INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,883
Thursday August 8, 2019 7:51 a.m.
Let me pose this question one more time.
Why is the Fed is such a hurry to cut interest rates ?
Is it because it wants to make it easier for corporations to borrow money to buy back their own stock running the price up to enhance the value of Executive holdings and options ?
Is it because the Fed wants to punish investors in fixed income investments ?
NO ! It’s because the Fed is scared stiff the economy will be in a recession in 2020, a presidential election year.
According to AXIOS Markets (Dion Raboun Aug. 7) and CME Group’s Fed Watch, the Street is pricing in a 50% likelihood that the Fed will cut rates three times by year-end. Raboun added, the “only reason for the Fed to cut rates by one percentage points or more in a year would be that the U.S. economy is in peril.
The Street’s algos are programmed to buy at the market, but especially on dips in prices.
If the money managers, brokers and analysts see a recession, they will have to change the algos, and since there has never been a recession without a bear market, their action will trigger a free-fall in stocks far worse than what we have seen in recent days.
It will happen, if not this time down, then in the near- to intermediate term future.
The Fed is artificially and irresponsibly propping this market up with a lot of inaccurate rhetoric and now with rate cuts.
They should let the market adjust to known and perceived negatives and find a level that discounts them. That would be a way to head off the flash crash which is a straight down phenom that does serious damage.
A purely technical scenario: Boeing (BA: 331) briefly broke below 330 again yesterday but failed to follow through on the downside. It seems its new support is closer to 327. Breaking that level would increase the odds of another leg down most likely below 300. This assessment is based on technical analysis.
The Trump administration and Fed will release whatever info it can muster up to stabilize this market and it may work temporarily.
Minor Support: DJIA:25,901; S&P 500:2,876;Nasdaq Comp.:7,830
Minor Resistance: DJIA:26,213; S&P500:2,903;Nasdaq Comp.:7,927
A rally failure this afternoon would put these minor support levels at risk leading to a steep [plunge as more of the BIG money breaks ranks.
Wednesday August 7 “White House/Fed Hype May Not Be Enough”
Yesterday I warned that after this week’s crunch in the market, the administration and Fed would release whatever info they could muster up to stabilize the market. Sure enough, St. Louis Fed president James Bullard played the rate card, saying, “Further rate action may be desirable.” which helped bump a sagging market up to an upbeat close.
Trump’s economic adviser, Larry Kudlow, told CNBC yesterday that the United States will remain committed to resuming negotiations with China in early September after stating Monday that the economy is in a strong position with money pouring in from abroad seeking safety and higher interest rates.
If that is the case Larry, why is the Fed in a hurry to cut interest rates ?
There is a trade off here, the Street can celebrate rate cuts, but has to cope with a recession and there has never been a recession that has not been accompanied by a bear market.
So far, government hype has worked. When it fails to move markets, it is time to head for cover.
A purely technical scenario: Boeing (BA: 332) briefly broke below 330 again yesterday but failed to follow through on the downside. Based on price action, it looks like it will rally to 339 before dropping to 307 where another rally should take place before dropping below 300 to the mid-200s. Just a technical opinion – a warning for some, opportunity for others.
Tuesday Aug. 6, 2019 “The Party Is Over – Use Rally to Raise Crash Reserve”
This is the rally I referred to in Yesterday’s blog, “Technical Rally Possible at Any Time – Highly Risky.” That is exactly what this is.
Expect the Trump administration to release anything possible designed to stabilize this free-fall. My guess it will be plans to renew tariff talks with China or comments by China about the yuan
The White House-friendly Fed will trumpet talk of one or two more rate cuts by year-end both attempts to stop the carnage.
BEWARE: WHEN HYPE AT HIGH LEVELS FAILS TO GOOSE THE MARKET, IT IS TIME TO RUN FOR THE HILLS.
This is looking more and more like the beginning of a bear market, keeping in mind fed rate cuts preceded every recession going back to 1955.
It looks like the BIG money is starting to jump ship, breaking ranks with the quant/algo types who desperately need to reprogram their computers before getting crushed by reality.
A lot of investors have gotten hurt by the Fed, which irresponsibly sucked investors into the market with its hype first, talk of rate cuts and an economy that is “in a good place,” then with last week’s rate cut.
This is all amateurish folly. While able to move markets with just a few words, the Fed simply is unable to understand market action and gross overvaluation of stocks.
They should acknowledge the seriousness of the weakness in our economy and global economies and let the market find a comfort level, but NEVER gloss it over and encourage investors to jump into a market that is overvalued. Shame !
The Fed did a great job in the 2007 – 2009 Great Recession/Bear Market, but failed to prepare for the recession that looms today by overstaying QE.
The horse has left the barn (the bear his/her den). If this is not the big downer, it is previews of coming attractions.
This is why I have continually urged a sizable crash reserve. The new normal now is the flash crash, a vertical plunge in stock prices that strikes without enough warning to do some selling.
So what does an investor do now ? A trader can act swiftly moving in on weakness to buy technically oversold stocks, then just as swiftly take profits on a rebound.
If this is the beginning of a 35% -45% crunch investors, indifferent to risk, are in for super angst.
Monday, August 5, “Technical Rally Possible at Any Time – Highly Risky”
I have been on record for warning that we are in the early stages of a recession and data over the weekend in InvesTech Research’s interim bulletin indicates just that with graphs highlighting the ISM Manufacturing Index (Purchase Managers ), the ISM New Orders Manufacturing Index and Chicago Business Barometer all on the threshold of crossing into no growth territory.
While Consumer Confidence (present and future) indices are at all-time highs, this extreme exuberance normal at business expansion peaks.
However, JP Morgan is bullish, urging clients to us the current weakness to add stocks to their portfolios.
Granted, the sharp sell-off at the open stands to attract traders, the risks are high – just too many visible and sub-surface negatives for a sustained rally in a market that is historically over valued.
If enough institutions agree, we will get a rally from these levels, but they are in the money management business and can’t afford to be bearish..
At much higher levels last Wednesday morningand before the Fed announcement of a rate cut, I headline “Traders – Sell the Rate Cut,” feeling the action was already priced in the market and the market was over due for a correction.
With the help of Trump’s Thursday warning to China of another 10% tariff on Chinese exports on September 1, the market tumbled and looks like it will follow through today before an attempt to rally today.
Nimble traders can exploit these wide swings in the market, but investors need a crash reserve.
Friday, August 2, 2019 “More Tariffs Bluster….or Blunder ?”
We are now in a correction phase of the Fed-induced rally from mid-June to mid-July. Whether that becomes more of a correction depends on just how spooked the Street gets from President Trump’s threat to not just raise tariffs on $300 billion of Chinese goods 10% on September 1, but may even up it to 25% or more.
That sounds like bluster, but the uncertainty that can be created over the remaining 29 days of August is capable of hammering a market that has been run up unnecessarily on hopes of a rate cut.
Obviously with individual, household, business and corporate and government debt at inflated levels higher rates would have been a disaster.
But who can afford to borrow at this point.
Well, possibly Corporations buying back their own stock, but stocks are still pricey, so how much sense does that make ?
We have been riding the crest of a rising wave of unrealistic expectations, also known as a bubble.
I have urged readers to establish a crash reserve in line with their tolerance for risk for over a year.
The pattern has been for the market to snap back after corrections, which some may interpret as a reason to ignore risk. Right ……..but at one’s potential demise.
Thursday August 1, 2019 “Fed Scared Stiff of Recession in an Election Year”
While the Fed finally cut its fed funds rate a quarter point to 2.00 – 2.25 percent, to better line US interest rates up with global rates, but more so because they see a recession looming..
But a quarter point wasn’t enough for President Trump who wanted a one-half point cut to ensure 2020 won’t be a recession year.
Early signs of a recession are already present, and while a worsening of the economy may be delayed a smidge, this economy is showing signs of tiring.
The market took a hit yesterday, partly because the rate cut wasn’t greater, but also because the Fed’s action was designed to head off a recession, which has not been discounted by the stock market averages.
As I have been saying, there have been bear markets without recessions, but not recessions without a bear market.
The market should rally briefly then sell off to test yesterday’s lows before attempting to regain the ground it lost yesterday.
Wednesday July 31 “Traders – Sell a Rate Cut”
The BIG day ! The Fed has been hinting at a rate cut since January when it suddenly reversed its policy of raising rates to one of ease – the reason – it wanted to head off a recession that threatened to strike in 2020, a presidential election year.
It’s hype was the main reason Q4’s 20% plunge in the S&P 500 was reversed and it surged 28% in seven months. That’s power – raw power.
The Street expects a rate cut at 2:00 p.m. today.
If it doesn’t happen, the market will take a hit, how much depends on what Fed Chair Jerome Powell says in his press conference at 2:30.
I expect him to have good things to say about the economy even if the Fed cuts its fed funds rate to head off a recession.
If they don’t cut its rate, he will allude to the possibility of a cut in September (no FOMC meeting in August).
One way or another, he will try to stabilize a market that has risen a lot in a short period of time.
IMHO, the Fed has acted irresponsibly over the last seven months. It panicked after Q4’s 20% plunge in the market, as well as in response to rising signs of a recession, Without really acknowledging the latter, it gave the Street reason to believe it would cut its rate and in essence cover its back in the event the market plunged again.
So, here we are at all-time highs, 28% above the December 26 lows and still facing the prospect of a recession, which the market hasn’t discounted.
While there have been bear markets without a recession there has never been a recession without a bear market.
My message to the Fed – let the market find a level that discounts current and possible events – don’t tamper with the level of stock prices. If the Fed can’t head off a recession this stock market has a long way down to go to discount a recession and the Fed is responsible for investors getting hurt.
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 120 months, the longest in history, twice as long as the average length of 11 cycles since 1945.
> Of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months. The unemployment rate is 3.6% which was hit in May. Technically, we won’t know when the start of the current recession is official for months after the fact, since that conclusion is reached by the Nat’l Bureau of Economic Research (NBER) and they consider host of economic indicators.
>Bear markets lead the beginning of recessions by 3 to 12 months. The current bull market at 123 months is 4 times the average of the last 15 bulls going back to 1957
>Nine out of the last 10 recessions have occurred with a Republican in the White House.
Investor’s first read.com
A Game-On Analysis, LLC publication
Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.