INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,864
Wednesday, May 22, 2019 9:08 a.m.
Before algorithms dominated the Street’s decision process, humans pondered current and foreseeable events to get a feel for whether stocks were over or undervalued. They tracked a host of indicators, but also used their instincts based on years of experience to come to conclusions.
Algos track a host of indicators, probably a lot more than the human brain can track, but where the human brain excels is the ability to weigh in on the unknown.
Currently, the market is ignoring a number of critical factors that could vastly affect the overall perception of what stocks are worth.
The big one is the prospect of the disruption of an impeachment process and uncertainty of the 2020 presidential election. Add to that, a looming recession and bear market, trade wars, war, and an overvalued market and you have enough to keep anyone awake at night.
What is driving stock prices today is not the tangible value, a dividend return, but rather the expectation stocks will keep rising in value somewhat in line with the growth in earnings and companies buying back their own stock, but mostly because institutions have nowhere else to invest.
This is all well and good as long as we don’t hit a prolonged losing streak where a lot of bad stuff hits the fan relentlessly pounding stocks and investor confidence down.
It happened in the 1970 and early 1980s where four recessions and five bear markets in 11 years combined with war, Watergate/impeachment, stagflation, the OPEC oil embargo hammered stocks relentlessly driving the price/earnings ratio for the S&P 500 below 8X (1980).
Stuff happens, and this stock market is ignoring how bad things can get, mostly because computers can’t be programmed for the unthinkable, and also because few analysts/money managers weren’t around in the 1970/1980’s.
Since so many Street algo decisions are based on the same indicators, they will eventually get a sell at the same time and whoosh – a flash crash of 12%-18% before anyone can say “ouch.” Instead of an immediate rebound we get another leg down as new negatives hit the market.
The best computer in the world is the human brain, not the fastest, not the ability to process zillions of things, but the best to ponder possibilities not yet quantifiable.
Cash will be king some day. It doesn’t have to be 100%, but enough to protect an investor in line with their tolerance for risk.
Minor Support: DJIA:25,757 ;S&P 500:2,856;Nasdaq Comp.:7,760
Minor Resistance: DJIA:25,927; S&P 500:2,868; Nasdaq Comp.:7,786
Tuesday (May 20)
Look for an attempt to rebound today. There is formidable overhead supply that will limit the upside barring unexpected good news. Nasdaq stocks are under pressure, what are all the bees going to do if the Queen dies ?
The big picture is clouded, but many on the Street don’t see it, or let’s say they haven’t tweaked their algos to respect what often happens in late stage bull markets – news that progressively gets worse, bit by bit.
Does anyone who is paying attention think for a moment angst about the future, near and longer term, won’t surge past the ouch point to the I can’t stand it anymore level where investors break ranks and bail out.
This will get ugly, very ugly. Project into the future, can the Street simply ignore total chaos at the highest levels of our government ?
The Street wants to party all night. That’s not how it works, not how it has ever worked, especially when the managers of money think we are in a new era where recessions don’t happen not with the Fed quick to prevent troubles.
The Fed’s quiver of quick fixes is empty. Yes, I expect a cut in the Fed funds rate, but they did that prior to the last three recessions.
Right now the Fed is a eunuch. They’ll try, clearly they don’t want a recession in an election year. But they can’t stop the looming chaos in confidence that is just around the corner, multiple constitutional crises.
Warning: Beware of a rally failure. Chasing the rally at the open is risky.
Monday (May 20)
A three day rally that recouped a bit more than half of May’s
5% loss ran into a wall Friday raising the possibility of a test of last Monday’s S&P500 low of 2801.
Today’s market will start on the downside which should attract buyers unless they have retreated to the sidelines, fearful of an escalation of war with Iran and uneasy about the inability of the U.S. to strike a trade deal with China.
The DJIA and S&P 500 have traced out triple tops (Nasdaq a double top) going back to January 2018 indicating an unwillingness of the Street to reach for stocks.
In the interim, we had a three month (Oct./Dec.) 20% correction which was quickly reversed by the Fed’s policy change from raising interest rates to a no action mode.
If humans rather than algorithms made more buy/sell decisions, this market would sell lower in face of mounting problems here and abroad.
This decision process has been responsible for the flash crash phenom which features sudden plunges of 12% to 20% in 6 to 18 days.
As long as those losses are recouped quickly, investors are safe, however if the next one leads to a 35% – 50% bear market the Street’s indifference to risk is devastating to portfolios.
Since the Fed’s quiver of tools for stimulating a recovery is limited, a new bull market stands to take a long time to develop.
Friday (May 17)
The market has rebounded each of the last three days, but yesterday’s momentum lagged. As a result, the market will open on the downside today, the key being whether this is the beginning of another leg down.
That will depend on the nature of the news flow going into the weekend.
There is increasing concern for the outcome of a budding crisis brewing between the U.S. and Iran as war ships head for the Mid-East.
There are rumblings about a recession on the horizon, though economists do not see one this year (I do, though only the early stages of one).
Recessions are loosely defined as two consecutive declines in GDP. The official declaration is made by the National Bureau of Economic Research (NBER) and that is done well after a recession has started.
Axios reports that the Fed is concerned about rising credit card delinquencies and surging corporate debt. Add to that the fact the U.S. national debt is $1 trillion higher than a year ago, and they have reason to worry.
This is why I have been saying I think the Fed will cut its fed funds rate. It does not want a recession in an election year !
I have warned of a bear market for months. It will start well ahead of a recession and it will begin with a sharp plunge as the Street suddenly becomes aware the party is over no matter what the Fed does.
A drop in the Fed’s fed funds rate has preceded each of the last three recessions, so a cut here would indicate the Fed is WORRIED.
The Street’s algos will buy at the market and on dips until analysts tweak them to slow down or stop buying and then to start selling.
Everyone will get the signal at the same time and the market will be down 12% – 18% before the individual investor can react, so a cash reserve is wise now.
Thursday (May 16)
The bulls have their work cut out for them with unimpressive news on the housing market, and declines in Industrial Production and Retail Sales on top of high angst for a military conflict with Iran and the breakdown in trade talks with China. These negatives are offset by better than expected Q1 corporate earnings.
It’s jump ball between bears and bulls at a time the Street has run stocks up to pricey levels. That’s OK so long as new negatives don’t surface……or so long as none of the big hitters on the Street breaks ranks and sells in-size.
Even so, the Fed’s policy switch away from raising interest rates should be doing more for the economy.
Contrary to most pundits, I think the Fed will cut its benchmark fed funds rate in December to goose the economy going into the 2020 presidential election year.
The S&P 500 was up 66% at this point in the Obama administration compared with a gain of 24% at the same point under Donald Trump.
Wednesday (May 15)
Ask yourself two questions.
Is a bear market possible beginning in the next 6 months ?
Is a recession starting within the next 9 months possible ?
If your answer is no to both, think again, or risk getting blindsided.
No one is bearish and that is bearish. The Street is blinded by the euphoria of a 10-year old bull market, propped up by an administration-friendly Fed, which may just cut its benchmark interest rate to head off a recession in time for the 2020 elections.
Bear markets begin ahead of recessions, the lead time varies from several months to a year. I don’t see the next bear market beginning slowly, since most analysts/money managers track the same indicators plug them into an algo and wait for an answer. Aside from free-thinkers who will anticipate problems in advance, most on the Street will get a defer purchase/sell signal at the same time and whoosh down the market goes giving anyone with no cash reserve a chance to react.
My message here is, establish a cash reserve of 30% and ignore the temptation to go all-in, because no one knows when the plug will be pulled. Worst case, an opportunity to make a little more is lost, but a flash crash leading to a bear market does not lead to two years of more getting back one’s losses.
We have had ugly corrections in recent years, all but one were flash crashes.
Apr./May 2011 the S&P plunged 12.6% in 8 days
Aug. 2011: – 15.8% in 6 days
Jly./Aug. 2015: – 11.5% in 18 days
Dec. 2015/Jan.: – 12.9% in 13 days
Jan/Feb. 2018: -11.8% in 10 days
Oct./Dec. 2018: – 20.2% over 3 months
All were followed by recoveries. The difference with a bear market will be, new negatives will hit the market after a sharp plunge and at the point when it is ready to rebound. That’s when a second leg begins leading to lower lows and ultimately a decline of 35% – 48%, or so.
In most cases, the bear will be accompanied by a recession and a rush by the Fed to trigger a recovery with lower interest rates and pumping money into the economy. But rates are still low and the ability of the Fed to pump money into the economy limited this time, so a recovery stands to take longer.
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 116 months, the second longest on record and 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 hit a low of 3.7 percent in November, jumped to 3.9 percent in December and to 4.0 percent in January. Now, averages include months below and above 3.8. What’s more, we won’t know when the current recession if we have one begins because that conclusion is reached by the Nat’l Bureau of Economic Research (NBER) long after the fact.
>Bear markets lead the beginning of recessions by 3 to 12 months. The current bull market at 119 months is four 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.
>The current economic expansion has lasted 123 months. That’s 65 months (2.1x) longer than the average expansion (58.4 months) going back to 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 3.8 Months.
> 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.
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.