“Assumptions” – Where Wall Street Analysts Get it Wrong

INVESTOR’S first read.com – Daily edge before the open
DJIA: 25,400
S&P 500: 3.029
Nasdaq: 9,368
Russell: 1,400
Friday,  May 29, 2020    8:35 a.m.

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.
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.
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.
Brief bio: In investment business 57 years, writing about stock market  for 52 years, including  investment publishers, brokers, research firms, investment bankers, plus my own investment advisories,  mostly as independent contractor to maintain independence of analysis.  “In the trenches” for every bear/bull market  since 1962. Started before  quote machines  as a tape reader/trader, posting charts by hand. Primarily  a technical analyst, but research includes fundamental, monetary, economic, psychological factors. Research recommendations/profiles of hundreds small companies.
Love rough and tumble… telling the story. CNBC-TV, Been writing investors first read.com daily before the open for 11 years. ……………………………………………………………………………………………………………………………………………..
It is imperative that investors assess the level of risk they can  tolerate and be sure their level of cash addresses it now, so they are ready for the next leg down whether it comes tomorrow or months from now.
Can’t blow holes in a detailed report, a point of view, an argument ?
Check its “assumptions.”
     Many of the bullish  stock market analyses I have read are impressive for detail, graphs, charts,  proprietary formulas,  and convenient comparisons to past events.
Here’s where I think they get it wrong.
Assumption #1That Covid-19 is not a metric that poses a major threat going forward. The Street was aware of its potential to adversely impact the economy and stock market back in February but gave it little weighting then, less so now.
What do they know that the smartest biopharmaceutical executives don’t know ?  How can this pandemic be so cavalierly dismissed  so early in the crisis.  Even if its severity declines, the uncertainty and damage it has done will topple dominos for many months to come.  It is primarily transmitted person-to-person, but it didn’t vanish, so what happens when people  get up close and personal again ?
Assumption #2 – That the economy can recover in Q3 and Q4.
Yes, reports will show improvement but primarily because they are being compared with disastrously low numbers in the past, however so much damage has been done in such a short time, the fallout stands to be intense and endless.  Q1 GDP is down 5% at an annual rate. Q2 is projected to drop 40%.  Does the Street think that won’t have an impact going forward, that it won’t topple a zillion dominos ?  Walk around the block guys with eyes open !
Assumption #3 That the Fed will have everyone’s back if the crisis continues or new ones erupt.
The Fed has already printed reams of USD’s on top of a top-heavy balance sheet which now stands at $& trillion, up from $1 trillion in 2002.  Why would they do this if they weren’t petrified at what the see ahead.  Why would any analyst treat this casually.
Assumption #4 – The Street entered 2020 totally oblivious to the fact the S&P 500 was more overvalued than at any time ever, except the dot-com/Internet bubble that burst and sent the 500 down 57% and Nasdaq Comp. down 78% in 2000 – 2002.
The S&P 500’s P/E is even more overvalued now with stocks rising and earnings cascading, YET, the Street dismisses this as an expansion of P/E’s, not to fret a bit, this is an aberration, a glitch in the big picture to be treated with an asterisk  looking back five years from now.  This is a time-tested yardstick not to be used in one instance but ignored in another
Bottom line:  This is what happens after an 11-year economic expansion and bull market. The Street does not want the party to end – spoiled by Fed nurturing for 11 years.
The “Three Amigos” I referred to on Wednesday (The Fed, Administration, and Street) will pump this market up  as much as possible, before the election, inflating a bubble that will once again be pricked and once again roil investor’s portfolios.
I expect a test of the March 23 lows.  Depending on news flow and whether money managers panic, those lows could be broken. This IS NOT business as usual, not like anything we have seen since the 1930s.  Too much ongoing damage has been done to the core of our economy.
No one knows where this can lead. Investors are best served by being told the jury bis out, to maintain a cash reserve they may desperately need if it goes worse than “badly.”
Once again the three amigos are inflating a bubble. It will burst with the predictable result – flash crash #2, or if we are lucky a more gradual slide to new lows.

Thursday May 28, 2020 (DJIA25,548) “Bubble #2 Driven by Fear of Missing Out and  “Hype”
The acronym for that is FOMO.  I opt for the “I can’t stand it anymore” response to extremes in the market that generate greed or fear forcing an investor to act in haste.
Investors who raised cash before the February/March crunch, as well as those who sold out at lower prices are panicking about the persistence of the market’s rebound, and understandably so.
Fear of missing out (FOMO)
is driving stock prices upward with a lot of hype from the Three Amigos, the Fed, the Administration and the Street.
I expected a test of the March 23 lows by now, even a break below if money managers panic.
I still expect another leg down, however we are now dealing with Bubble #2 and that will either have to run to an extreme or be pricked by a news event.
That can happen at any time and could result from spikes in COVID-19, worse than expected economic/corporate news, or the realization by the Street that the Republicans will lose control of the presidency, Congress and some governors up for re-election.
      Bubble #1 was pricked by the COVID-19 pandemic in February,  resulting in a flash crash, taking the DJIA down 38%, truly an unprecedented event.
But COVID-19 is still here. If it spikes after the nation’s “coming out” it will be devastating and  flash crash #2 will result. This time the institutions will panic.
More than likely, a second leg down will be more gradual and related to the realization we are not returning to where we were earlier in the year.
I think the Street has it wrong on this one.
They had it wrong in February.
Fully aware of the threat of COVID-19, the Street was projecting yet another banner year for the stock market in 2020 even though it was historically enormously overvalued.
But Corporate earnings are plunging  now with no guarantee of a “V” recovery other than a Q3 bounce.
Lifestyles, personal wealth and confidence have been seriously impaired, yet the STOCK MARKET IS EVEN MORE OVERVALUED TODAY THAN IN FEBRUARY AND GETTING MORE SO WITH EVERY TICK UP.
The Street dismisses that as an aberration, an “expansion in the price/earnings ratio.”
That’s a dangerous assumption !
Wednesday   May 27, 2020 (DJIA:24,995“Three Amigos Inflating Bubble #2”
I believe the lambs are being led to the slaughterhouse on this one.  It has the makings of “Bubble #2.”  In addition to record short covering, this recovery has been driven repeatedly by hype from the “three amigos” – the Fed, the Administration, and the Street, for example:
 The Fed: St. Louis Fed president, James  Bullard said yesterday he sees jobless rate returning below 10% by year-end.
The Administration:  Trump’s adviser Larry Kudlow says the administration is looking very carefully at a “return-to-work” bonus.
The Street:  JPMorgan’s CEO, James Dimon announced he sees a good chance for  a rapid recovery of the U.S. economy this year.
Others piled on:
Allianz economic adviser El-Erian  said he  is Risk-On ! noting
 Stocks are surging on good news across the board.
Axios Am reported today the Mitch McConnell  sees the possibility of a fifth coronavirus relief bill. Would all this be necessary if we were not in the deep stuff ?
      Add to that, headlines on MarketWatch, “Airline stocks take off as COVID-19  restrictions ease, more travelers fly.” This is the industry that Warren Buffet dumped recently.
The S&P 500’s index crossed above its 200-day moving average, which is a bullish signal  for technicians. The Nasdaq Comp crossed it months ago, but the DJIA is lagging.
Bubble #2:
This has the makings of another bubble just like the bubble I warned readers of before Februarys flash crash. When it gets pricked, the result will be the same – another flash crash (straight down).
      How far can it run before the burst depends on news flowMore hype from the three amigos pushes stocks higher. Reports of company problems, bad earnings,  horrendous economic projections, spikes in C-19 can prick the bubble.
Once again, it is about what value the Street wants to put on stocks in face of how much damage has been done to individuals, companies, communities, local, state and federal governments and to the perception of the future.
       If the stock market was extremely overvalued by time-tested yardsticks in February “before” taking the C-19 hit, it is many times more overvalued now.
orporate earnings are taking a beating and will not return to pre-COVID levels any time soon, because irreparable damage has been done to the internal workings of our economy in spite of how much money the Fed and federal government throws at it.
Bottom line: The DJIA is still down 15.5% from the February all-time highs, the  S&P 500 down 11.8%, New York Composite index of 2,000  stocks off 18.2%, Dow Transports off 21.6%, Russell 2000 18.8%, Value Line Composite 23.4%.   It’s still a bear market, except for the Nasdaq Comp., which is dominated by a handful of mega growth stocks and is only down 5.1%.
As stocks rise, they will encounter more and more sellers from investors who saw the market  plunge in February/March and traders who bought in at lower prices. That is what is called resistance or overhead supply.
Tuesday May 26, 2020 (DJIA: 24,465)  “Overvalued Becoming Grossly Overvalued”
Unless COVID-19 has vanished, unless the majority of individuals worldwide have been immunized from its venom, all this sudden coming out without masks and getting up close and personal will have disastrous results.
While continuing  stay-at-home will severely impact the economy and stock market, a huge spike in  infections will devastate it.
Clearly none of this is of concern to the Street.  It’s party time all over again, the Fed has our backs, and it’s beginning to look like our policy is on the fast track to Modern Monetary Theory (MMT), with all problems solved via the printing of money.
This is the coming out bump which will break the DJIA and S&P 500 out of its two-month consolidation pattern and set the stage for an attack on the next resistance level, DJIA: 27,104 and S&P 500: 3,136.
The Nasdaq Comp. is driven by the heavy weighting of a  handful of growth stocks, primary beneficiaries of the COVID-19 shutdown (Facebook (FB), Amazon (AMZN), Netflix (NFLX), Google (GOOG), Apple (AAPL), Microsoft (MSFT), and could punch to new all-time highs.
This is one of those moments in the bear cycle that can destroy a portfolio if an investor chases rising stocks.  Much of the two-month surge in stocks has been short covering, a panicky buying to close out positions that are posting bigger and bigger losses as the market rises.
Will the stock market return to February’s  all-time high levels ?
The Nasdaq Comp. may, but that index is heavily impacted by the few big growth stocks mentioned above.
With a recession well underway the length of which is uncertain, it is hard to justify current levels, less so new highs.
I still expect a test of the March lows, and a plunge into October. The timing is uncertain, but will probably start with  a spike in the market averages with a dramatic one-day reversal with the market closing at the lows for the day after a big surge in prices. That could happen today, tomorrow, a week from now. The key is to be prepared in advance with plenty of cash reserve.


Friday May 22, 2020 (DJIA: 24,474) “Two Major Growth Engines Stalling”
We had a spike yesterday followed by a slight sell off. In Thursday’s post, I was referring to something more dramatic, which can still happen.
Often there is one final thrust before a big sell off. I expect that here as the Street weighs the nation’s response to the coming out and going back  to business as usual.
CNN Business Before the Bell headlined today that, “The world’s  growth engine has stalled,” referring to the fact that for the first time in 20 years, China will not project a growth target this year and India  announced its economy won’t grow at all.
     Weighing on global markets is the announcement that China plans to impose a national security law on Hong Kong, a major setback on the city’s autonomy since its handover to China in 1997. The move was condemned by the US State Department which promised a response.
Fed, Administration and Street pre-election hype  will cloud the real picture for a recovery in coming months..
The 34% rebound from the March 23 lows is extreme and based on hopes for a fast recovery from the impact of the world’s response to COVID-19.
The S&P 500 has recouped two-thirds of its February/March, 21-day plunge.
That’s extreme in light of  the damage this crisis has done to consumer and business confidence.
Will everything return to  how it was after the 11-year old economic expansion and bull market that ended in February ?
No !
I expect a test of the March 23 lows ( DJIA:18,136, S&P 500: 2,192, Nasdaq Comp.: 6,031) and odds are it will fail, leading to much lower levels.
How low depends on the degree to which the Street panics.


Thursday  May 21, 2020 (DJIA: 24,575)  “One More Breakout SPIKE Up”
Looks like the “Buy-only” algorithms are back, maybe they were never re-programmed for risk after the 21 day, 35% + drubbing the stock market took in February/March.
I am not sure anyone would know how to re-program these buy-biased algos, we are in unchartered waters.
This is important since risk rises with stock prices, but so does the “I can’t stand it anymore” urge to jump in with both feet (all your cash reserve) fearing one will miss out.
Investors without extensive research  sources are at greater risk, but money managers have more to lose if they buy in size, and are wrong.
At extremes, this becomes a game of emotions – greed at tops and fear at bottoms. As a human, going against those emotions is next to impossible.
Bottom line:
The market will decline at the open, but the bull bias  suggests one more spike up  before a second leg down gets under way.
That could happen at any time, so investors must prepare NOW.
The DJIA is still down 16.9% from its February 12  all-time high, the S&P 500 down 12.4% and the Nasdaq Comp., highly weighted by the FANG stocks, is only off 4.7%.
There is absolutely no fundamental justification for the current level of stock prices, and even less for a higher level.
       This is a presidential election year and the powers that be, want  the President to be re-elected and the Senate to stay in Republican control, so the Fed, Administration and Street will do whatever possible to see to it that happens.
If this was anything but a presidential election year, the DJIA would be thousands of points lower.
Everyone would like to see higher prices, the Democrats included, except they want to win it all.
        Hoping and wishing don’t cut it.  Realistically, the direction of the economy and stock market defy quantification. We simply don’t know how bad the damage is.  We do know, we are worse off now and in the coming months (years) than we were in February before the bear market began.

Wednesday May 20, 2020  “Market More Overvalued Now Than in February”
(DJIA: 24,206) Yesterday, Boston Fed president said, “If consumers are afraid to eat out, shop or travel, a relaxation in laws requiring business closures may do little to bring back customers and thus jobs.”  
That’s my point, as well.   The economic landscape has changed for years. Wall Street doesn’t get it.  In order to discount the adversity and uncertainty we face, face, the market must go lower. It is still overvalued based on pre-COVID-19 conditions, more so now.
This doesn’t have to be complicated, it’s common sense. The Street doesn’t want the party to end, they were making too much money.
Along with the Fed and of course the Administration, they desperately want the President and Senate to retain control of the country.
       But no matter what party an investor is affiliated with, the risk of another chilling plunge lies out there, and a healthy cash reserve is imperative.
If  a new bull market of consequence is underway, there will be plenty of opportunities to make money.
The biggest contributor to poorly timed investments is the fear of missing out on an opportunity (FOMO).
Bottom line:
The Street is back in its cruise control buy mode, i.e. buy at the market, buy on dips.  It is  looking beyond the COVID abyss to a return to life and business as usual.  Can’t happen ! Too much damage has been done to confidence.
There is no good reason to chase stocks here. That does not mean the market can’t still go up from here in face of  economic news that improves from severely depressed levels and Fed, Administration and Street hype.
      Fed and government aid merely masks the underlying weakness of the economy.
Another leg down to test the March lows looms. I think it can start at any time, why risk it ?

Tuesday  May 19, 2020 “Bubble # 2” (DJIA: 24,597) Wall Street is doing what it has always done when the market declined over the last 11 years – buy with the confidence the Fed is going to have their backs.
     The Fed is doing what it has always done ensure they are right.
So it was in 2019 when the Fed’s nurturing inflated the biggest bubble in blue chip stocks ever  with comments like, the “risks have subsided,” the economic outlook is  “rosy,” the  “economy is in a good place.” Add promises of interest rate cuts then delivering three later in the year with the market posting new highs on a daily basis, and you have what a bubble needs.
We can be grateful the Fed is there to prevent a depression, flooding the markets with money, as Fed Chief Jerome Powell told 60 Minutes Sunday, but what was not addressed was the fact an extremely overvalued stock market was moving up when every aspect of the economy was moving down.
      Of course the question “why” was not asked by 60 Minutes,  and Powell didn’t raise it, but he did exactly what he did throughout  2019 when he nurtured the bubble, he made sure the Street knew the Fed had its back, so they bought.
While Powell acknowledged the economic recovery may not kick in until 2021, that a lot depends on a vaccine, and that there will be bankruptcies, he was quick to  assure the Street that:
– “You  wouldn’t want to bet against the American economy,”…
“The Fed has policies that can go a long way toward minimizing” economic adversities.
“It’s a reasonable assumption the economy will begin to recover in the second half of the year,”
“There’s a lot more we can do…we’re not out of ammunition by a long shot,”
“No, there’s really no limit to what we can do with these lending programs”
“We’ll get back to the place we were in February, we’ll get even get to a better place than that, I’m highly confident of that, and it won’t take that long to get there.”                      

Granted a big part of yesterday’s gap open was hurried short covering, but what we have here is of Bubble #2,  and then Flash Crash #2.
We have a “V” shaped recovery in the stock market but the prospects for an “L” shaped recovery in the economy after the initial “coming out” bump as some people return to business and life as usual.
The Fed headed off a  recession in early 2019 after a 20% drop in the stock market and a weakening economy. All they did was delay it, possibly because 2020 was a presidential election year.  After 11 years (132 months) of economic expansion, we were due for a recession, the average expansion since 1945 lasting 58.4 months.
       But this won’t be a normal recession – too many people  hurt worldwide, hurt too deeply, too many dominos tumbling.
Bottom line:   OK, so what’s my point ?
I think we are headed for another leg down, one that discounts economic and personal devastation unprecedented since the Great Depression. Some money managers will see this risk in advance and sell, others will wait until the plunge in stock prices gains momentum then sell.
This has the potential for Flash Crash #2 and it won’t end until the major market averages are down 55% – 60%.
Reportedly, 100 biopharmaceutical firms are scrambling to find a vaccine and  with out doubt several will find one.
At these levels, the stock market does not come close to discounting adversity> The Street is jumping the gun.
Monday May 18, 2020 (23,517) “Powell Back in the Bubble Business ?” My headline Friday was “Yesterday’s Rally Must Hold…..or Straight Down.”   It held, managing to post a gain after a sharp sell-off in the morning.
Today brings a big jump at the open following Fed Chief Powell’s comments on 60 minutes Sunday. While he acknowledged unemployment could reach 25%, and a recovery may stretch out into 2020, he said there is no limit to what the Fed can do to lend money to the financial markets, adding it wouldn’t be a good idea to bet against the American economy.
All that the Fed can do to head off a depression is obviously of utmost importance, but I think Powell is remiss in not addressing the overvaluation of stock prices, just as he was throughout the inflating of 2019’s stock market bubble, a bubble I believed he owned lock stock and barrel.
As I have said repeatedly, this is a presidential election year, expect the Fed, Administration and Wall Street to hype the stock market going into the November elections.
The risk here is, investors will take the bait and go all-in in time for another leg down.
        It takes only a smidgeon of common sense that 39 million workers applying for jobless benefits and a 30% – 40% hit to the nation’s GDP in Q2 will have lasting negative impact.
Every American will feel pain going forward even if COVID-19 doesn’t re-appear in the fall. Every corporate function will be adversely impacted by what has happened even without regard for the  impact of dominos tumbling in the future.
Does this justify a vastly overvalued stock market ?  That’s what we had in February, that’s what we have now, except the stock market is so much more overvalued now.
The Street is in denial…..none of this happened….there is no reason for the 11-year old bull market to end…..this was a mere aberration to the norm to be treated with an asterisk when publishing future historical data.
All of what is happening is cutting deep, it’s causing consumers to pull back on spending, it’s causing corporations to change spending priorities and revamp supply chains, or try to based on uncertainty.
The S&P 500 is down 15.6% from its February all-time high when it reached a level of overvaluation seen only once ever excepting the 2000 dot-com/Internet bubble.  That does not begin to discount what we are seeing now.  INSANITY !
Bottom Line:  “Sell in May and go away” may have to wait for a month or two.
Numbers on the economy will become easier to beat several months out since comparisons will be going up against the current low data.  Even so, the damage done to lives and the economy is nowhere near reflected in the current level of stock prices.
      Instead of an erosion in stock prices going into the fall, it looks like it will take another flash crash to discount what lies ahead and that is even with improving prospects of an announcement of a number of  vaccines  in development.
George Brooks
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.











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