INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,039
Tuesday, October 29, 2019 9:09 a.m.
The S&P 500 broke out to new highs yesterday on better than expected Q3 earnings, trade hopes and expectations of a Fed rate cut, but there was not the big follow through that normally accompanies a breakout.
The DJIA and Nasdaq Comp.
That can still happen, since the Street often takes a day or two to decide if overhead supply has lifted. This is the third attempt since July to break out of this general area.
BUT, what if all these goodies have been discounted at these levels, which are in fact very pricey, so much so, you have to go back to the 1999 – 2000 dot-com blow off to find the market so overvalued.
As noted yesterday, this is a big week for economic reports, especially Q3 GDP (Wed 8:30) which is estimated to drop to an annual rate of 1.8 percent from 2.0 percent in Q2 and 3.1 percent in Q1, as well as the Employment Situation report (Fri. 8:30) estimated to show 93,000 new hires in October vs. 135,000 in September.
The week got off to a bad start with the September Chicago Fed National Activity index report dropping sharply to -0.45 from +o.10 and the October Dallas Fed Mfg. Survey index dropping to 4.5 from13.9.
With a breakout to new all-time highs by the S&P 500 yesterday, a follow through would be normal. The primary reason it won’t follow through is all the good news has been discounted at current levels.
Off and on, I have referred to this as a bubble that will burst when least expected. When that happens, the market will plunge so sharply, investors will have no time to protect their portfolio from nasty losses.
Minor Support: DJIA:27,061; S&P 500:3,038; Nasdaq Comp.:8,321
Minor Resistance: DJIA:27,168; S&P 500:3,051; Nasdaq Comp.:8,347
Monday Oct. 28 “Buying Breakout to New Highs – Risky”
Big week for economic reports – Q3 GDP comes at 8:30 Wednesday, the Employment Situation on Friday at 8:30.
Both have a bearing on whether the economy is near or in a recession.
The Fed Open Market Committee (FOMC) meets Tuesday and Wednesday with an announcement of the third rate cut in less than a year. expected on Wednesday, though no press conference is scheduled.
No FOMC meeting is scheduled for November, so the next meeting is not until December 10.
Three things are driving stock prices: a cut in the fed funds interest rate; better than expected Q3 earnings; progress in the U.S./China trade talks.
Conclusion: This market is pricey at these levels, in fact, historically very overpriced, but the Street thinks it can run the table anyway, so expect new highs today and all the press hoopla that goes with it.
Negatives: 1) the Fed does not cut rates this time. 2) trade talks disappoint. 3) GDP signals a recession, as well as other economic indicators announced this week, primarily Consumer Confidence (Tues. 10 a.m.) Employment Situation (Fri. 9:30).
This is a very dangerous market to chase. It is next to impossible to resist doing so, but all things considered, the downside risk far exceeds the upside potential. Many on the Street have no idea how ugly a bear market can get, therefore very few are bearish enough to be selling.
That in itself is bearish, but until several big institutions cut and run, the market will hold the line with short-lived corrections along the way.
Friday Oct. 25 “Big Move Looms as Street Decides on Earnings”
The market needs some volatility and I think we are about to get it.
Q3 earnings are hitting the Street. Some are better than expected, some disappointing, and the Street is about to decide what to do – Buy…or Sell !
The technical picture (price action) is slightly upbeat, which I think can be credited to hopes for progress on trade and a Fed rate cut plus QE. It’s really hard to tell now how the Street is factoring earnings into its equation.
New highs would be easy to hit (DJIA: 27,398; S&P 500:3,028). The S&P hit 3,016 yesterday.
New highs by the S&P would trigger news headlines and rush to buy.
However, with the markets as historically overpriced as it is now, a recession looming, and the uncertainty of a presidential impeachment process underway, a sustainable surge from these levels stands to be short lived.
Thursday, Oct. 24 “Watching and Waiting….for a signal”
Street is watching and waiting for a signal on trade and earnings, not just Q3 but guidance and projections for 2020, which has so far been projected to be better than this year.
If the Fed cannot head off a recession, the Street will be slashing 2020 earnings projections which would adversely impact an overvalued market.
Odds are good we already are in a recession, so the Fed has its work cut out for it. The Fed is cutting rates and employing a variation of QE, so I don’t know what it can do if we get into a severe recession.
These are strange times.
But a Fed rate cut is built into current pricing and much of expected progress on trade.
Failure to cut rates and/or failure to make progress on trade would hammer prices.
I think the market has a shot at new highs, which would be accompanied by a lot of press, Administration and Street hoopla, driving the market up temporarily and maybe into early January before a major correction develops.
Playing that move by buying the breakout would be a challenge for all but the nimble and quick.
Wednesday Oct. 23 “Buying a Breakout to New Highs Would Be Risky”
A ho-hummer yesterday, today stands to follow suit, unless we get hit with negative surprises on earnings.
Over the last four days, the major market averages have tried to break out to new highs for the fourth time since August.
It still can happen if progress on trade is announced, and actually happened.
The question is, how much is progress on trade and Fed rate cuts built into current prices ?
I think – a lot with the S&P 500 significantly overvalued.
Q3 earnings are hitting the Street. While better than expected, expectations had been lowered significantly before the report period.
Even so, Disappointing results from Caterpillar (CAT) and Texas Instruments (TXN) yesterday reminded the Street not all is well.
Progress on trade seems to be announced only after a couple bad days in the market, the Fed is expected to cut its fed funds ratye on the 30th.
Retail sales remain soft, but existing homes sales are firm on a year/year basis.
Tuesday Oct 22 “OCTOBER – A pivot month”
“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”
October hosted bear market bottoms in1957. 1960, 1966, 1987. 1990,, 1nd 2002, but AFTER bear market declines, which we have not had yet.
October market one bull market top – 2007, the beginning of the Great Recession/Bull Market.
President Trumps saying trade talks with China are coming along very well. More importantly, China’s chief trade negotiator, Vice Premier Liu He, indicates trade negotiations are progressing well for phase one with a potential for signing in mid-November.
We have been down this road before, and the stock market appears to agree, though talks can hit a snag at any time.
The question is, how much of an agreement in phase one as well as a Fed rate cut, are already priced in the market at these levels ?
We are so close to new all-time highs, I think we can hit them with or without an agreement, but only temporarily.
The all-time high for the DJIA is 27,398 (now 26,827); the all-time high for the S&P 500 is 3028 (now 3,006).
Anticipation of progress in the trade talks and or a Fed rate cut on the 30th could push the market averages to new highs.
Buying the news would be HIGHLY RISKY in light of looming negatives and a very pricey market.
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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