’s actions and those of Congress, the stock market should sell at lower prices my guess being 30% – 45% lower.
The damage here is in NOT spelling out how dire the condition of the economy is and letting the stock market find a level that discounts known and perceived negatives.
Eventually, the market will ignore the Fed, the Administration and Street hype and find that level, and a lot of investors will be crushed.
Monday, June 15, 2020 (DJIA: 25,605) “Portnoy’s Army of First-Time Investors – a SELL Signal ?” One of the classic sell signals over the years is when the public (individuals) begin buying stocks aggressively, the logic being that it takes a lot of bull market to convince them it is safe to buy.
According to a Goldman Sachs report there has been a surge of buying of stocks and options by the “Covid at-home day traders,” a stunning level of speculation, according to Sundial Capital Research.
Robinhood, a commission-free investment app added three million accounts this year, half being first-time investors according to a weekend article by Bloomberg, “Barstool Sports’ Dave Portnoy Is Leading an Army of Day Traders.”
Day trading is a highly risky venture involving the buy and sell within the same day, usually scalping a small profit (or loss).
With no games to bet on, Portnoy has taken to trading and “calling attention” to certain stocks.
Hand it to him, he is a wizard at attracting attention with some 1.5 million Twitter followers.
With a mantra of “ stocks only go up, only losers take profits, ” Portnoy thinks it’s time for the “suits” to make way for the new kids on the block.
Portnoy goes so far as to diss Warren Buffett, saying he is ‘a great guy, but when it comes to stocks he’s washed up—I’m (Portnoy) the captain now,” he boasts.
This reminds me of the movie “The Hustler”, where Eddie Felson (Paul Newman) took on Minnesota Fats (Jacky Gleason) in an all night pool game.
Eddie taunted Fats with disrespect while cockily consuming a fifth of J.T.S. Brown bourbon. Fats waits patiently until early morning, taking a few minutes to freshen up in the rest room before emerging clear headed and ready to take Fast Eddie down.
If its not a cult following of a promoter, it’s reckless greed that takes late comers down.
Over 58 years in the business, I have seen them come …..AND GO !
It is classic late-stage bull market stuff, promoters with little experience, lots of money and a great knack for attracting attention orchestrate a following.
With Portnoy’s big following, any stock he highlights is bound to attract buyers with the predictable result – a jump in the price of the stock.
I have seen people abandon successful businesses to trade the market for a living as speculation heats up near the end of bull markets. This is when the less you know, the more money you can make. It is a classic sell signal.
To his credit, Portnoy believes younger people (millennials and GenZs) need to be invested in stocks that will pave the way to financial independence down the road.
Actually, this age group got a bad start with first the Great Recession (2007-2009) denying them jobs out of college, then what we are dealing with now just adds to their woes.
I believe we are on the threshold of another devastating plunge in stock prices and an extension of the recession that started in February.
Young people interested in building a portfolio would be better off waiting for a big plunge in the market (30%+) to consider buying, not at a level when stocks are selling at all-time valuation highs.
Bottom Line: COVID-19 is not going away, with some states showing big spikes in cases.
It is unlikely, states will return to stay-at-home, but the increased risk may keep people there anyhow impacting an economic recovery.
People have money, but the question is, will they spend it and on what ?
The economic expansion was 11 years old in February before turning into a recession, but it was not even strong then.
With corporate earnings plunging with no guarantee of a meaningful recovery any time soon, the overvaluation of stocks is even more extreme than before the February/March crunch.
Some 80% of the nation’s listed stocks are owned by 20% of the nation’s investors, with institutions managing the bulk of that money.
They will hang tough, but if another major sell off is imminent, these managers will stop buying, for one, and do some selling , for another.
That is what will mark the difference between a 20% plunge and a 40%-50% plunge. Doesn’t look good.
Friday June 12, 2020 (DJIA: 25,128) “BIG Money Having Second Thoughts ? Risks Rising
Sudden plunges in stock prices, and especially flash crashes (new normal), are more a result of buyers suddenly not showing up rather than a cascade of selling which comes after a plunge scares enough investors.
This is a reflection on how reliant the market is on buying by institutions, savvy traders and market manipulators – they all march to the same drumbeat and pretty much track the same indicators.
Fed Chair Powell indicated Wednesday that the economy’s recovery will take longer than the Street hoped for. What’s more, Powell did not say everything is just peachy as he so often implied in 2019 and earlier this year which stunned a Street that has been spoiled for years by assurance the Fed had its back no freaking matter what.
Anyone out there with their eyes and ears open is aware the economy IS NOT CHARGING BACK AND WON”T FOR SOME TIME !
Yes, a golf ball will bounce sharply if dropped from a high enough level, and yes, news from the airlines that people are flying again, or the fact you can now buy toilet paper even after the hoarders have taken their cuts are encouraging.
But the Big-C is still there and that is enough to cut into business as usual, discourage impulse buying, change shopping habits, and remind shoppers gthey can get along without “stuff.”
Shopping online is a big beneficiary, but a woman cannot try things on online, people will not see something they forgot they need or something the can use that is not listed online.
Buy a big ticket item ? Clearly many people now have extra ching to do that, but what if that money is needed beyond the Fed and governments’ ability and willingness to grant/lend it ? What will be the burn-rate beyond rescue, and that applies to business as well.
Why should anyone assume the economy will rebound robustly beyond an initial bump ?
Why should the stock market return to February levels where stocks were insanely overvalued ?
Simplistic analysis ? Damn right. I access a lot of pre-market info, but at the end of a day, the big picture boils down to common sense. All wrapped up in economic and investment indicators, algos and theories, the Street can overlook the obvious.
The key today is the intensity of the bounce at the open. I expect resistance to begin at:
S&P 500: 3,076
Nasdaq Comp.: 9,665
Thursday June 11, 2020 : No Post
Wednesday June 10, 2020 (DJIA: 27,272) “Wall Street on the Fed Teet, to Get Another Bump Today”
Yesterday, I chastised pros on Wall Street for acting like amateurs, chasing stocks up beyond February’s overvalued bull market peak when in fact, economic conditions and the foreseeable outlook is significantly more dire then back then.
I am not sure what many of the managers of money today would do without the Fed teet to cover their backs.
How would today’s decision makers fare during the 14 years between December 1968 and November 1982 which included four (4) recessions and six (6) bear markets ?
We will get a close look at what the Fed is thinking at 2:30 today following the FOMC meeting when Fed Chief Powel takes questions from the press.
It has yet to launch its “Main Street” lending effort to help small/medium sized businesses or comment of plans for July when millions of Americans lose enhanced unemployment benefits.
The area I find fault with is the Fed’s subtle hyping of the stock market, the “We have your backs” message that drives the stock market up at a time the market should be finding a level that discounts uncertainties and negatives.
Based on historical precedent, today’s S&P 500 is 50.6% overvalued, about the same as it was in February before a 34.6% – 21-day plunge..
If the economy is in such dire straits that the Fed has to employ drastic measures to rescue it with no guarantees of success, why would it do anything to run the stock market up ?
It’s called an “asset bubble” and if the best interests of investors is the Fed’s intent, any wording by the Fed that increases overvaluation of stocks in is injurious to the public interest.
It’s bad enough the Fed has such a free hand in managing the direction of the economy, but equity markets should trade freely. Clearly that would minimize the adverse impact of flash crashes.
Tuesday June 9, 2020 (DJIA: 27,572) “Amateur Hour ! Bush League ! Unprofessional Behavior …….and an Unchecked Federal Reserve Out Of Control.”
Money managers, analysts and advisers need to get ahold of themselves. They are handling other peoples’ money. It’s one thing for individual investors to respond to “fear of missing out,” but professionals need to have more courage to simply say –“No,” this market is more overvalued than it was when Bubble # 1 was pricked.
Chasing stocks in face of a complex, unpredictable future, is bush league.
This is what happens when an economic expansion and bull market is artificially propped up and nurtured by a Federal; Reserve that can’t say no.
Naivete ? or politically biased ? Whatever this gang is, it can’t have it both ways.
It can’t employ measures to rescue a cratering economy, because conditions are truly bad, but at the same time communicate to the investment community that it is safe to load up on stocks, i.e. if any thing goes wrong they’ll be there to ensure the market does not plunge out of control.
The Fed set investors up for a flash crash earlier this year, inflating BUBBLE #1 (Dec. 2018 – Feb. 2020 and it is now doing it all over again with the same old assurance to the Street – WE HAVE YOUR BACK !
This is so bizarre, so irresponsible, so untimely. Too much power !
The next flash crash will be devastating.
Either the Fed not aware of the dangers of what they are doing, or they are trying to get President Trump re-elected and to keep the Republicans in control of the Senate.
I would think anyone with untethered power over the economy and stock market would be more responsible.
Too much power in the hands of bankers, no less.
Who is checking these guys ?
Monday June 8, 2020 (DJIA:27,110) “Fed Creating Yet Another Bubble”
Two questions need to be asked to put the current market action in perspective
1) Is the economy stronger today than it was in February before COVID-19 pricked the stock market bubble throwing the economy into a recession ?
2) Is the stock market a better value today than it was in February when it was historically more overvalued than at any time ever, except for the dot-com/Internet bubble in 2000 ?
The answer is obvious to most people – NO !
Why then is the DJIA and S&P 500 selling within 6%-8% of its all-time highs ?
Rigged by the Fed ?
Single handedly, the Fed headed off a recession/bear market in December 2018 when it reversed its policy and triggered a rebound in the stock market, nurturing it with promises of QE and interest rate cuts then doing the latter three times later in the year.
The result: a huge bubble in stock prices second only to the dot-com Internet bubble in 2000 which COVID pricked in February resulting in a 21-day, 35% plunge in the S&P 500.
Faced with a depression, the Fed and Administration stepped in to throw enough money at the crisis to stem the collapse, at least so far.
That is fine, that is what should be done in face of an economic disaster.
However, just as the Fed nurtured to rise is stock prices in 2019 into early 2020, the Fed is once again creating a huge bubble in stock prices by assuring the Street it has its back, i.e. no sweat, we will step in if the market declines again.
A freely trading stock market would trade lower in face of unprecedented negatives and uncertainties, but be less susceptible to flash crashes and have a more solid base from which to launch a new bull market.
WHY is the Fed not urging caution about excessive speculation ? There is no good reason for today’s stock market being priced at anywhere close to February’s overvalued levels..
I can only conclude the Fed, Administration (obviously), and Street want the Republicans to maintain control of the White House and Senate.
They know a change would be good for America, but bad (intermediate-term) for the stock market.
Fed Chief Powell, who was appointed to the job of his dreams by President Trump, would be gone, as would the worst administration in modern history. The party for the Street would by over once and for all.
Markets would trade freely without manipulation. Which is how it should be, how it was years ago. Corporate taxes would increase, why should they be given a pass when everyone else suffers ?
I sense a monstrous sea change surfacing, one that will address the imbalance of income and wealth and set the stage for addressing issues of urgent importance – education, our infrastructure and our global credibility.
Bottom Line: This is pre-election hype. Just as the employment numbers were reported incorrectly, so will other data. The Fed will talk of an economy that is “rosy” and “in a good place,” just like it did in 2019. The Administration will lie, as it has all along, and the Street will pump out upbeat forecasts.
Be ready for the next bubble burst. When ? Don’t know, but raise cash as the market rises just to be safe.
Friday, June 5, 2020 “Looks Like a Bubble, Acts Like a ……”
For most of last year and into February, I warned of a Fed-induced stock market bubble that would drive the S&P 500 to levels of overvaluation seen only once ever except the dot-com/Internet bubble in 2000 .
I called attention to instances where Fed Chief Powell’s comments goosed stock prices upward well beyond levels that were justified.
In November, I called for a January 2020 top to the 11-year old bull market. It didn’t happen until February with a 38% plunge in the DJIA, 35% plunge in the S&P 500. If COVID-19 didn’t prick that bubble, something else would have, obviously though not with such a dramatic result.
As it did in early 2019, the Fed stepped in assuring the Street it had its back triggering yet another bubble as the market averages have recouped most of the February/March losses. It’s Bubble #2.
Shorts are panicking, but investors as well, sucked in by the fear of missing out going right back in near the level that led to this year’s flash crash..
With the enormous damage done by COVID-19 and efforts to counter it, there is no way current prices can be justified except that the Fed has promised to intervene at least until after the elections.
The stock market is a bad place to be in denial. We saw the result of a bubble bursting in February. Anyone around for 2000’s bubble burst shudders at a repeat of its 57% plunge in the S&P 500, and 78% plunge in the Nasdaq Comp.
Over the years the Fed has tried unsuccessfully to manage the economy and the market, but following the Great Recession, it has tried to micro-manage it. With rhetoric, interest rate changes and QE.
I think the Fed has contributed to flash crashes, which have become the new normal. The Fed inflated the bubble between December 2018 and February 2020 leading to this year’s crash, and are once again inflating yet another bubble which stands to have the same result when reality sets in that our economy is in far worse shape than in February.
WHY is the Fed inflating both its balance sheet and the stock market ? Is the outlook for our economy really that dire ?
Or, after being appointed to the job of his dreams by President Trump, does Fed Chief Powell feel compelled to do his part in getting President Trump re-elected.
Thursday June 4, 2020 (DJIA: 26,281) “Market Almost Acts Like It’s Rigged For November”
What will prick the current stock market bubble ? Hopefully, not another pandemic.
More than likely, institutions will simply stop buying since they can’t justify paying up for stocks, thus creating a vacuum for a flash crash, which is the new normal.
As noted Monday, Bespoke Investment Group told clients that 74% of the S&P 500 are now overbought and there is not a single oversold stock in the index, the first time this has happened since 2007.
Also Monday, Citigroup’s Manolo Falco, co-head of investment banking urges corporate clients to raise as much cash as possible before reality of the pandemic sinks in for investors.
Falco’s “reality” is the Honeymoon which Harvard’s Jacob Furman, former chair of the Council of Economic Advisers, warned would mislead investors prior to a “long and painful slog” when workers are not re-hired and businesses are not going to open
Jesse Felder (The Felder Report) sees the potential for an S&P 500 plunge of 44% to 1,750 from current levels and he bases this in part on the “Buffett yardstick” a ratio of the S&P 500 to the nation’s GDP which just hit an all-time high of 200%.
Axios Markets reports FactSet estimates for the earnings of the S&P 500 for the first five months of 2020 have fallen to $128.03 from $177.82, or 28%, the lowest going back to 1992 when FactSet started the calculation.
Joe Brusuelas, chief economist for RSM International told CNN , “The market is broken, it no longer reflects a forward outlook that is truly aligned in the real economy. That’s a problem, because at some point, he says, the public will say these markets are rigged.”
Precisely my point with the Three Amigos (The Fed, the Administration and the Street). Why ? November elections. All three have a lot to lose.
Axios also reports, Close to six million white-collar jobs are at risk with layoffs due in coming months. “It will get worse before it gets better, says Yelena Shulyatyeva, senior economist Bloomberg Economics.
Bubbles have an irresistible lure, tormenting investors fortunate enough to have cash. some in the business refer to it as “Fear of Missing Out,” my term is the “I can’t stand it anymore” urge to either get into the market as it appears to be running away, or as I am sure in mid-March when stocks were plunging, the urge to get out.
Fundamentals do not support the current level of stock prices, clearly there a number of respected analysts who believe this rally will yield to a sharp correction, even a test of the March lows.
As noted this is the “bounce” phase of the bear market. The momentum is building so we may erase all the February/ March loss.
A lot of this is short covering.
Bubbles just have to run their course until they are pricked like COVID-19 pricked the December 2018 – February 2020 bubble. Or they may just burst.
Investors do not want to get caught by a bubble burst again like that in February/March.
Wednesday June 3, 2020 (DJIA: 26,269) “Honeymoon Stage of Coming Out – Then Reality
1)We are in the honeymoon phase of the national bailout and simply will not know how much traction the re-opening will gain.
2)Even so, the Street, spoiled by a fed-nurtured 11-year old bull market, is betting the economy will rebound strongly and continues to pay up for stocks even though stocks are more overvalued now than they were in February before a 35% 21-day crash.
3) But there is little justification for either the economy and the stock market to sustain strong growth any time soon, given the damage done by COVID-19
4)The Fed has stated it will step in to whatever degree it takes to prop up the economy in spite of its top-heavy balance sheet.
5)Has the Street asked why would the Fed and U.S. government be taking such an unprecedented steps to save an economy if the risks of a major depression were not likely ?
6)That said, why is the Street so quick to pay up for stocks in face of such uncertainty ? The Nasdaq Comp. will punch to an all-time high with the DJIA and S&P 500 not far behind.
7)This looks like bubble #2, the first being the 2009-2020 bull market bubble that ran from December 2018 to February 2020 and was mostly orchestrated by the Fed itself in an effort to head off a recession that was starting to take hold in Q4 of 2018.
Beyond an initial surge from deeply depressed economic data, there must be a follow through. A “bounce” is a given, but the core of our economy, global economies, has been skewered at a time the 11-year old economic expansion was running out of steam. Without COVID-19, odds are we would be in a recession anyway.
Essentially, the message from the Street is it is willing to risk clients’ money buying stocks that are far more overvalued now than they were before the crash in face of a badly damaged economy. I just don’t understand “why.”
!”Tuesday June 2, 2020 (DJIA: 25,475) “Market Needs To Adjust To Reality” Simply stated, fear drives stocks down beyond reason at bear market bottoms and greed drives stocks well beyond historic norms at bull market tops.
Where this gets challenging is measuring the extremes.
Time-tested yardsticks like the price/earnings ratio, price/sales, investor sentiment (bulls/bears) have been helpful over the years in relative sense.
What is complicating today’s assessment of the stock market is the fact the Fed and U.S. government has dumped an unprecedented amount of money into the economy.
The Fed in particular has promised it will stop at nothing with its QEinfinity to prevent a recession.
As a result, the stock market has rebounded dramatically from its March 23 lows with the DJIA only off 14% (S&P 500 off 10%) from the February bull market highs. The Nasdaq Comp. is off less than 3% from its highs and will likely erase the 21-day 32.6% Feb/Mar. plunge and punch to new all-time highs.
In spite of how serious a toll COVID-19 took on our economy and will take as economic dominos tumble relentlessly going forward, the stock market is more overvalued now than before the 35% flash crash plunge earlier in the year.
At the time the Shiller price/earnings ratio was higher than at any time ever except the 2000 dot-com/Internet bubble that once pricked led to a 57% drop in the S&P 500 and 78% drop in Nasdaq Comp.
In February, we were not faced with the dire economic outlook that we are today, so why should the stock market NOT reflect that ?
I have lost count of how many times I have said this, simplistic as it is, but reason will prevail. The key is to be prepared for it what it strikes.
Monday June 1, 2020 (DJIA: 25,383) “Stock Market Bubble Insanity”
Axios Markets reported today that JP Morgan’s Marko Kolanovic has reversed his March bullish stance, warning that reopening efforts look insufficient and that the threat of supply chain and international trade breakdowns justify equities trading drastically lower.
Bespoke Investment group told clients that 74% of the S&P 500 stocks are now overbought and there is not a single oversold stock in the index, the first time this has happened n since 2007.
Our present economic and stock market situation is best summarized in Axios by Jacob Furman, Harvard professor and former chair of the Council of Economic Advisers who said the U.S. is in the honeymoon stage of the economy’s recovery where some furloughed workers are called back, but there are a lot more workers who aren’t called back to their jobs, businesses that aren’t going to open, so once past the first phase you are in for a long and painful slog.
While the economy and individual’s lives are in shock, there is a bounce taking place as people come out of seclusion and businesses re-open. That’s normal.
To the best of my knowledge, COVID-19 has not vanished as evidenced by spikes in various states.
Since its spread is caused by close contact, I see no reason why more spikes won’t occur. The question is, what are states going to do about it ?
Another shutdown is out of the question, but consumer wariness isn’t.
An economy cannot take a hit as great as this and not have a domino effect for months, years.
Hundreds of numbers can be crunched, but common sense screams one thing:
Aside from a brief but brutal 35%+ plunge in the stock market, it is not currently discounting the adversity of what has happened. NO ! Not with a mere 14.2% drop in the DJIA, a 10.3% drop in the S&P 500 and a 3.5% drop in the Nasdaq Comp., the latter significantly skewed by a half dozed heavily capitalized growth stocks.
The Fed, Administration and Street (Three Amigos) want the party to continue at least through the November elections, that’s reality regardless of political affiliation.
Bottom Line: It is another bubble just like the one in 2019 and early 2020.
It will pop, either it will get pricked by an event like it was in February by COVID-19, by a massive return of it, or the realization that the gears in our economy are so clogged by debris the economy must go further south before a recovery is possible – an “L” recovery.
This is what happens after 11 years of an economic expansion and bull market. The powers in business, finance and politics can’t accept a bear market.
Again, I say, the market was vastly overvalued in February and is so much more overvalued now that prices are going up and corporate earnings going DOWN.
Reports on the economy that will be released in coming months will compare well with prior months/quarters simply because they are going up against the extreme numbers posted in March and April.
That will be misleading, but will stoke hype by the three amigos that will inflate the bubble even more.
Anyone compelled to “play” must be aware that risks are very high and maintain a sizable cash reserve and “sit close to the exits” as another leg down looms.
Friday May 29, 2020 (DJIA:25,400) “Assumptions” – Where Wall Street Analysts Get It Wrong.
Can’t blow holes in a detailed report, a point of view, an argument ?
Check its “assumptions.”
Many of the bullish stock market analyses I have read are impressive for detail, graphs, charts, proprietary formulas, and convenient comparisons to past events.
Here’s where I think they get it wrong.
Assumption #1–That Covid-19 is not a metric that poses a major threat going forward. The Street was aware of its potential to adversely impact the economy and stock market back in February but gave it little weighting then, less so now.
What do they know that the smartest biopharmaceutical executives don’t know ? How can this pandemic be so cavalierly dismissed so early in the crisis. Even if its severity declines, the uncertainty and damage it has done will topple dominos for many months to come. It is primarily transmitted person-to-person, but it didn’t vanish, so what happens when people get up close and personal again ?
Assumption #2 – That the economy can recover in Q3 and Q4.
Yes, reports will show improvement but primarily because they are being compared with disastrously low numbers in the past, however so much damage has been done in such a short time, the fallout stands to be intense and endless. Q1 GDP is down 5% at an annual rate. Q2 is projected to drop 40%. Does the Street think that won’t have an impact going forward, that it won’t topple a zillion dominos ? Walk around the block guys with eyes open !
Assumption #3 – That the Fed will have everyone’s back if the crisis continues or new ones erupt.
The Fed has already printed reams of USD’s on top of a top-heavy balance sheet which now stands at $& trillion, up from $1 trillion in 2002. Why would they do this if they weren’t petrified at what the see ahead. Why would any analyst treat this casually.
Assumption #4 – The Street entered 2020 totally oblivious to the fact the S&P 500 was more overvalued than at any time ever, except the dot-com/Internet bubble that burst and sent the 500 down 57% and Nasdaq Comp. down 78% in 2000 – 2002.
The S&P 500’s P/E is even more overvalued now with stocks rising and earnings cascading, YET, the Street dismisses this as an expansion of P/E’s, not to fret a bit, this is an aberration, a glitch in the big picture to be treated with an asterisk looking back five years from now. This is a time-tested yardstick not to be used in one instance but ignored in another
Bottom line: This is what happens after an 11-year economic expansion and bull market. The Street does not want the party to end – spoiled by Fed nurturing for 11 years.
The “Three Amigos” I referred to on Wednesday (The Fed, Administration, and Street) will pump this market up as much as possible, before the election, inflating a bubble that will once again be pricked and once again roil investor’s portfolios.
I expect a test of the March 23 lows. Depending on news flow and whether money managers panic, those lows could be broken. This IS NOT business as usual, not like anything we have seen since the 1930s. Too much ongoing damage has been done to the core of our economy.
No one knows where this can lead. Investors are best served by being told the jury bis out, to maintain a cash reserve they may desperately need if it goes worse than “badly.”
Once again the three amigos are inflating a bubble. It will burst with the predictable result – flash crash #2, or if we are lucky a more gradual slide to new lows.
Thursday May 28, 2020 (DJIA25,548) “Bubble #2 Driven by Fear of Missing Out and “Hype”
The acronym for that is FOMO. I opt for the “I can’t stand it anymore” response to extremes in the market that generate greed or fear forcing an investor to act in haste.
Investors who raised cash before the February/March crunch, as well as those who sold out at lower prices are panicking about the persistence of the market’s rebound, and understandably so.
Fear of missing out (FOMO) is driving stock prices upward with a lot of hype from the Three Amigos, the Fed, the Administration and the Street.
I expected a test of the March 23 lows by now, even a break below if money managers panic.
I still expect another leg down, however we are now dealing with Bubble #2 and that will either have to run to an extreme or be pricked by a news event.
That can happen at any time and could result from spikes in COVID-19, worse than expected economic/corporate news, or the realization by the Street that the Republicans will lose control of the presidency, Congress and some governors up for re-election.
Bubble #1 was pricked by the COVID-19 pandemic in February, resulting in a flash crash, taking the DJIA down 38%, truly an unprecedented event.
But COVID-19 is still here. If it spikes after the nation’s “coming out” it will be devastating and flash crash #2 will result. This time the institutions will panic.
More than likely, a second leg down will be more gradual and related to the realization we are not returning to where we were earlier in the year.
I think the Street has it wrong on this one.
They had it wrong in February.
Fully aware of the threat of COVID-19, the Street was projecting yet another banner year for the stock market in 2020 even though it was historically enormously overvalued.
But Corporate earnings are plunging now with no guarantee of a “V” recovery other than a Q3 bounce.
Lifestyles, personal wealth and confidence have been seriously impaired, yet the STOCK MARKET IS EVEN MORE OVERVALUED TODAY THAN IN FEBRUARY AND GETTING MORE SO WITH EVERY TICK UP.
The Street dismisses that as an aberration, an “expansion in the price/earnings ratio.”
That’s a dangerous assumption !
Wednesday May 27, 2020 (DJIA:24,995) “Three Amigos Inflating Bubble #2”
I believe the lambs are being led to the slaughterhouse on this one. It has the makings of “Bubble #2.” In addition to record short covering, this recovery has been driven repeatedly by hype from the “three amigos” – the Fed, the Administration, and the Street, for example:
The Fed: St. Louis Fed president, James Bullard said yesterday he sees jobless rate returning below 10% by year-end.
The Administration: Trump’s adviser Larry Kudlow says the administration is looking very carefully at a “return-to-work” bonus.
The Street: JPMorgan’s CEO, James Dimon announced he sees a good chance for a rapid recovery of the U.S. economy this year.
Others piled on:
Allianz economic adviser El-Erian said he is Risk-On ! noting Stocks are surging on good news across the board.
Axios Am reported today the Mitch McConnell sees the possibility of a fifth coronavirus relief bill. Would all this be necessary if we were not in the deep stuff ?
Add to that, headlines on MarketWatch, “Airline stocks take off as COVID-19 restrictions ease, more travelers fly.” This is the industry that Warren Buffet dumped recently.
The S&P 500’s index crossed above its 200-day moving average, which is a bullish signal for technicians. The Nasdaq Comp crossed it months ago, but the DJIA is lagging.
This has the makings of another bubble just like the bubble I warned readers of before Februarys flash crash. When it gets pricked, the result will be the same – another flash crash (straight down).
How far can it run before the burst depends on news flow. More hype from the three amigos pushes stocks higher. Reports of company problems, bad earnings, horrendous economic projections, spikes in C-19 can prick the bubble.
Once again, it is about what value the Street wants to put on stocks in face of how much damage has been done to individuals, companies, communities, local, state and federal governments and to the perception of the future.
If the stock market was extremely overvalued by time-tested yardsticks in February “before” taking the C-19 hit, it is many times more overvalued now.
Corporate earnings are taking a beating and will not return to pre-COVID levels any time soon, because irreparable damage has been done to the internal workings of our economy in spite of how much money the Fed and federal government throws at it.
Bottom line: The DJIA is still down 15.5% from the February all-time highs, the S&P 500 down 11.8%, New York Composite index of 2,000 stocks off 18.2%, Dow Transports off 21.6%, Russell 2000 18.8%, Value Line Composite 23.4%. It’s still a bear market, except for the Nasdaq Comp., which is dominated by a handful of mega growth stocks and is only down 5.1%.
As stocks rise, they will encounter more and more sellers from investors who saw the market plunge in February/March and traders who bought in at lower prices. That is what is called resistance or overhead supply.
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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.