A “Coming-Out” Party….Then a Plunge

INVESTOR’S first read.com – Daily edge before the open
DJIA: 23,664
S&P 500: 2,848
Nasdaq: 8,854
Russell:1,263
Thursday,  May 7, 2020    9:14 a.m.
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brooksie01@aol.com
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November 15, 2019 (DJIA – 28,004)  My blog headline:  “Bear Market…Why?”  Here I Called for a bear market to start in January, that the initial plunge would be 12%-18% – “straight down.” It started mid-February.
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December 17 (DJIA: 28,235)
I repeated that projection.
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January 20, 2020 (DJIA:29,348) My blog,  “INSANITY,” projected a bear market decline of  30% – 45%. The S&P 500 plunged 35% in 21 days.
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Currently, I expect this bear market rally to top out in May and  the bear market  to post a decline of 50% -60%  before bottoming out in October.
A game changer would be a sharp reversal in the growth of COVID cases and the lifting of  measures designed to counter it.  Additionally, the ability of people and businesses to adapt and innovate.
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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. ……………………………………………………………………………………………………………………………………………..
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TODAY
NOTE:  Coverage of a broad range of subjects by Axios.com is second to none.
Go to Axios.com to select topics. AxiosAM is especially good for concise daily info  on the key issues of each day. They know how to nail it for a quick read.
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       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.
Outcoming Party
       We  have to have an “outcoming” rally first with news coverage of lines of people waiting to access restaurants, public events, kids taking a ballfield to play their game, record sign-ups for cruises, parties inside and outside, interviews of maskless people braving the risk to return to the way things were.
Fiddlesticks ! After the bump, COVID-19 will still be there. Without a quick fix that stops it in its tracks, fear and uncertainty will prevail.
Even with a “fix,” lasting damage has been done and will continue.
Beware of “Hype”
Expect the Fed, the Administration and powerhouses on Wall Street to pull every stunt in one’s devious playbook to  prop the stock market up through election day.
Wall Street, spoiled from a fed-nurtured , 11-year old bull market won’t let go, pushing stocks as the only place to put one’s money.
I agree it is, but at much, much lower prices.
Still Overvalued
NO, this is NOT an opportunity of a lifetime. The stock market was absurdly overvalued before the bear market started in February, and is much more overvalued now.
       The Fed and government can throw all the money they can “create” at our economic nightmare, but consumers are so shellshocked they’ll go into survival mode and slash spending especially on big ticket items.
This is why the liberation of states from stay-at-home mode will only trigger a temporary bump as government rescue efforts run their course, and the nation sinks deeper into recession.
Institutional Panic ?
       I see a second leg down that will take the  DJIA below 12,000, and 10,000 if the Street panics. That counts to the S&P 500 to at least 1,500, and the bulletproof Nasdaq Comp. below 4,000.
Here’s why a panic can happen.
Managers of money have a fiduciary responsibility to preserve client’s assets.
If they suddenly see the possibility of the recession we are in now turning into a severe recession or a depression, they will sell. All will get the sell signal at the same time and that means – straight down, flash crash #2.
Worst Since 1930s
 This bear market stands to be the worst since the 1930’s Great Depression.  Adding to the severity is the fact all this happened after the longest bull market/economic expansion on record.
Jobless claims for the last week reached 3.17 million.  While that is down from 3.85 million the prior week, it is ominous for the future. To date, the grand  seven week total exceeds 33 million jobs lost.
Not only does this impact the job losers, it sends a chill into those who already have a job.
Bottom Line
     The market is up at the open as the Street anxiously awaits the re-opening of business.    As my headline suggests, a coming out party will precede the second leg down in this bear market, however the party may first have to reach a fever pitch before “last call,”
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RECENT POSTS:
Wednesday May 6, 2020  “The Big Gamble Begins”

The Stock Trader’s Almanac was the first to target May 1 as the beginning of the worst six months of the year with November 1 to April 30 being the “best” six months for investing.
      However, investors must realize, major moves in the opposite direction can occur within these six month periods, The Feb/Mar. 35% plunge being a recent example.
For good reason, I don’t think the stock market comes close to discounting the adversity that lies ahead, i.e., it is more overvalued now than in February when it went into a bear market, especially given the fact earnings will be getting clocked in coming quarters.
The current bear market rally is tempting investors to jump in. Who wants to miss a new bull market ? (FOMO: fear of missing out).
That’s classic behavior in a bear market rally. However, it wouldn’t take much of a plunge to renew the FOLE mentality (fear of losing everything).
      Bad news accompanies bear market bottoms, which tend to precede the end of recessions by 3 – 5 months. turn up 3-5 months.
But news in coming months will get worse, so it boils down to how bad does it get before the stock market has discounted the worst ?
U.S. factory orders plunged 10.3% in March as the COVID-19 shut down began. Durable goods fell 14.7%, nondurables dropped 5.8%. MarketWatch’s Jeffrey Bartash believes U.S. and global economies could take years to  recover.           The ISM (service) Index plunged 41.8% in April, the first decline in 112 months.
I hold to my bear market bottom in October with the possibility of DJIA below 12,000 – 10,000, the S&P 500 below 1,500 and Nasdaq Comp. bellow 4,000.
For that to happen, the institutions would have to panic.
      It depends on how far the economic dominos tumble. The Fed and U.S. government has thrown an unprecedented amount of money at the problem in an effort to prevent a devastating depression. Initially that will buy some time.  If the economic wound heals quickly, a depression can be avoided, but an ugly recession will still do a lot damage.
The chaos and damage of a depression would be unthinkable.
In either case, the stock market is extremely overvalued.
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Tuesday May 5, 2020 (DJIA: 23,749) “The Street Rolls the Dice, Buffett Raises More Cash”      While yesterday’s rally at the open stalled, the market finished strong and will follow through today.
         We have 18 more trading days in May so the adage, “Sell in May, and go away” may still prove as good guidance .
Warren Buffett didn’t wait for May to dump his entire position in airline stocks, going on to admit he didn’t find any stocks interesting at this time.
A year from now, most students of the market, money managers, analysts and investors will look back  and wonder why it wasn’t more obvious what was happening now.
We are well into a recession and may well sink into another Great Depression, yet the bear market rally, now up 32% from its March low, is still notching up.
Only 16% off its February 19  all-time high, and facing the worst economic debacle since the 1930s, the S&P 500 is absurdly overvalued, and will get more overvalued in coming quarters as earnings plunge.
But, the Street is looking past the immediate crisis to what it thinks is a robust recovery.
If Buffett thinks it is wise to raise cash, why shouldn’t more people.

 

Monday May 4, 2020  (DJIA: 23,723) “Stock Technicals Weakening – Test of Lows ?”    Q-1 earnings are hitting the Street and are not a good read. Q2 will be worse for the obvious reason.
Guidance on future earnings is of little value, since no one has a handle on where things will go in coming quarters.
A number of states are lifting COVID-19 restrictions, though the virus is still spreading at around 30,000 new cases per day.
If  the spread recedes, the economy has a chance to stabilize, if not, the country will have to return to  social distancing again leading to the worst recession since 1929-1932.  I am not sure that won’t happen anyhow,, since so much damage has been done already.
Wall Street doesn’t get it. While a good chunk of the 35% bear market rally between March 23 and April 29 was short covering, there was a lot of bargain hunting by traders and institutions thinking the correction was over and it was party time again.
       The S&P 500 is down 17% from its February 19 bull market high where its price earnings ratio (P/E) was more overvalued than at any time ever except at the dot-com Internet bubble high in January 2000.
With a severe recession underway, possibly a depression, a 17% correction doesn’t begin to discount the potential damage looming for the economy and corporate earnings.
Why ?  I think the Street has become desensitized to hard times. It has been more than 11 years since the Great Recession. Memories of its angst have faded.
What’s more, I would hazard a guess, that many of the decision makers today were either not in this business then or just starting.
         A grand bull market tends to erase the pain of hard times and embellish the rewards of  a relentlessly rising market, one nurtured by the Fed whenever it stumbled.
Bottom Line:
        While the market will open on the downside, watch an attempt to rally – if it is robust, a downturn in May, a key pivotal month, will have to come later.  If the rally is lifeless, we are heading lower.
I alerted readers of a rally on March 23 with the S&P 500 at 2,245 and picked April 15 (S&P 500: 2,846) as an end to the rally after a 27% rise. It continued to rise another 8 percentage points before its peak three days ago at 2,954.
My headline Friday, “End of Bear Market Rally ?” has a better chance of being right.  On Friday, we saw a  break in the tech stocks that stands to follow through this week. If so, it should trigger a plunge in the overall market as a beginning of a test of the March 23 lows at DJIA: 18,213, S&P 500: 2,191, Nasdaq Comp.: 6,631.
Initially, I see that test as appearing to be successful at some point above those lows, but believe  we will see a substantial  drop below the lows if institutions panic and sell aggressively, even a DJIA below 10,000.
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Friday  May 1, 2020 (DJIA: 24,345) “Is the Bear Market Rally Over ?”

Headlines in Axios’ AM- Mike’s top 10  this morning tell the story of today’s dilemma.
“U.S. Jobless claims soar past 30 million”
was accompanied by, “Wall Street has best month in 30 years.”
Whoa !
Does that mean the bear market is over, that Wall Street sees an economic recovery later in the year and is loading up on stocks in advance,  driving the S&P 500 up 33% in 28 days ?
Aren’t investors supposed to experience excruciating  pain before bear markets end ?
IMHO, they will in coming months.  This has been a bear market rally, driven by short covering, buy-biased algos and Wall Street hype in a presidential election year.
We have massive government stimulus for several reasons. For one, this is an election year, but more importantly, the economy is now in the deep stuff.
Consumers
account for 70% of the nation’s GDP and it is where the recession will have a major impact.
A new economic era looms, but it isn’t about aggressive spending on big ticket items, travel,  housing.
Coming off 11 years of economic expansion, consumers are in debt and as a result of the recession, getting deeper in debt and that will alter spending plans going forward..
As a result, corporate earnings will be taking a big hit
near-term and going forward.  Stock buybacks, a major driver of stock prices, will all but stop.
 Here’s  the reason for another leg down in stock prices. It’s the valuation of stocks.  At the market peak in February, the S&P 500 price/earnings ratio (P/E) was higher than at any time in the past except the dot-com Internet bubble in 1999-2000.
A bear market had to happen.
Now, with earnings plunging and the S&P 500 only 11% below its peak, the stock market is even more overvalued.
So, when does the next leg down start ?  News flow (Fed, Administration and Street hype, news of a treatment/vaccine for COVID-19), will have an impact. Without that, May is a good possibility with a plunge into fall.
How far down ?   Again, it’s an election year and powerful forces media and otherwise will attempt to prop the market beyond election day.
At its ugliest, I’d say DJIA 9,750, the S&P 500 below 11,500 and Nasdaq Comp. below 4,000.
Absurd ! How could that be ?
The news is bad enough, worse yet falling dominos  can make it a lot worse.  It really only takes a couple big hitters on the Street to break ranks and sell to trigger mass selling by institutional investors.
Aren’t they in it for the long haul, i.e. buy  and sell only to switch to another stock ?
None can afford to sit on monstrous losses and ride out an extended bear market. The managers will lose their jobs – get sued. They are humans, they get greedy (seen that) and can get scared.
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Thursday  April, 30, 2020  (DJIA: 24,633) “Shilling’s “INSIGHT” asks, “Is This 1929 All Over Again ?”

Bear market bottoms are mostly accompanied by a lot of angst, and rightly so, investors just took a big hit.    The hit between February and March was big (35%+), but the bear market rally’s 34% rebound was so swift investors didn’t have a chance to jump out of any windows.
So now, just 13.3% down from the February 19 bull market top, investors feel safe enough to hold tight if not buy more stock.
CFOs disagree according to an Axios report with 80% expecting losses this year
, one-quarter of them expecting losses in excess of 25%. More important, 70% are considering deferring or cancelling investments plans.
One-third of U.S. debt is “distressed,
which means corporate bonds are trading  at significant  discounts because a company is likely to file for bankruptcy or default, Axios reports.
As stated here many times since this year’s March 23,  S&P 500 low  of 2,191, I believe this is a bear market rally that will yield to another  plunge. Depending on what new adverse news hits it as it is tumbling, the DJIA could drop below 10,000.
For one, what is happening will have long-lasting impact on individuals and businesses no matter how much money the Fed and Congress throws at the problem.
        Even with the announcement of  new treatments and a potential vaccine, the new mindset of the consumer will be changed for years.   Saddled  with debt, unemployment and fear of the future, the consumer will be more reluctant to take on big ticket items, especially if it means more borrowing.  This will have an adverse impact of numerous industries, just one example of dominos tumbling.
The U.S., Q1  GDP was down 4.8%, for the week ending April 25, more than 3.8 million more filed for unemployment, bringing the total to 30 million. Unemployment is now tracked to reach 22%, the worst since the Great Depression.
At current levels, the stock market does not discount the present adversity or what lies ahead, only lower prices will.
The late-stage, bull market bubble was pricked by COVID-19 in February, but the stock market was historically extremely overvalued at the time, and that is why it dropped 35%+ in 21 days.
         Now, having recouped all but 11% of its loss, and faced with plunging earnings, it is even more overvalued now.
This is one thing the books written five years from now will point out and readers will wonder, how could the Street be so blind ?
A. Gary Shilling’s Monthly publication, INSIGHT,” headline’s its May issue with
 “Is This 1929 All Over Again ?”
His 32-page analysis strikes some stunning parallels with that era, far too much for me to do justice to here.   We are facing something worse than the Great Recession and bear market of 2007-2009 which hammered  the S&P 500 down a whopping  58%.
Shilling is one of the nation’s most renowned economists, having predicted the Great Recession, bear market, financial crisis, and housing collapse of 2007-2009  well in advance.  INSIGHT”S, editor, Fred T. Rossi, makes a compelling case for this parallel to 1929 backing it up with  a host of stats, charts, graphs. I will attempt to condense his findings as we go forward.
All students of stock market history know the picture must get extremely bleak before bear markets end and turn up in anticipation of a recovery.
Bottom Line:
THE PROBLEM HERE IS, THE ECONOMIC PICTURE GETS MORE DIRE, BUT THE STOCK MARKET RISES FROM OVERVALUED LEVELS TO EVEN MORE OVERVALUED LEVELS.  THE DAMAGE DONE TO OUR ECONOMY, TO GLOBAL ECONOMIES,  IS TOO GREAT TO BE REVERSED SO QUICKLY, SUPPORTTING THE CASE FOR ANOTHER LEG DOWN, AND I SEE THE POSSIBILITY OF A DJIA BELOW 10,000.
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Tuesday  April 28, 2020 (DJIA: 24,133) “Goldman Buys While People Die !  “Stocks Don’t Need to Fall on Economic Damage,”  Goldman Sachs (Bloomberg Markets)     “U.S. Stocks Don’t Need to Fall on Economic Damage, Goldman says,” Bloomberg Markets headlined today.
What could better highlight the arrogance that an 11-year old economic recovery/bull market can create.
What could better highlight the  rot that has overcome our society when the nation’s premier Wall Street powerhouse dismisses the significance of 26 million unemployed, 1 million sick with COVID-19, more than 56 thousand  dead, bankruptcy, businesses lost, futures altered or destroyed ?
Have these people no shame ?
Have they no sense of what is happening ?
How many portfolios will they destroy this time around ?
I have been writing about the stock market for 52 years but feel dirty to even be writing about this business now.
Time for these prima-donnas to walk around the block with eyes and ears open and see what is happening.
Goldman’s message is
that U.S. stocks may be able to look through the dismal earnings season or two, and the deepest economic contraction in modern history.
Co-head of global FX and EM strategy, Zach Pandl wrote,
Investors usually discount at least the next two years of macroeconomic performance, suggesting markets may continue to look through bad news over the near term if it can reasonably be expected to reverse in the coming quarters.
Bad news ?  Really ? Is that what this is ?
Reasonably be expected to reverse in coming years ?   Says who ?
Can’t these out-of-touch elites see the sea change that’s coming as a result of the enormous imbalance that they have created in our society.
        What a pity that COVID had to interrupt their party for two months.
ARROGANCE PRECEEDS THE FALL, AND THIS MARKET, WHICH IS RALLYING INTO AN UNPRECEDENTED  OVERVALUATION, WILL FALL TOO, UNFORTUNATELY CRUSHING  THE PORTFOLIO VALUE OF THOSE INVESTORS WHO HAVE ENTRUSTED THEM TO “THE STREET.”
 Weeks ago I wrote that the Street would find a way to treat this period with an asterisk, something that should be disregarded as too unusual to matter, i.e. ignore it.  Time-tested measures of value just don’t apply.
Spoiled rotten by the longest economic recovery and fed-nurtured bull market ever, they just can’t accept that this time is different.
If just one of these behemoth powerhouses breaks ranks and sells, they will all head for the exits and the DJIA will not stop falling until it drops below 10,000.

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Monday April 27, 2020 (DJIA: 23,775)  Re-Open” Rally….A Chance to Sell In May and Go Away…an “L” recovery….not a “V”

>An “L” recovery …not  a “V”
>Stock market more overvalued than at February market top
>A 17% drop in DJIA does not discount damage done.
>Next leg down to start in May after “re-open rally” DJIA: 9,759 ?
>Will money managers break ranks and sell ?
>Recession/bear market was due before COVID-19
>Huge sea change in corporate and consumer culture afoot – bad for economy
>Debt (individual, corporate, government) too high and getting higher.
>Next unemployment report to be a shocker (May 8).
>Dominos to tumble in all directions and for a long time
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Money managers, well aware that the stock market is only 17% off its all-time bull market highs, are looking right and left to be sure no one  jumps ship and sells, starting a cascade of institutional selling that takes the market averages to new lows.
Depending on how severe the panic of these behemoths gets, I can see a spike down to DJIA 9,750.
Can’t happen ?  Anything can happen in this environment. How about 26 million people on unemployment ? No one on the Street saw that under ANY conditions.
CNN’s “Market Flash” Sunday quoted  John Normand, head of cross-asset fundamental strategy at JPMorgan as saying, “The focus should be more on the return to growth than the contraction in the economy.”
That is what you do in late stage bear markets when stocks are hitting new lows  every day and the market is off significantly more than it is now.
The big question here is, are we even close to an economic recovery ?
What is happening is historic, it will have lasting impact, and the stock market is not discounting that.
Worse yet, it all happened after 11 years of economic expansion and 11 years of a fed-nurtured bull market that in terms of over valuation was only topped by the dot-com/Internet bubble in 1999-2000 that preceded a 50% plunge in the S&P 500, 78% plunge in Nasdaq Comp..
The stock market is now more overvalued than at any time in history.
Something has to give     –  prices….or earnings.

The Street wants the party to pick up where it left off  …..Not going to happen !
      The country is on the threshold of a huge sea change in corporate and consumer culture.
Consumers
have been stunned beyond anyone’s imagination.  They will go on strike, not for a month or two, but for years.
A treatment and or vaccine would help and clearly spike stock prices up, but too much damage has been done and a return to basics is taking over now that people have tasted it and find they can get by with less.
DEBT – individual, corporate, city, state, and federal debt is too high to enable the big spend needed to trigger a “V” recovery beyond an initial bump when we emerge from our seclusion.  It’s going to be an “L” recovery, not just because of COVID-19, but because too much of our economic foundation is unwinding.
Dominos will be tumbling for a long time across the board in most industries.
    There is absolutely no justification for stock prices  at this level while everything else is collapsing.  Everyone at the top knows the market is absurdly overvalued. They will do all they can to prop it up, including the Federal Reserve which created the December 2018 – February bubble of all bubbles.
But managing money is a highly competitive profession.  No one can afford to sit on huge losses with no cash reserve.  If a few big hitters begin selling, they will all sell and with no buyers, the second leg of the bear market will be underway, and we will likely see the biggest bear market plunge since the 1930s, greater than the 2007-2009 bear market of DJIA 55%.
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George Brooks
Investor’s first read.com
brooksie01@aol.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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