A Cash Reserve a MUST

INVESTOR’S first read.com – Daily edge before the open
DJIA: 25,802
S&P 500: 2,876
Nasdaq Comp.:7,898
Russell 2000:1,557
Friday, May 17, 2019
   8:52 a.m.
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gbifr79@gmail.com
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Summary:
TODAY:
The market has rebounded each of the last three days, but yesterday’s momentum lagged.  As a result, the market will open on the downside today, the key being  whether this is the beginning of another leg down.
That will depend on the nature of the news flow going into the weekend.
There is increasing concern for the outcome of a budding crisis brewing between the U.S. and Iran as war ships head for the Mid-East.
There are rumblings about a recession on the horizon, though economists do not see one this year (I do, though only the early stages of one).
Recessions are loosely defined as two consecutive declines in GDP. The official declaration is made by the National Bureau of Economic Research (NBER) and that is done well after a recession has started.
Axios reports that the Fed is concerned about rising credit card delinquencies and surging corporate debt. Add to that the fact the U.S. national debt is $1 trillion higher  than a year ago, and they have reason to worry.
This is why I have been saying I think the Fed will cut its fed funds rate. It does not want a recession in an election year !
I have warned of a bear market for months. It will start well ahead of a recession and it will begin with a sharp plunge as the Street suddenly becomes aware the party is over no matter what the Fed does.
A drop in the Fed’s fed funds rate has preceded each of the last three recessions, so a cut here would indicate the Fed is WORRIED.
The Street’s algos will buy at the market and on dips until analysts tweak them to slow down or stop buying and then to start selling.
Everyone will get the signal at the same time and the market will be down 12% – 18% before the individual investor can react, so a cash reserve  is wise now.

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TECHNICAL:
Minor Support: DJIA:25,685;S&P 500:2,856;Nasdaq Comp.:7,817
Minor Resistance: DJIA:25,600; S&P 500:2,876; Nasdaq Comp.:7,891

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Thursday (May 16)
The bulls have their work cut out for them with unimpressive news on the housing market, and declines in Industrial Production and Retail Sales on top of high angst  for a military conflict with Iran and the breakdown in trade talks with China.  These negatives are offset by better than expected Q1 corporate earnings.
It’s jump ball between bears and bulls at a time the Street has run stocks up to pricey levels.  That’s OK so long as new negatives don’t surface……or so long as none of the big hitters on the Street breaks ranks and sells in-size.
Even so, the Fed’s policy switch away from raising interest rates should be doing more for the economy.
Contrary to most pundits, I think the Fed will cut its benchmark fed funds rate in December to goose the economy going into the 2020 presidential election year.
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The S&P 500 was up 66% at this point in the Obama administration compared with a gain of 24% at the same point under Donald Trump.

Wednesday (May 15)
Ask yourself two questions.
Is a bear market possible beginning in the next 6 months ?
Is a recession starting within the next 9 months possible ?
If your answer is no to both, think again, or risk getting blindsided.
No one  is bearish and that is bearish. The Street is blinded by the euphoria of a 10-year old bull market, propped up by an administration-friendly Fed, which may just cut its benchmark interest rate to head off a recession in time for the 2020 elections.
Bear markets begin ahead of recessions, the lead time varies from several months to a year. I don’t see the next bear market beginning slowly, since most analysts/money managers track the same indicators plug them into an algo and wait for an answer.  Aside from free-thinkers who will anticipate problems in advance, most on the Street will get a defer purchase/sell signal at the same time and whoosh down the market goes giving anyone with no cash reserve a chance to react.
       My message here is, establish a cash reserve of 30% and ignore the temptation to go all-in, because no one knows when the plug will be pulled. Worst case, an opportunity to make a little more is lost, but a flash crash leading to a bear market does not lead to two years of more getting back  one’s losses.
We have had ugly corrections in recent years, all but one were flash crashes.
Apr./May 2011 the S&P plunged 12.6% in 8 days
Aug. 2011:  –  15.8% in 6 days
Jly./Aug. 2015:   – 11.5% in 18 days
Dec. 2015/Jan.:  –  12.9% in 13 days
Jan/Feb. 2018:  -11.8% in 10 days
Oct./Dec. 2018: – 20.2% over 3 months
All were followed by recoveries. The difference with a bear market will be, new negatives will hit the market after a sharp plunge and at the point when it is ready to rebound. That’s when a second leg begins leading to lower lows and ultimately a decline of 35% – 48%, or so.
In most cases, the bear will be accompanied by a recession and a rush by the Fed to trigger a recovery with lower interest rates and pumping money into the economy.   But rates are still low and the ability of the Fed to pump money into the economy limited this time, so a recovery stands to take longer.
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Tuesday  (May 14)
One year ago, The Guardian reported 1,140 economists (14 Nobel prize winners) warned President Trump his economic protectionism policies threaten  to repeat the mistakes the US made in the 1930s that resulted in the Great Depression.
Obviously, the warning was ignored as the trade war between the US and China heats up.  The NAFTA’s remake, the U.S.-Mexico-Canada Agreement (USMCA), is stalled in Congress.
When will this nonsense end ?  The long and the short answer are the same – no one knows and that is NOT GOOD.
So far, the Street isn’t all that worried with futures  trading indicating a rally at the open.
This would be  a dangerous rally to buy, since the risks of a rally failure at this point are high.
The current U.S./China trade impasse was not expected, and must be discounted as the market seeks a level that reflects that.
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Monday (May 13)

The Street was unfazed Friday by the inability of the U.S. and China to reach an accord on tariffs, but today it is more concerned today that this may be the new normal.
Shortly, we will know what China’s response will be, and the Street can chew on that.
This indifference to negatives is classic late-stage bull market behavior by an industry that simply won’t accept the possibility the party is ready for last call.
Historically, stock markets top out ahead of the beginning of recessions. The lead time has varies between two months (2007) and 12 months (2000), which is of little help here.
It’s going to be a tough read this time around, since the Street isn’t ready for a bear market, the Fed is  determined to head off a recession in an election year, and  so much of the decision process is computerized by algos, which can’t possibly be programmed to account for the current political improbabilities that will influence our economy going forward.
What I see developing now is uncertainty about everything. How can corporate managements plan for a future that is so uncertain ?
Will a “pricey”  stock market have to find a level that discounts this uncertainty ? What if new negatives surface once that level is reached ?

If the Street’s algos are not programmed to address this uncertainty, will analysts have to re-program them to do so and will that all happen at the same time, resulting in an extreme plunge in prices.
I think the biggest risk here is the Street has lost respect for the savagery  of a bear market, a relentless assault by new negatives that pound stocks unmercifully.
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Friday (May 19)
Unable to strike an agreement on trade with China, Trump has upped the ante by slapping tariffs of 25% on $250 billion of Chinese goods entering the United States. Previously the tariff was 10%.
This could be posturing leading to a surprise announcement over the weekend.  The bottom line is, corporate planners have no idea what to expect.
This uncertainty confounds planning and disrupts complex supply chains around the world. It is bad business and bad politics.
With 45 minutes before the market opens, the futures indicate only a mild negative reaction. That could change into a full blown free-fall, if the Street suspects a deal is not imminent.
Even if a deal is announced the market at these levels pretty much discounts a “deal,” so a rally would be limited.
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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 116 months, the second longest on record and  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 hit a low of 3.7 percent in November, jumped to 3.9 percent in December and to 4.0 percent in January. Now, averages include months below and above 3.8. What’s more, we won’t know when the current recession if we have one begins because that conclusion is  reached by the Nat’l Bureau of Economic Research (NBER) long after the fact.
>Bear markets lead the beginning of recessions by 3 to 12 months.  The current bull market at 119 months is four 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.
>The current economic expansion has lasted 123 months. That’s 65 months (2.1x) longer than the average expansion (58.4 months) going back to 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 3.8 Months.
> 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.
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George Brooks
Investor’s first read.com
A Game-On Analysis, LLC publication
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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.

 

 

 

 

 

 

 

 

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