INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,130
Thursday March 5, 2020 8:59 a.m.
Yesterday’s strength carried the major market averages back to
the highs posted Tuesday following the Fed’s one-half point rate cut.
The major market averages have now recouped half of the Feb 12,
16% flash crash.
A two-thirds recovery would take the DJIA up to 27,940; S&P 500:3,214 and Nasdaq Comp.: 9,313.
In face of the size of the Fed rate cut and all the hype about a strong economy, the market can get to those levels, but it’s a stretch.
Today’s open will be down, as it should be after a big advance yesterday. What must be watched closely is how quickly buyers jump in at lower prices.
If buyers show up in size, look for a move above yesterday’s close. If they are a no-show, the risk of another big slide increases.
The recent flash crash jolted the Street’s confidence in their “buy-only” algos, so we don’t know how or if they are being tweaked.
Normal human behavior suggests money managers will not take a chance of seeing clients get hammered by another leg down and will defer purchases, even sell.
The HOT money would prefer a crunch so they can leverage-up on buys at lower prices.
While the manipulation apparatus in place today between the Fed, Administration and the Street is capable of propping the market under most conditions, the open-endedness of today’s risks suggests otherwise.
Rate cuts and efforts to head off the destructive impact of a panic, are intended to conveniently eliminate COVID-19 as a market risk, that the Street is looking past any economic weakness or recession to the next business expansion and bull market, making this the first time in history, a bear market would not accompany a recession.
Is a little more upside versus a big downside worth it if the powers behind this 11-year old bull market lose control ?
Minor Support: DJIA:26,437; S&P 500:3,067; Nasdaq Comp.:8,807
Minor Resistance:;DJIA:27,387; S&P 500:3,164; Nasdaq Comp.:9,113
> Friday, February 28, 2020 post “Walks Like a Bear, Talks Like a….. Selling Climax could Lead To a Sharp Rally Today or Monday At the Open: Conclusion: DJIA dropped 1,105 pts (4.2%) but regained much of it loss, a climatic day.
> Monday March 2, 2020 “Successful Test of Friday’s Selling Climax Lows would Spark Strong Rally”: Conclusion: DJIA advanced1,293 pts. (+5.09%)
> Tuesday March 3, 2020 “Rate Cut To Suck Investors In For another Crunch”
Conclusion: After the open, Fed announced a 50 basis-point cut in its fed funds rate. The market soared as investors piled in thinking the cut would surely prevent a recession. The market hit a wall and plunged confirming my warning that buying the news of a cut would crunch investors who hastily jumped in on the news. The market should attempt to rise again to new resistance levels, drawing investors in again. Failure to do so would be a very bad sign.
Wednesday March 4, 2020 “Fed Chief – A Trump Toady ?”
If the economy is as fundamentally strong as Fed Chief Powell stated yesterday, why did the Fed cut rates so dramatically ?
Anyone who chased stocks on the news most likely is sitting on a loss for their haste.
However, the market will surge again thanks to Democrat Joe Biden’s big victory in Super Tuesday, which is was a relief to the Street which prefers a moderate over a highly progressive candidate should the Democrats win the presidency in November.
Yesterday’s surge hit my resistance levels spot on for the S&P 500 and Nasdaq Comp. but fell a bit short for the DJIA. It will give it another shot today. Failure would be bad news for the bulls.
Today’s resistance to the upside is DJIA: 26,667; S&P 500: 3,088 and Nasdaq: 8,988.
Independence of the Fed in doubt
Much as I would like to think Fed Chief Powell is not a Trump toady, his about-face on policy a year ago headed off a recession and bear market and his move yesterday stands to help the president in November. He was appointed to the job of his dreams by Trump, so odds suggest he is not independent.
I am not the only one to be concerned about this. Win Thin, head of currency strategy at Brown Brothers Harriman, told Bloomberg.com the “optics are bad after Trump just called for a big rate cut…I’d like a central bank that doesn’t hit the panic button every time the stock market freaks out…..I am shocked”
OK, assuming Powell is another Administration Toady, investors need to know that. They can count on the Fed to to goose the market every time it tanks. Whether they benefit from the Fed action or get hammered is really their call – no guarantees.
FYI: The yields of the 10-year and 30-yr Treasury bonds are at all time lows. Looking ahead, when interest rates rise again some time in the future, the market value of the long bonds ahead of maturity will drop possibly 20% – 30% – yikes !
Bottom Line: The Fed is doing everything possible to prevent the economy and stock market from tanking before the November elections. The Fed and Administration claim the economy is strong, so I don’t understand why a cut in rates is needed at this time.
What will the Fed do when we have a recession ? What if it is severe ?
The flash crash has warned the Street, buyers can disappear without warning. While fears of the spread of COVID-19 pricked the bubble in stock prices, the flash crash stands to suggest the BIG money walked away for other reasons – a Democrat sweep in November and/or a recession that not even the Fed can stop. Traders only.
Tuesday March 3, 2020 Rate Cuts Would Suck Investors In For Another Crunch” I believe we are in a bear market. The trap door was sprung six days ago and buyers were nowhere to be found until the major market averages had registered a 16% plunge.
COVID-19 was blamed for pricking a highly inflated bubble, but the BIG money simply does not pull all bids that easily. I think the Street sees an unavoidable recession, one that could last a long time, as well as a Democrat sweep in the November elections.
Short covering drove the initial surge of buying yesterday.
Yes, the Street will be buying in face of another cut in the fed funds rate and the Administration’s unsubstantiated hype about progress in containing COVID-19, BUT a lot of damage has been done by February’s flash crash and investors and institutions will be ready to sell when they see prices rising to pre-crash levels (overhead supply).
The risk here is investors will now be tempted to jump in after the rebound only to see the market stall as the market attempts to rise further.
The Fed is pretty much a eunuch at this point, without a long-term effective ability to head off a recession any longer, central bankers around the world are scrambling to keep economies from tipping into recession all the while expending all the tools they will need when their country’s economy has plunged into recession.
A moderate recession a year ago would have been preferable to a gigantic one after all stops were pulled to extend this expansion even further. Obviously, the Fed did not want the country in recession heading into an election year.
Bottom line: The Bulls are hoping for lower interest rates to balance off the news flow from COVID-19 and the damage fears of it can do to global economies. The question will be, how much of an impact can
lower rates have when individual, corporate and government are inflated to begin with ? Yes, it would goose the market short-term.
What is needed are test kits for COVID-19, but that is just a starting point. A vaccine will take months, years to develop.
Resistance to higher prices will begin at DJIA: 26,900; S&P 500: 3,127 and Nasdaq Comp.: 9,097.
Monday March 2 “Successful Testy of Friday’s Selling Climax Lows Would Spark a Strong Rally”
My headline Friday, “Walks Like a Bear, Talks Like a ……..Selling Climax Could Lead To a Sharp Rally Today or Monday at the Open” may play out. We had a one-day reversal on Friday with the major market averages closing at the highs for the day on significantly increased volume after coming within a smidge of my DJIA, S&P 500 and Nasdaq projected lows of DJIA: 24,560, S&P 500: 2,877, Nasdaq Comp.: 8,237.
Those lows may be tested today. I suspect the market averages will rebound within a hair of reaching these lows or after breaking slightly below them all before 10:30 a.m..
If news of the rapid spread of the Coronavirus (COVID-19) didn’t prick the stock market bubble, a recession or fears on the Street of a Democratic sweep of the presidency and Congress in November would have, obviously not this dramatically.
The 16% plunge in the S&P 500 met the upper end of my January/February forecast for a drop of 12%-18% when the bubble burst.
I think we are in a bear market and will see significantly lower prices by October, but with rallies (some sharp) in the interim that give the impression that the recent big losses will be recouped.
This bear has the potential to plunge 45% – 55% in a panicked sell off driven by COVID-19, plus the ;prospect of a nasty, prolonged recession and a big Democrat victory in November.
A recession is not confirmed yet and we won’t know about the elections until November, but any spark of good news in the spread and treatment of COVID-19 will enable the stock market to recoup one-half to two-thirds of its 16% loss in recent weeks.
I expect the Fed to announce another cut in its fed funds rate, which would trigger a brief rally from a temporary oversold level.
What happens in major downtrends is you have times when the outlook looks like it is improving (rally), but are followed by more negative news (another leg down). Positioning oneself takes patience and the ability to reject the fear of missing the big buying opportunity.
Buying because one fears missing a move is one of the biggest contributors to poorly timed investments. One tactic to employ in late-stage downtrends is to buy a partial position in an attractive stock. Buy 50 shares if you intend to own 150 or 200 shares. If it goes lower, buy more. If it goes higher you can average up. The key is, you don’t risk buying an entire position all at once only to incur losses if the stock goes lower.
Fed Meddling created the super bubble.
I believe in letting the stock market find its level of comfort. That goes for the economy except at extremes.
The Fed created a huge bubble last year that burst in recent days hurting investors who got caught up in the hype, people who thought the Fed had their backs as the bubble inflated taking valuations far beyond breaking points in bull markets of the past.
Now, when the Fed needs something to stimulate the market in a crisis, they are out of ammo – shame !
Another rate cut ? Is that supposed to get people back on airplanes ? Back in stores ? Is the economy in a good place now ? Ha !
They blew it, they sucked people into an overvalued market starting January 2019. The Fed should have highlighted the seriousness of our economy’s weakness December 2018 without promising rate cuts and at the same time saying the economy was in a good place.
What Americans need is a dose of the TRUTH !
This flash crash stripped investors of most of their gains going back to January 2019.
BOTTOM LINE: Expect the Fed to announce another rate cut. While that may bring in buyers, it does little to change corporate and individual plans since rates are already low. Additionally, the Fed will hype pumping money into the system, but they have been doing that for months.
The Administration will hype their progress with in combating COVID-19, but they no longer have credibility after firing CDC’s pandemic response team in 2018.
What is needed is test kits, and they are not yet available.
While China is getting back to work after it reports a slowdown in new outbreaks, that may not be true in the United States, since we are just beginning to see the virus gain traction. Most likely, there have been a host of COVID-19 cases in the U.S. for months, there was no capability to diagnose them.
Again, any improvement in COVID-19 will trigger a huge rally, however other negatives loom to limit the upside beyond DJIA: 26,517; S&P 500: 3,077; Nasdaq Comp.: 8,897, initially.
The market should be developing a base in this general area. From there, expect an attempt to recover, which I see failing around mid-year followed by a slide into October.
There are really too many uncertainties out there, any one of which can emerge to change the big picture.
Risk of chasing a rebound is HIGH. Odds favor more downside starting later in the year.
Friday, February 28, 2020 “Walks Like a Bear, Talks Like a….. Selling Climax could Lead To a Sharp Rally Today or Monday At the Open
“BEWARE OF HYPE, LIES AND MISINFORMATION COMING OUT OF THE FED, WASHINGTON AND THE STREET. This is a presidential election year and there are absolutely no limits as to what can be said or done – none !
While that would be welcome to investors, it would suck them in at higher levels prior to another leg down in coming months (May)
A rally is likely this morning and even a selling climax today or at the open Monday with the DJIA reaching lows of 24,560, S&P 500: 2,877 and Nasdaq Comp.: 8,237.
Monday would be the most likely low for the selling climax, since traders are wary of negative news over the weekend. But, the Fed and Administration may use the weekend to release statements designed to curb the carnage.
Odds favor a sharp rally from a climax low, which would recoup about one–third of the loss since mid-February.
More downside awaits, I expect losses in this bear market to exceed 45%, we have lost 13%+ already. A bear market low could come as early as October.
Yesterday, the plunge in the DJIA from its Feb. 12 all-time high reached the lower end of my forecast of a flash crash plunge of 12% to 18%. The “trap door” phenom kicked in four days ago as buyers were suddenly a no show creating a vacuum for stock prices, ergo a free fall -m straight down.
Expect the Fed to either cut its fed funds rate, pump even more money into the system, or promise both in the near future.
That would trigger a “gap” open which would be a “Bull Trap” where investors, thinking they are on board for a big run, discover the opposite – a fake out and a plunge in prices.
Yes Coronavirus is horrific, but it is not the only thing that terrifies the Street. A recession is imminent and quite likely a Democrat domination of the Presidency and both Houses of Congress. That’s what scares the Street.
The Fed would take such action because it is panicking again seeing trouble ahead. Nine out of the last 10 recessions have been with a Republican in the White House, this would be 10 for 11.
Economic expansions since WW II have averaged 58 months (4.8 years). In June, this expansion will be 11 years old.
Here is what is going through investors minds now. “If only my stocks could rebound to near where they fell from in mid-February, I would surely get out.”
Not going to happen. Too much damage has been done…..and it is not all Coronavirus, which had as much impact as this only because the stock market was so overvalued when news of its spread hit.
We either are in a recession or on the threshold of one as well as a major political upheaval.
BLAME THE FED AND ADMINISTRATIONM FOR RUNNING THE MARKET UP WITH NONSENSE ABOUT THE “ECONOMY BEING IN A GOOD PLACE.” IF IT WAS, WHY CUT RATES AND PUMP MONEY INTO THE SYSTEM ?
BOTTOM LINE: A rebound is inevitable, most likely fueled by Fed rate cuts and Administration bluster. It would be a bear market rally and the Bull Market’s death rattle. Bear in mind, any indication that Coronavirus’s spread is lessening and the DJIA by 1,500 points.
Thursday February 27 “Here’s Where It Gets Tricky”
OK, the market averages have plunged 9% in days and we are looking at a big drop at the open. The tendency at bull market tops is to view the initial plunge as a gift to jump back in.
In the last four such flash crashes, the market recovered to new highs.
If this is the beginning of the first bear market in 11 years, anyone jumping back in on a rally will get hammered by the next leg down, which could be another 25% to 40% depending on how economic, political, monetary and psychological events play out.
Once a bull market disintegrates, all Hell breaks loose, things happen that no one dreamed of and fear mounts.
Not until the “cauldron of fear boils over” will the market turn up from a bear market bottom leaving investors in the dust with huge losses. Many will have sold out at the bottom convinced the market will go lower.
Odds favor a technical rebound today, triggered by Fed/Administration hype, but risks are high. I believe fears of a spread of Coronavirus is partly to blame, the real danger is the economy which is dancing on the edge of sliding into recession.
Fears of Coronavirus can vanish quickly, a slumping economy can’t. The Fed delayed a recession/bear market a year ago with its abrupt policy change toward ease, but a strong recovery did not develop.
Jumping back in today or in the near future may reward investors, but is the risk worth it. I issue an occasional “buy” for nimble traders, who are capable of clipping a quick profit on a bounce from a short-term extreme down move in prices, BUT that is only for that kind of skill set.
Again, I repeat, there is an overwhelming urge to jump in after one of these flash crashes. While it would have paid off in the past, you do not want to be wrong this time around.
The entire scene here (fundamental, technical, political, economic, monetary and psychological could get VERY, VERY UGLY !
Sooo, what about the Street’s algorithms ? Are they in ask no questions “buy” mode ?
If they are now being tweaked for “risk” employing a defer purchase strategy or worse yet a “sell” mode, we will see the “trap door” affect – straight down.
BOTTOM LINE: I think the economy will be what takes this market down with a bull market top leading a recession by 3-5 months.
A big but short-lived rally will be triggered if news of a slowdown in the spread of Coronavirus is reported. But, it is really the economy that trumps everything.
Wednesday February 26 “Buy: Nimble Traders only – More Downside Ahead”
Probable scenario: an opening rally followed by a sell off then a rally starting after 10:30. Only the quick afoot.
Add fears of a Sanders presidency to Coronavirus as a reason the Street and press gives for the plunge in the stock market.
But these two issues wouldn’t have had such an impact if the market was not as historically overvalued as it was (and still is).
What will crush this market is an 11-year old economy that is running out of steam. The party is over – last call and the stock market, which always leads recessions and economic recoveries is telling the Street a recession is looming.
We would be in the middle of one if the Fed hadn’t panicked a year ago with hype about easier money then cut its benchmark rate three times before year-end.
Their irresponsible action triggered a 40% + surge in the market averages,
sucking investors into a highly overvalued market. The Fed only delayed the inevitable.
Expect the Fed to trot out its minions with all kinds of bluster about the economy being in a good place at least until November.
Expect the same from the Administration.
Do not buy it !
We are ;looking at a bear market that will slash 35% – 55% off the market averages AS CLUELESS INSTITUTIONS REVISE THEIR “BUY ONLY” ALGOS TO DEFER PURCHASE/SELL.
WHY ? Because they cannot afford huge losses on the magnitude of 50%, buy hold won’t do it as clients panic and accounts shift over to mother money managhers.
What fed the buying panic in recent years will feed a SELLING PANIC.
It happens ! It always happens and this one is overdue.
BOTTOM LINE: A sharp rebound can be expected as the Fed, Administration, and Street pundits fire off a zillion reasons why this eight-day crunch is temporary, that business is great. At the very least this was a warning shot of worse to come.
More than likely, it is the beginning of a bear market.
Technical support capable of preventing more major downside at this time lies a little below yesterday’s close. This was a trading range established between February and October 2019.
A bear market scenario would have a 4-6 week rally stall in early March with another leg down.
Triggers could be one tiny smidge of encouraging news about Coronavirus, or as noted above the Fed, i.e. talk of another rate cut.
Tuesday February 25 “Ignore Fed and Administration Hype”
As I have repeatedly said, a nasty correction was imminent, whether it turns into a bear market (down 20%), depends on what new negatives hit the market when it attempts to rebound from that initial correction.
Expect the Fed and Administration to rush out with hype about how good the economy is and what a great time it is to buy stocks.
Don’t buy it ! The hype from both sources has been relentless, but has served to draw investors into the market at extremely overvalued levels.
The U.S. will be lucky to avoid a recession/bear market this year.
Yesterday’s plunge in the market is being blamed on the spread of coronavirus. While I recognize the horrors of it, other negative factors are looming to put the survival of this bull market at risk.
Coronavirus is having a big impact now since the market was so overvalued when news of its increasing spread hit.
For one, the 11-year old economy is struggling and if it weren’t for the Fed stepping in with a lot of hype and three rate cuts last year, we would be in a full-blown recession bear market today and the President’s re-election chances diminished.
For another, even if the economy was not on the threshold of a recession, stocks are vastly overvalued (see Feb 24 post below).
What disturbs me most is the lack of truth and accuracy coming from all levels at the top. Nothing is believable and that is dangerous.
This market will get crushed by the economy. The stock market turns ahead of recessions/expansions, the lead time varies.
BOTTOM LINE: Expect a rally attempt in early trading, sparked by “hype.” A lot of technical damage has been done in the last 7 days, but we have seen five freefalls like this over the last two years, all were followed by recoveries.
The S&P 500 has given up 5% of its value since February 19. That will attract buyers who see this as an opportunity. Overhead supply gets formidable at DJIA 28,720 and S&P 500: 3,315.
As I have warned relentlessly, we are a high risk, overvaluation in the stock market exceeds all levels in the past except the dot-com bubble 1999-2000.
Monday February 24, 2020 “I Am Not The Only One Seeing a Bubble Burst”
This is a very dangerous market, especially since speculative fever is over the top. This is classic bull market top stuff. It is a bubble and will burst at any time. The Fed and Administration will do everything in their power to prevent a bear market before November, but the new normal is a flash crash, a precipitous 12% – 18% plunge in prices without any warning except from a few of us, one of which is InvesTech Research (see below).
InvesTech Research came out swinging in its Feb.21 issue. It blasted the Fed for the “Powell Pivot,” its about-face 13 months ago resorting first to stimulative rhetoric until it cut its fed funds rate in July followed by two more cuts, as well as pumping money back into the system and undoing half of the monetary normalizing underway that started in 2017.
The “pivot” headed off a recession and bear market but created the potential for asset bubbles in the stock market and real estate.
Driven by rate cuts, InvesTech’s Housing [Bubble] Bellweather Barometer is surging to extremes not seen since the 2005 real estate bubble burst that preceded the 2007-2009 Great Recession/Bear Market.
Corporate sales are not as easily manipulated as corporate earnings, InvesTech points out, noting that the Price/Sales Ratio of the S&P 500 has surged to a level not seen since the dot-com bubble burst in 1999-2000.
It’s widely known that the Price/Earning Ratio of the S&P 500 is extremely overvalued with the Shiller P/E higher than at any time over 100 years except the 1999-2000 dot-com bubble.
Additionally, InvesTech notes that the percent of IPOs with negative earnings recently reached that same extreme level as in that 1999-2000 bubble burst.
With all the hoopla about Tesla (TSLA), few know it now sports a valuation higher than that of Honda, Fiat Chrysler, GM and Ford combined.
While the media hypes a historically low unemployment rate, job openings are collapsing. While service employment is still increasing, goods-producing jobs are tumbling.
InvesTech recommends a 35% cash reserve. If all this sounds familiar it is to readers here.
Bottom Line: I am in good company with my warning of downside risk. Granted, the Fed will do everything in its power to prevent a recession/bear market in a presidential election year, including more rate cuts.
This is a big week for reports on the economy. The Chicago Fed National Activity Index comes at 8:30 Monday, the Dallas Fed Mfg. Survey at 10:30.
Aside from the Fed standing ready to cut rates if the economy weakens, we can expect the Administration to hype the Hell out of any report that suggests improvement and downplay any that doesn’t.
Friday February 21, 2020 “Can Phase One Optimism Continue ?”
Yesterday, I wrote that any further weakening in the economy would spark another Fed cut in interest rates, but that was before the release of the Philly Fed Business Outlook for manufacturing and the Leading Economic Indicators (LEI) both of which exceeded expectations by a wide margin. The Philly Fed showed a dramatic surge in business optimism and the LEI a rebound after more than a year of no-growth.
How much of the rebound in these indicators reflects a rebirth of optimism after Phase One of the China trade agreement will be better known several months from now.
So far, the stock market has indicated some lack of buying in early trading, which suggests it is fully priced. But, the stock market “is” a leading indicator of economic recession and recovery itself, so one has to question whether its overvaluation has discouraged buyers at these levels.
What if the economic rebound is not just an initial reaction to the announcement of Phase One of the China trade agreement and the economy gains traction ? That may force the Fed to increase rates, not good for an overvalued stock market.
Bottom line: Where the economy and stock market go from here is a day-to-day challenge. Yes, the stock market is historically overvalued, but the bubble phenom can enable it to become yet more overvalued.
But institutions are holding fat gains. Any threat of a recession and they will surely want to lock in gains and clearly not be buying at lofty levels, all of which suggests a major recession/bear market..
One has to accept the level of risk they can afford and raise cash accordingly. ……………………………………………….
Thursday February 20 “Prepare For Another Fed Rate Cut”
Pardon me, when I return to my warning about the bubble in stock prices, which stands to inflate from bubble to a pre-burst status.
A flash crash at any time.
Actually, we have had several bubble bursts since early January 2018 which preceded a 12% plunge in less than two weeks. The bubble re-inflated again in June then burst in early October followed by a 20% plunge in Q4.
So yes, they do burst and will burst again. Timing is difficult.
January, a year ago the Fed decided it had couldn’t let a normal self-correcting economic cycle take its course and intervened with hype of easier money and three cuts in its fed funds rate starting in July.
It worked, at least for now, but especially for the stock market which soared more than 44% in 14 months.
While a recession was delayed, a recovery is suspect.
I believe the Fed will cut rates again regardless of what it says and that it would clearly look like they were trying to ensure President Trump of re-election in November.
What concerns me is that the Fed has set the stage for a horrendous crunch in stock prices. It single handedly has inflated the bubble and sucked millions of unsuspecting investors into the market at overvaluation levels seen only once in 100+ years. Lambs led to the slaughter.
I believe in stock prices trading freely without interference by the Fed and less micro-management of the economy, as well. The Fed has consistently created economic contractions and recoveries with interest rate policy changes and that is interfering with normal economic cycles.
Wednesday Feb 19, 2020 “The Fed Holds The Trump Card”
While the Fed has stated it does not expect to cut rates again this year, it will if the economy begins to weaken, the result being President Trump’s re-election chances will be vastly improved.
The Fed’s about-face on policy a year ago headed off a recession/bear market, which would have been devastating for Trump’s re-election.
The Street favors re-election, so further Fed rate cuts should be bullish.
But investors can’t bet the ranch on that simplistic conclusion. If the economy is “in a good place” as Fed Chief Jerome Powell claims, why the need to cut rates ?
Then too, with a historically overvalued stock market, what else can the Fed do to pump it up, more importantly, what can the Fed do to trigger a recovery if the economy sinks into a recession and the stock market plunges ?
Bottom line: We are in uncharted waters, downside risk outweighs upside potential. What worked a year ago when the Fed stepped in to delay a recession/bear market may not work this time with the S&P 500 up more than 43% after its 20%, Q4, 2018 plunge.
A rate cut, or just a hint of one coming out of the FOMC minutes today, could trigger a rally. What’s more, how much more stimulus is left to push the an 11-year old bull market higher when it already is more overvalued than any bull market in the past 100 years except for the 1999 – 2000 dot-com speculative pig-out ? Easy does it .
Tuesday, February 18, 2020 “Cash “is” an Investment”
1) It is a cushion against portfolio losses in a major sell off/bear market (down 30% – 50%).
2) It is a reserve for emergencies avoiding the need to sell stock.
3) It is a reservoir that can be tapped to buy at lower prices in the event a major correction.
What an investors does not want to do is to be forced to sell after a major hit to their portfolio. For example, if they have a major expense looming like college expenses or a house, or uncovered medical expenses. Or they are withdrawing funds from an IRA or retirement account, nursing home or simply need funds when income sources vanish.
Why don’t investors want to maintain a cash reserve ?
1) They want to maximize return.
2) Fear of mission out (FOMO) on opportunities to score.
3) Greed, a normal human emotion. It intensifies as bull markets surge.
4) Hype – by the Fed, Administration, Street pundits and the Press which reports the market hitting new highs though it may only be by a miniscule gain.
5) Money managers. Financial advisers get paid for investment in stocks, not cash. The responsible, savvy and gutsy ones will raise a lot of cash as a bull market matures even at risk of losing an account.
Every bull market top I have experienced since 1966 has been marked by these issues, and they are not hard to spot. All one has to do is objectively track their own emotions.
-Are you spending next year’s projected winnings ahead of time ?
-Do you instantly reject any case for a bear market however reasonable ?
-You can’t wait for the market to open to check your stocks.
-You are foolishly buying a stock simply because you hope to sell it to some other fool at a higher price.
Doesn’t the stock market ALWAYS REBOUND TO NEW HIGHS ?
So far it always has. But the problem is it is only normal to be overwhelmed with fear when the stock market is plunging. The broad-based, blue chip S&P 500 declined more than 50% in the last two bear markets (1998-2000, 2007-2009).
Once a market drops 40% the “I can’t stand it anymore” pressure forces investors to sell, sometimes most of their portfolio and usually close to the bear market bottom denying them the opportunity to benefit from next bull market.
The buy/hold no matter what mentality has its downside. It can take years for the market to recoup bear market losses. A cash reserve would have minimized those losses, even provided an investor to buy-in at lower prices.
CONCLUSION: The market will jump and drop on reports of an increase or decrease in new cases of Coronavirus, but the market’s trend will be determined by other factors, primarily the outlook for the economy over the next 6 to 9 months.
January’s Industrial Production took another hit, dropping 0.3% (m/m)bringing the annual rate of decline to 0.8%. With only one exception over 50 years, this kind of weakness has resulted in a recession.
One year ago, a change in Fed policy prevented (delayed) a recession and triggered a surge in stock prices. If the Fed sees any new weakness in the economy, it will cut rates for the fourth and fifth time since last summer to prevent a recession/bear market in a presidential election year practically assuring President Trump his re-election even though it has vowed not to cut rates again.
Personally, I don’t think the Fed should be in the business of micro-managing the economy and stock market. This kind of meddling impedes both from making normal and healthy adjustments that ensure stable markets going forward.
A flash crash (3-day plunge of 12%+) can occur at any time. Like a rogue wave, they are unpredictable. Easy does it !! A cash reserve of at least 30% is simply smart. Under the circumstances, I’d prefer a 60% reserve.
Friday February 14 “BIG Bubbles….. BIG Burst
I am going to run yesterday’s post again for weekend readers, since it is so relevant. I experienced the bubble manias in the 1960s, 1970s, 1990s and mid-2000s first hand and remember them well.
As those bubbles expanded, a market top was the last thing investors expected. Corrections were short-lived as buyers pounced on any concession in price then went on to pay up for stocks believing a market top couldn’t happen.
Today’s bubble is much like the Nifty Fifty (one decision blue chip stock craze) in the 1970s. Only one decision was made – BUY. Aside from Eastman Kodak and Polaroid, most of the 50 are still around.
They sold at extreme price/earnings multiples until the 1974-1975 recession/ bear markets lowered the boom with a thumping that took eight years to recover from.
Today the S&P 500 sells at extremely high P/Es relative to past market tops. While corporations are aggressively buying back stock to shrink the bottom line producing a windfall for top executives and those lucky enough to have options for exercise, there comes a time when the BIG money locks in gains and stops buying stocks that are so overvalued.
We saw it in Q4 2018 when the DJIA and S&P 500 dropped 20% in face of a looming recession. It took a major Fed policy change to head off the recession and trigger a huge rebound in the market which has evolved in the inflating bubble we have today.
I can only warn of the consequences of overstaying this bull market. Timing the burst of bubbles is next to impossible to read. The burst rarely follows classic technical market top formations.
On a given day, buyers will simply not show up and down the market will go 12% to 18% for openers. Initially, investors jump in thinking they are getting a gift with lower prices only to find out later that they have been had.
READ BELOW: BUBBLES 1960S “ONICS,” 1970S Nifty Fifty… Thursday February 13 “Bubbles: 1960s “onics,” 1970s Nifty Fifty: Late 1990s Dot-Com Mania, 2020: ?????
Yesterday’s market surge was attributed to a reduced threat of Coronavirus, as well as Street’s perception that Sen. Sanders’ good showing in New Hampshire raises his odds of being Democrat candidate in November and very beatable by President Trump.
The truth is, today’s late-stage bull market is a BUBBLE, fueled by fears of missing out (FOMO) and the inebriated conviction that the party will last forever. It will burst as all bubbles in the past did but timing is next to impossible. One day big buyers will not show up and stocks will simply plunge.
This happened in 1999 – 2000 when the Street hysterically bid up dot-com/tech stocks that had no chance of surviving as entities. All that was needed was dot-com in its name and investors rushed in to buy without thinking.
Most went out of business as dot-com stock prices dropped to “zero.”
It the 1960s, a name ending in “onics” was all a stock needed to soar relentlessly until the 1966, and 1968-1970 bear markets zapped their appeal.
In the early 1970s it was the “one decision,” “Nifty Fifty” stocks that the Street believed should be bought and held indefinitely until the bear markets of 1973-1974 defrocked them of their bullet proof veneer. It took 8 – 10 years for them to recoup their losses.
Today the bubble sports a better quality company though they are historically extremely overpriced well beyond values seen at prior market tops.
I sense the Street knows the end is near and is pumping the market up to eke out as much as possible before reality day.
What to do ?
Resist the temptation to go all-in and have a cash reserve, because no one knows when the break will come and when it does it will be straight down because the BIG money won’t be there to prop the market up and drive it higher.
This is Kool Aid stuff and every bit as addicting to investors who want to wring out more and more stock market scores, and corporations buy in more of their own stock before they run out of sight.
It’s becoming a dumb/dumb market, the less you know the more money you can make. It’s history repeating itself over and over again.
Wednesday February 12 – no blog posted
Tuesday Febuary 11, Cash Is Actually an Investment
A new high for the S&P 500 and Nasdaq Comp. with the DJIA close behind.
It is clearly an institutional buying bubble, as the NYSE market composite, Dow Jones Transports and the “unweighted Value Line Composite” lag behind.
There is nowhere else to put one’s money, thus a stampede to gobble up stocks before they run higher.
Make sense ?
YES, if you are a professional under pressure to perform for clients.
YES, if you are desperate to make more and more money to simply survive the relentless drain on daily costs.
NO, if you are aware how historically overvalued stocks are and cannot afford to take a 15% – 30% hit.
The Administration is pressuring the Fed to cut rates further, which if the economy is in a good place doesn’t make sense, except it would help Trump get re-elected.
Not all indicators are bullish, not everyone surveyed is bullish on the economy, so a rate cut this summer is possible.
The higher it goes, the more severe the crash.
Since not all savvy investors are chasing stocks, they will at some point be a no-show. The BIG money is not stupid, it didn’t get rich paying up for stocks.
Monday February 10 “All Is Not Just Peachy – CYA”
A closer look at the economy suggests all is not as well as we are led to believe.
InvesTech Research’s Feb. 7 bulletin notes that the ISM Manufacturing Index posted its first expansion in five months thanks to early reactions to Phase 1 of the China trade deal.
However, InvesTech explains, the Chicago Purchasers Manufacturing Index (PMI), a leading indicator , plunged 5.4 points to 42.9%, the second lowest in this 10.6-year cycle. All five components of the index declined.
Additionally, the U.S. Leading Economic Index (LEI) declined in December crossing below its 18-month moving average, a warning signal. Over the past 16 months, the LEI has been flat.
Alternet.com published results from the Washington Monthly’s Feb. 7 economic/political letter – summarized highlights include:
–wage growth lags despite the low unemployment rate with growth at plus 0.9%
accounting for the impact of a 2.1% inflation
-the Tax Cuts Jobs Act (TCJA) did not produce a $4,000 pay raise for Americans, Worse yet, 91 of the Fortune 500 companies paid no federal taxes. (essentially corporations got a 40% tax cut while the general public got 1% – 1.5%). The corporations spent the windfall on stock repurchases to shrink their bottom line, pump up their stocks and assure profitable exercise of executive stock options.!
-The TCJA did not produce a 4%-6% growth in GDP, and Q4 growth was only 2.1%
-The trade war cost American households $1,277 in 2019 according to the publication. (I cannot confirm that and going forward that cost may be less if other savings result)
-Reportedly, the trade war generated a 24% increase in farm bankruptcies in 2019.
OK, the Washington monthly is a liberal publication, but there is a major league imbalance here with a huge gap between high net worth individuals and lower net worth/earning Americans.
THAT IS ECONOMICALLY UNHEALTHY.
With some 70% of the GDP coming from consumer spending and household debt increasing to $14 trillion with auto loans, credit card and student loans debt the biggest contributors.
Very little can be done about this imbalance, it is a result of changing times and a reduced bargaining power by employees in negotiating wages and salaries.
What’s worse and still not acknowledged is that automation and Artificial Intelligence will severely impact employment going forward leading to the nation’s greatest employment crisis ever. .
WHAT IS AT ENORMOUS RISK NOW IS THE OVERVALUED PRICE PAID FOR THE STOCKS OF COMPANIES WHOSE FUTURE DEPENDS ON THE AVERAGE SPENDER WHICH LESS BUYING AND BORROWING POWER GOING FORWARD.
ALL THE PLATITUDES AND OPTIMISM ABOUT THE ECONOMY ARE UTTER
RUBBISH, aka, BULLSHIT.
Suddenly, all this will come home to roost, as the BIG money walks away and sellers panic with an initial plunge of 12% – 18%. Depending on what news hits the market when it tries to bounce from these levels, another 30% down will be slashed from the market averages.
I do not know when this bubble will burst. I have warned about it at lower levels and have been wrong. When it bursts, it will be straight down because the BIG money will not be there to catch stocks and selling will accelerate.
CLEARLY, EVERYTHING LOOKS JUST PEACHY ! HOW ON EARTH CAN ANYTHING GO WRONG ?
WELL, THAT’S WHAT IT LOOKS LIKE AT MARKET TOPS.
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 3.5% which was hit in September. 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.
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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.