INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,096
Friday November 15, 2019 9:15 a.m.
Why a bear market ? A couple things come to mind.
Lies, lies, lies at the highest level, a clueless indifferent public, press bias, debt, debt, debt, arrogance, greed, denial, earnings, inequality imbalance, overvaluation assets (stocks, real estate) ………. Too few people expect it.
What will the bear look like ?
Straight down. Traders, hedge funds and fast money will hit the exits first and overwhelm cruise-control buyers. The public will follow and the institutions will hold out until fear and pressure by clients screaming “raise cash.”
FYI that happens near the bottom when everyone wants out and few (myself) are urging readers to work back in.
After an initial plunge of 12% – 18%, numerous attempts to rally will fail as new negatives and negative pundit commentary pound the market lower.
WHAT MUST BE UNDERSTOOD HERE IS: there are no new eras, no markets that go uncorrected. Excesses get punished beyond reason just like bull markets run to excess beyond reason.
EXTREMES: If one has the smarts and psychological discipline the exploitation of extremes is how BIG money is made.
Unfortunately, this is so much about human behavior the buy low/sell high adage is almost impossible to achieve.
This economy is phony, the market is phony and our governance is phony. That spells TROUBLE.
WHEN ? January !
WHY ? More in coming days.
The Street will have to deal with the impeachment proceedings again today. So far the Street could care less about what is happening at the highest level in our country. That’s sheer arrogance. Of course it matters. The Street punishes corporations for management dysfunction, why not for running the country ?
Minor Support: DJIA:; S&P 500:; Nasdaq Comp.:
Minor Resistance: DJIA:; S&P 500:; Nasdaq Comp.:
Thursday Nov. 14 “Bull Market Top Forming
The DJIA is not the market average (index) the pros use. It’s 30 blue company stocks combined in a price-weighted average that gives more weight to higher priced stocks. The Street prefers the S&P 500, weighted by market cap (shares X price).
But when the press and investors in general refer to the market being up or down a number of points, it is referring to the 30 Dow Jones industrial average (DJIA).
While yesterday’s gain of 92 points for the DJIA looked like another good day, the average would have been down 8 points if Disney (DIS) was not up 10.18 points.
Three days ago it was Boeing (BA) that distorted the DJIA with a one-day 24-point jump. Without it the DJIA would have been down 154 points.
This kind of misinformation lulls investors into a false sense of security, i.e. there is no need to raise cash, the market was up today.
Currently the technical indicators support positive market action, though stretched and vulnerable.
President Trump won’t be removed from office, a Republican Senate would not do that. He may resign, though. But the Republican brand will be damaged and their control of the presidency and the Senate put in jeopardy by the impeachment process/conclusion.
The market is up 45% since the Republicans gained control of the presidency and for two years both houses in 2016. Loss of control would adversely impact the market from these lofty levels at least over the intermediate term.
At some point, the Street will begin to worry about this. If too many of the big hitters see it all at once, we’ll get a flash crash, DJIA down 12% – 18%.
Wednesday November 13 “Where a Correction Becomes a Bear Market”
The Street is in denial – too much of a good thing – a Fed-mis-managed, over-extended economic recovery and bull market has erased memories of what can happen when buyers vanish and the bottom falls out of the market.
This 10-year old bull market has had numerous corrections, but the market has always bounced back as corporate buybacks and Fed intervention triggered rebounds.
But, here’s where a correction becomes a bear market.
A correction starts from an overbought condition, or as the result of bad news.
The correction takes the market down to a level the Street thinks represents a good point to buy. Traders investors, institutions and corporations step in expecting a rebound to new highs.
BUT new negatives hit the market and pound it below the level everyone thought represented a buying opportunity.
This process repeats again and again as new negatives prevent a rebound, worse yet drives it lower.
Optimism fades, fear creeps in. Attempts to rebound encounter sellers, investors fearing the worst is yet to come, and for the first time since the market topped out, they are right.
I don’t know when all this will happen. I thought it should have started many months ago.
The Fed, Street and Administration hype will continue to inflate the bubble.
When it starts it will be straight down 12% to 18%. Valuations mean little until they suddenly do, as the Street senses the Fed is powerless to prop the economy and stock market up.
The GOOD NEWS is: The carnage will end but not until all those deluded, cocky, clueless bulls are too petrified to buy.
Total damage: It depends on the “new negatives,” but anywhere from 38% to 58%.
The bear bottom will not be a “V” shaped turn, but most likely will feature numerous wide swings up and down before an up turn gains traction.
Wednesday November 13 “ Flash Crash – the New Normal – Careful”
This is what a stock market run by algorithms looks like – booooring !
Well maybe not for inactive investors who simply want predictability.
Algos for investment decisions have been designed to take human emotion out of the equation and to reduce the mental workload of investment professionals who don’t like the angst of boiling all key elements of market analysis down every day.
Clearly algos take a lot of volatility out of market swings, but at the end of the day, they must be programmed to anticipate all of the unknowns that could adversely impact stocks.
I have often written that the biggest challenge to investors and especially professionals in that there are always “several
balls up in the air,” anyone of which can come down suddenly to change the direction of the stock market.
If algos aren’t programmed to cope, the investment portfolios will get clobbered.
It appears the new normal for market corrections is the flash crash, a precipitous plunge in stock prices (8% – 18%) without warning as investors (pros) abandon the conclusions of their algo and stampede out the exit door.
We last saw a flash crash in Q4 of 2018 with the S&P 500 plunging 20% in 3 months. It took the market 4 months to recoup that loss.
OK, so what’s my point
Be damn sure you have a cash reserve in line with your tolerance for risk, so you are ready for the next flash crash.
Monday November 11 “Impeachment Proceedings Could Crunch Stocks:
This will be a light week for reports on the economy. The main focus will be on U.S. House impeachment hearings, which will go public this week.
That could put a lid on stock prices as uncertainty builds, but the debate will be along party lines with conviction of President Trump by the Republican Senate doubtful.
Nevertheless, the process will adversely impact confidence and concern for the Republicans that they may lose control of the presidency and both houses of Congress next year if this plays out poorly.
Risk of downside is heightened by the fact the market averages are trading near all-time highs.
So far, the Street has ignored the impeachment process – not a good idea. Perhaps that’s the kind of bulletproof mentality that accompanies an economic expansion/bull market after 10years.
I don’t believe in “new eras.” Bear markets have a way of showing up when least expected. Careful.
Friday November 9 “At an Intersection Waiting for the Light to Change”
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The Street is in a quandary, the market is seriously overvalued on a historical basis, unless corporate earnings find a way to rebound. That is generally expected to happen next year but that is where a problem exists. If earnings DON’T rebound, the Street will have to revise them downward, which with an overvalued market spells bear market.
I believe they will be revised downward, as a recession looms in spite of the Fed’s efforts to prop the economy until the 2020 elections are over.
Is the Fed politically biased ? It looks like it, but for whom ? Yes, delaying would help Trump – if he runs.( I don’t think so, I sense Nikki Haley will be their candidate). If the Fed feels the need for a change, they may want to make sure the recession/bear market is in full swing by mid 2020. They have the power. It would be nice if they understood the need for stock prices to find a level that discounts reality rather than trying to micro-manage levels, which the tend to screw up on a regular basis. Bankers !
Don’t take impeachment proceedings lights whatever your political preferences. This process could expose a whole lot more than expected. Loss of the Presidency, Senate, House and more changes stock market dynamics, bad initially, good long-term.
Thursday November 7 “Trade Breakthrough ? Careful !
The market will get a boost today from news that China says a deal would result in the United States rolling back tariffs. At this time, it looks like progress would be pursued step by step as points are negotiated.
But one reason stocks are hitting new highs is just that – perceived progress.
We already know everything appears to be pushed into December as the two countries haggle over a location to have talks.
Even so, stocks need some tangible news on trade before doubts set in “again.”
This is so classic with dominating issues between countries – On again, off, again, on again……
The announcement takes the heat off both leaders and gives them a better chance at negotiating small concession rather than one big all encompassing solution.
Obviously, a disappointment in U.S./China trade talks would whack stocks at this pricey level
But the real sleeper would be any significant downgrade in 2020 earnings. That is not expected at this time based on what I see on FactSet and searches on Google.
As noted often, the Street is unconcerned (clueless) about impeachment proceedings launched against President Trump. It is serious as it stands. What is more serious is, where this can go. It may be just the beginning.
That is another thing the Street hasn’t taken time to consider…. That is what a Fed micro-managed bull market can do to sensitivity. The stock market is no place for delusion….for long.
Conclusion: Favorable trade news out of China, how about the United States ? Does it go along or have a different solution. Failure to go along kills a rally from lofty levels. Agreement with China’s concept is worth more upside.
Wednesday Nov. 6 “Street in Denial – Economy, Trade, Impeachment”
After Reuters reported progress in U.S./China trade talks and a likely delay in U.S. tariffs on European autos, the stock market cannot afford any disappointments.
In fact, at these levels, the stock market is vulnerable, and unless news gets much better from here, the stock market is fully priced.
In November 2016, the Street celebrated the election of Donald Trump with a strong rally in the stock market.
But the Street has not given consideration to his removal from office via resignation, impeachment/conviction, or defeat in 2020.
With impeachment proceedings well underway, it is likely it will begin to think about alternatives.
A 10-year old bull market wipes out memories of the most recent bear market (2007 – 2009) where the S&P 500 dropped 57%. At the time the world looked like it was ending, and without gallant efforts by the Bush and Obama administrations and the Fed, we would still be recovering from a global meltdown.
I think tops are tougher to call than bottoms. No one wants bull markets to end, everyone wants bear markets to. Unless a bear market is triggered by dramatic news, tops take longer to develop as the market begins to sense worsening economic news. However, investors are usually in a state of denial trying to eke out one more big score, and with prodding by the pros in the Street, they keep buying.
Bottoms tend to develop faster, as mounting fear convinces investors prices will continue to fall, and they better sell out completely, resulting in one or more selling climaxes until there are no sellers left.
So, where am I going with all this ?
The end will come when it is least expected, and the outcome will be ugly. Be sure to have a cash reserve and sit close to the exits with the restyou’re your holdings.
Tuesday Nov. 5, 2019 “Bubble Expands Further”
The next 12 months will be wild as impeachment proceedings move forward, trade talks stir anxiety, and the U.S. economic numbers flow in indicating recession or a pause before a recession.
So far, the Street has a single focus – BUY regardless of any outcome. Most of these decisions are computer based, with human tweaks now and then. That is the primary reason that the Street ignores looming negatives.
Expect “DOW 30,000” to be hyped, as well an economy that is finally recession-free.
What I am reading suggests otherwise, but investors don’t want to hear that in bull markets, and that is why they get hurt in bear markets.
Some investors will think they can sell near the top but not until they make some more money before then. Some are sure they can ride out a recession/bear market over 6 to 15 months then start making money all over again for the next two to four years.
The problem with that logic is after a 30% plunge in prices the news environment becomes so negative that investors begin to fear that lower prices are inevitable and the safe thing to do is “sell” with losses big enough it takes years to recoup the damage done by the bear market.
The Fed has decided it will micro-manage the economy and stock market. I don’t think Fed Chief Jerome Powell is smart enough to do that. To his credit though, I don’t think anyone is smart enough to micro manage anything so huge and unpredictable.
You see, there are always several balls up in the air in that business any one of which can come down when least expected and change to situation.
One of those balls already came down – impeachment. The other is the Feds attempt to goose the economy and stock market when the latter is already significantly over valued based on prior valuations.
Another ball that can come down is global depression. I don’t expect that, no one does, and that is why it can happen. This would feature economic stagnation at zero growth levels and a stock market that after a 50% decline has no more bounce than a soggy playground soft ball.
Yet another ball that can come down is one that no one on earth suspects !!
Be very careful here. With a new market high hyped whether it is a fraction of a point or many points, the urge to go all-in surges. It’s called a “BUBBLE.”
Monday Nov 4 “I Am Wrong….so far Bubble Still Bubbling – Careful
OMG ! The bubble of all bubbles. Why is the Fed doing this ? Three rate cuts in less than a year.
It’s like the alternative is unthinkable……NO ! what the Fed is doing is unthinkable !
With their rhetoric, the Fed is sucking investors into the market as the major averages are hitting all-time highs. This is what the Fed normally does in recessions when stocks are plummeting.
The Shiller price/earnings ratio is higher than the 1987 Black Tuesday crunch (down 36%), than 2007 Great Bear market ( down 50%), but still below the 2000 dot-com bubble burst ( down 57%).
The DJIA is set to follow the S&P 500 and Nasdaq Composite with a breakout of the trading range that has constrained it for two years. The NYSE Composite still has a way to go.
Axios points out that the S&P 500 is up 4% since optimism was announced October 11 about phase one of the U.S./China trade talks. Odds favor more announcements of progress on trade coming out of the White House as impeachment proceedings move forward.
I have been wrong here with my warnings about the direction of stock prices. I expected a bull market top which historically occurs months ahead of a recession. According the A. Gary Shilling’s November “INSIGHT,” we are in a recession, and he backs his conclusion with facts and reason, referring to the consumer as the “last straw.”
There is no sanity in the expansion of bubbles, they have to run their course.
The danger is they are irresistible for investors who are drawn in deeper and deeper until the inevitable burst and plunge. Adding to investors’ demise is they are drawn in even more so by the initial plunge, thinking this is a “gift.”
It is a ride that is moving too fast for anyone to get off. Besides, humans being human make it impossible even if they saw the break coming.
Friday Nov. 1 “Fed’s Bold Gamble…Just That ….. a Gamble”
The market will just have to digest what is going on, including corporate earnings, conflicting economic reports, stock market seasonal tendencies (Best Six Months), Fed policy panic, and impeachment procedures.
The latter is the wild card, the only known is that it will be divisive in a political environment that is already divisive.
So far, the Street couldn’t care less – NOT smart ! Confidence, or a dearth of it, rules in the end as far as stock prices are concerned.
But decisions on Wall Street are so “algoized” it’s hard to tell when a change in analyst/money manager marching orders will occur, but any change from the automatic buy at any price mentality to defer purchase or “sell” will have an immediate, profound impact on the market.
Obviously, the Fed has ramped up its quest to micro-manage the economy and stock market – BIG mistake !
Hands off, at least as far as the stock market is concerned. Let it find a level that discounts known and prospective conditions and events.
Fed policy is now what it would normally be, after a recession and bear market are already well on their way, so what will the Fed do if this effort to head off a recession/bear market fails ? Uncharted waters.
Thursday Oct. 31 “Fed PANIC ! Begs the Question – Why ?”
Fed Chief Jerome Powell had this to say at his post-FOMC press conference yesterday. “There’s plenty of risk left, but I have to say the risks seem to have subsided.”
Really ? Why then, did the Fed decide to cut interest rates for the third time in less than a year ?
Powell has to stop sugar-coating the situation. If the economy is bad enough to cut rates three times in less than a year, the Fed is doing investors a huge disservice by sucking them in at all-time market highs where the S&P 500 is more overpriced than any time in history except the 1999-2000 dot-com bull market highs which preceded a 50.5% drop in the S&P 500 and 78% drop in the Nasdaq Comp.
As I see it, the Fed is panicking in the face of a global recession and a presidential election next year.
Some progress is expected on the U.S./China trade front – both countries are feeling the pain of tariffs and the damage it is doing to corporate decision making.
Trump needs a win during impeachment proceedings, so he will do his best to ensure some progress. Xi Jinping, China’s president, will likewise make concessions unless he decides to play hardball with Trump under pressure from within his own country.
Bottom line: The Fed is doing now what it normally does after a recession is well underway when the stock market is down sharply, not historically overvalued.
If it fails to head off a recession, it will have little firepower to prevent the recession from getting worse and lasting longer.
Wednesday Oct. 30 “Street Worried About Fed Rate Cut Today ?”
The first of three estimates of Q3 GDP came in today at annual rate of 1.9%, better than the Street’s 1.6%, a positive unless the Fed decides not to announce a cut in its fed funds rate today. While the Q3 GDP is better than expected, it is lower than Q2’s growth rate of 2.1% and Q1’s 3.1%. The next key report will be the Employment Situation report at 8:30 Friday.
While this market is overvalued historically, one more push up is possible in response to better than expected Q3 GDP and Q3 earnings that so far are above expectations though projected from intentionally low-balled levels.
The stock market bubble continues to deflate then inflate, chasing investors out only to suck them back in – a highly risky situation.
No one want to miss out on an opportunity to make more money. That has to be weighed against one’s tolerance for risk if the next move is down 35%-45%.
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.
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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.