INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,257
January 3, 2020 8:10 a.m.
The market will try to shake off the killing of the Iranian General, but this market is more overvalued than at any time over the past 100 years except the dot-com bubble burst 1998 – 2000 which pounded the S&P 500 down 57% and Nasdaq 78%.
I have urged readers to raise cash countless times before this, and have been wrong…….. but not unwise, as time will tell after the market gets crushed by a 35% -48% drubbing.
Bull markets tend to feed on themselves as the Fed, Street, highly leveraged traders and incumbent administration want the party to continue.
Bull markets press on well beyond reasonable value in a state of vulnerability until some event triggers a return to reason, a bear market.
A year ago, the Fed headed off a recession with a complete about face in policy featuring three cuts in its fed funds rate. It bought time, but did investors a great injustice – it delayed the inevitable – a recession and bear market.
Its hype claimed the “economy was in a good place” which was a lie, if it was in a good place why did the Fed cut its benchmark interest rate three times in six months ?
On August 19, 2007, I sensed our economy and stock market were at risk of a severe correction and wrote the following:
“The perfect storm in our financial markets
is looming….It will take a heroic effort internationally
to avert a meltdown of huge magnitude…Trading in
everything may have to be stopped until some sort of
sanity is restored…This can get real ugly…No one has
a handle on the leverage amassed in derivatives ..No
one has a true handle on how precarious the situation out
there is, and that uncertainty feeds on itself prompting
increased selling…With few buyers, stocks tank…
Only when a cauldron of fear begins to boil do you have
a market that is reasonably safe to invest in.”
Two, months later, the worst recession/bear market since the 1930s began taking the S&P 500 down 54%.
On March 10, 2009, with the DJIA at 6,800, I went against panic in the Street and issued a Special Bulletin “BUY,” one day after the actual bear market bottom, a bear market that took 50% off the S&P 500.
Like today, I had alerted readers to an unprecedented buying opportunity for weeks before the bear market bottom. Bottoms are much easier to read than tops because the Street, Fed and party in power don’t want a top to develop.
I expect a January correction as the BIG money cashes out, investors put gains into 2020, when the public rushes in. Of course, news flow will have its say, and the Street will beat the drums for buyers to extend the bull run, but why over-stay a good thing. January initially benefits from institutional buying of funds flowing in from client accounts and the re-investment of proceeds from year-end sales.
Minor Support: DJIA:28,487; S&P 500:3,228; Nasdaq Comp.:8,976
Minor Resistance: DJIA:28,627; S&P 500:3,238; Nasdaq Comp.:9,023
Thursday January 2, 2020 “Bull Bubble Burst This Week”
Yes, the bubble inflates further, casting doubts on all warnings of overvaluation and sucking every prospective investor in with all the money they have left save those who borrow to buy even more stock.
Not much I can say except this is classic behavior of investors at market tops.
FYI: They are equally feverish at market bottoms except they are then selling convinced the market is going lower.
This scenario has been written about hundreds of times over the years in how to invest successfully books, but greed and fear are a staple in human emotions and in all fairness no one can be blamed for being greedy when stocks are rising relentlessly, or being mortified by stocks that plummet every day.
Memories of the carnage of the 1999/2000 bear market and the 2007/2009 bear market are distant, in fact, I doubt many on the Street today were even employed in the business for the 1999-2000 bubble burst.
Futures trading indicate a big jump at the open, and that should convince just about everyone that 2020 will be a banner year.
That’s unfortunate…very unfortunate.
Tuesday December31, 2019 “2020 To Be Extremely Volatile”
I have been watching year-end activity and still expect an early January correction, which could become a bear market depending what hits it when it is about to rebound.
Fed hype and rate cuts, hype about trade pacts, and corporate buy-backs have kept the bull market intact in spite of slower earnings growth and a recession in manufacturing.
Yesterday’s selling (lack of buying) could be the beginning of what I expected for the first week of January, but volatility is what happens in the stock market in December.
No one wants the party to end. The Fed will have a difficult time stopping a correction this time around like it did in Q4, 2018 when the S&P 500 plunged 20%.
It’s abrupt policy change to that of three successive rate cuts in the fed funds rate not only headed off a bear market, it extended the economic expansion.
All things considered, the market has outrun the looming negatives, political and economic uncertainty, and investors who are ignoring reality that parties like this eventually do END.
Only contrarians can reject the urge to go all-in.
Like I have said many times the Street never thinks bull markets can ever end at market tops and never thinks bear markets will ever end at market bottoms.
As I wrote above, this last leg up Dec. 2118 to Dec 2019 is all about Fed hype and rate cuts trade talk resolution, and corporate buy-backs. What can any one or all of these do with stock prices at all-time highs ?
At some point, buyers will vanish and sellers take over, the result another flash crash.
Friday December 27 “ Party Over – Last Call Jan 3
Classic year-end rally. Expect sellers to show up to put gains into the 2020
tax year. IMHO, early January will mark the end of the 10-year bull market as political uncertainties surface along with renewed worries about a recession.
In a real world, these risks are worth considering. Maybe the Street thinks it can ride out a recession/bear market, but fear mounts as stocks slide and investors begin to panic. A 50% decline takes a double to recover, not to mention years.
To its credit, the abrupt change in Fed policy last January averted a recession, but temporarily.
I am one of the few who believes Donald Trump will not run for the presidency next year, will resign for health reasons or otherwise.
I am most bullish when no one is bullish. Today, everyone is bullish – look at all the buying and at record highs !!!
While the S&P 500 appreciated 32% more under President Obama’s first 35 months in office, Wall Street has strongly endorsed Donald Trump’s election, and stands to be disappointed if he is not re-elected or doesn’t finish his first term.
I think the party is over.
Monday December 23 “ Bull Market Top January 3 ?”
No one believes that, but………….
Most portfolios have been tweaked for tax purposes and to purge losers going into what is expected to be another good year.
This seems just a little too pat for me with some key indicators challenging all-time high levels.
The Shiller S&P 500 price/earnings ratio of 30.9 has only been topped by the 1999 dot-com bull market top of 44. While that leaves the current S&P room to rum, any duplication of that outlandish speculative binge of enormously overvalued dot-com stocks is more than a stretch.
Rising uncertainties as the November presidential elections approach are likely to put a lid on investor enthusiasm setting up a strong possibility of a major sell-off in 2020, and I think that can start in early January starting as early as the 3rd or 6th.
To its credit, the Fed prevented a recession from starting last year with its abrupt change in policy and three cuts in its fed funds rate. Time will tell, whether a recession was avoided or just delayed.
Is it worth the risk of buying now after such a run and with so many uncertainties looming ? I don’t think so. The downside risk far outweighs the upside potential.
Friday December 20 “SELL ? You Kidding ? Life’s Good ! No One In Their Right The party is over, don’t stay for another drink …you’ll regret it tomorrow. ..People laughing at unfunny jokes, booze beginning to talk, life’s good… didn’t someone tell that story before. . …This is beginning to sound like a Christmas letter. Fruit cake ? – No thanks… I’ll take some Red Bull if you have it. Who bought me another drink ? Easy does it, I have to work tomorrow.
SELL ? Me sell ? You kidding ? Made a ton of money this year, next year will be better…. thinking of going on margin, a guy at the office told me that’s a great way to leverage my winnings.
Hey, a drink for Smitty over there, starting to get my second wind.
Talk to who ? No way, he’s bearish….yeah I know he isn’t always bearish, even called the bottom in 2009, but why sell ? Interest rates are down, housing is strong, analysts are bullish on 2020….can’t wait for their best buys for the new year. Nope, I’m in for the long haul , this is a new era, no way this market goes down.
Thursday December 19 “ Street’s Algos Clueless – Not Programmed For This !”
The President has been impeached, Wall Street has no reaction – what gives ?
The computer algos haven’t been programmed for impeachment, simple as that. What else have the algos not been programmed for ?
How about the increasing possibility the Democrats gain control of the presidency, the Senate and the House next year, as well as a chunk of the 11 governorships up for grabs ?
As one of the few, I have contended in Folly Sci 20/20 that Trump will not run in November.
Does anyone think the algos are programmed for that ?
At the end of the day, week, month, CONFIDENCE is the real driver of stock prices, UNCERTAINTY the enemy.
What is happening before our eyes is confidence is beginning to vanish and uncertainty beginning to surface.
The algos and their ditto-heads are not ready for this, eventually leading to a sudden awareness that stock prices are based partly on earnings but mostly on confidence in the future.
The Street will get blindsided, waffled, crushed, hammered, clotheslined, woomfled by this wake-up call and the bear will hit so fast no one can react, i.e. straight down 12%-18% followed by a fake-out rally then another downleg.
Those who got out and those who have a sizable cash reserve will not only preserve capital but will have a great opportunity to buy close to the bottom, one of the all-time GREATEST opportunities to buy.
Those who don’t, will have to wait for years to recoup losses. Investors who are old or need to raise money for college and other big expenses will suffer.
Wednesday December 18 “CONFIDENCE in The Future Due To Take A HIT”
The Street remains unconcerned with impeachment proceedings. While a rebuke of the President may impair the Republican agenda from going forward in the future, it has gotten all it wants in the interim – a massive corporate tax cut and Fed-friendly decisions on interest rates.
Three cuts in the Fed’s benchmark fed funds interest rate have averted a recession for now, though manufacturing remains in a recession of its own.
As noted numerous times, the stock market is historically overvalued. The question has always been, how overvalued can it get before a correction sets in ? There is room to run if the dot-com bubble market (1999 – 2000 ) is to be rivaled, but that was a different bull market, driven by wild speculation in dot-com stocks.
We don’t have that here. While speculative fever can drive stocks higher in coming months, it is unlikely mostly because the political climate doesn’t fuel CONFIDENCE.
Uncertainty is on the increase as the November elections draw closer.
For this reason, I am warning readers of the strong possibility of a major correction starting in early January especially if the market closes 2019 on a string note. Whether that turns into a bear market depends on news flow.
Decisions to buy and occasionally sell on the Street are mostly based on computer algorithms. Obviously, they are tilted to the buy side. Should they be tweaked to reflect uncertainty or a recession, all algos will signal sell at about the same time and we would get a 12% – 18% straight down plunge.
Tuesday December 17 “Major Correction Starting First QWeek January Could Become Bear Market”
Just how much of the news of the USMC trade deal and phase one of the U.S./China trade deal is priced into a historically overvalued stock market will be known within a month (IMHO).
The Fed has no more goose juice to prop and propel stocks upward, so where do the bulls get help ? Corporate earnings going forward are questionable, whether the economy eventually slips into a recession is anyone’s guess since we Are halfway there now.
I thought this party was over two years ago before the Fed reversed policy and initiated three cuts in their benchmark fed funds rate all the while claiming the economy was in a good place.
It wasn’t, that’s why the Fed changed policy. To its credit, the economy didn’t tank. Thanks to lower interest rates, the home building binge continued and consumer sentiments rebounded enough to head off a recession – for now.
Enough for that.
Readers here care more about insight on where the market goes from here.
I honestly don’t know what 2020 brings – too many unknowns.
The Shiller price/earnings ratio of the S&P 500 is more overvalued than the bull market top in 2007 prior to the Great Recession. However, at 30.6 it is not as overvalued as in late 1999 when it hit 43.8 powered by dot-com stocks, prior to a 50.5% drop in the S&P 500 (78% drop Nasdaq).
I continue to expect the beginning of a major correction in the first week of January. Whether that turns into a bear market depends on what hits it when the market is down 15% to 18% in that correction which will be straight down.
Monday Dec 16 Please – Watch Your Back ! Risk Rising !
The market will celebrate the prospect of trade deals (USMC , China phase One). Can we believe it ? U.S. trade representative, Robert Lighthizer insists it is a done deal.
While some industry analysts doubt it, the Street is a believer. China will buy $40 billion of U.S. farm products over 2 years and not require U.S. companies to reveal patent secrets in exchange for access to Chinese markets, U.S. concessions to be announced.
We have been here before. The timing is questionable in light of fact the U.S. House votes on impeachment this week.
The market will get more overvalued each day it rises in response to comments by the Fed or Administration regarding the economy or trade.
But the Street wants the party to continue just like it did before the bubble burst in 2000. The problem will be, no one will believe it is last call until after the fact when it is too late to avoid serious portfolio damage.
Bull market tops and bear market bottoms always trace out similar emotional patterns. Amazing.
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.
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.