Bubble, Bubble, Bubble

INVESTOR’S first read.com – Daily edge before the open
DJIA: 28,121
S&P 500: 3,140
Nasdaq: 8,647
Russell: 1,624
Wednesday  November 27, 2019
     9:26 a.m. 
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gbifr79@gmail.com
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TODAY:
      The dot-com bubble saw a fivefold increase in the Nasdaq Composite between 1995 and 2000 followed by a 77% plunge after the bubble burst. It took 12 years for the Nasdaq to get back to  its 2000 peak price of 5,048.
       In December 1996, Fed Chief Alan Greenspan referred to surging speculation in high tech stocks as “irrational exuberance.”
His warning came four years too early as investors enchanted by the open-ended potential for dot-com companies, scrambled to get on board before the train left the station without them.  Most of these dot-com companies had little substance to justify anyone buying them, which proved to be true starting on March 12, 2000.
Add a new acronym to your growing list. It’s FOMO, short for “Fear Of Missing Out.”  Yes, fear of missing a chance to make more money, ergo buying stocks regardless of excessive valuation.  The idea for doing such a foolish thing is an investor expects to sell their stocks to  greater fool at a higher price.
Today’s market is looking like another inflating bubble in route to a burst. It too has been fed by an economic expansion lasting 10 years and a historically extreme price/earnings ratio, 30.8 versus a historic norm of 16.6.
What to do:
Since these manias tend to chug on relentlessly like the pink rabbit, it is best to simply raise a healthy cash reserve, even though that is the last thing you want to do.  At some point the bubble will burst with a 12%-18% vertical plunge in the market, just for openers.

TECHNICAL
Expect a lot of volatility between now and year-end. Year-end behavior by individual stocks tend to defy reason. Stock that should go up – go down, One’s that should go down – go up. It’s all about institutional portfolio adjustments and decisions based on taxes.

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Minor Support: DJIA:28,076; S&P 500:3,136; Nasdaq Comp.:8,641
Minor Resistance: DJIA:28,127; S&P 500:3,140; Nasdaq Comp.:8,651
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Tuesday November 26 “Fed’s Powell: Economic Glass More Than Half Full ?”
Really ?
Speculation is rising from hot to Scorching as the  smaller company Russell 2000 jumps more than 2% in a day to all-time highs. This is more bubble stuff and almost impossible for investors to ignore.
Gotta get in on this, is the mindset, hock the jewels and bet the ranch.  Who could blame anyone when the market keeps running from overvalued to incredibly overvalued, but who cares as long as it keeps rising.   Beyond classic late stage bull market, this is out of sight and much like the dot-com bubble in 1999-2000.
Fed’s Powell says the economic glass is more than half full.  I am awaiting economist A. Gary Shilling’s “INSIGHT” to confirm whether  Powell is right or wrong.
My bearishness is based on two things.  One,  Shilling’s well documented conclusion that our economy is in the early stages of recession, two, the extreme overvaluation of the S&P 500.
There has never been a recession without an accompanying bear market.
Does the market “know all” ?
Not if you consider we have had 8 bear markets since 1980, two of which were in excess of 50%.

 

I would refer to the Stock Trader’s Almanac more often if my space here was not limited.  Give it to yourself for Christmas. Not only does it contain more relevant information about everything you need (and want) to know about seasonal and timely trading, but it is accompanied by regular commentary. (Contact:800-762-2974)
The “Best Six Months” for owning stocks (Nov.1 to Apr 1) is one of its outstanding discoveries. It highlights a few year-end phenoms like the tendency for market weakness before Thanksgiving Day and strength after.
      The “Santa Claus Rally” was discovered in 1972 by founder Yale Hirsch whose jungle, “If Santa Should Fail to Call, Bears may Come to Broad and Wall,” sums it up in a few words.
Monday November 254  “Risk Rises as Bubble Inflates Further”
      “The Only Free Lunch” on Wall Street occurs in late December as stocks hitting 52-week new lows selectively cough up over-sold bargains  that will rebound after the tax selling abates.  December 20 is projected to be the bottom this year..
We live in uncertain times, both the economic expansion and bull market are long in the tooth. I have to go back to late 1972/early 1973 to find a time that I feel parallels the current time for economic. Stock market and political drama. Clearly we are witnessing a bubble in the stock market and it just keeps inflating.  CAREFUL ! The lure to go all in, even borrow to buy stocks becomes irresistible at these junctures.
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Friday November 22  “Tariffs to Start Hurting Companies”
Here’s where push comes to shove.   Axios AM reports that “Big retailers are refusing to accept tariff price increases from their brand suppliers, telling the companies they will have to either eat the tariff costs or find another buyer.”
This stands to adversely impact the smaller companies that can afford it the least.  The next round of tariff increases will hit on December 15.
While I expect that date to be pushed into 2020, the ability for corporation managements to plan for the future must be next to impossible.
A tariff  increase would be the final straw in the efforts to avoid a recession.
I have never seen investors ignore serious warning signs to this extent.
It must be computer algos that are programmed to ignore bad news, or are not programmed to understand the dangers that exist for not adjusting for potential adversity.
Looking back, I assume many money managers and analysts will regret letting an algo do their thinking for them.
      Bull markets do end. Bear markets happen.

 

Thursday Nov. 21 “Too Many Lies and Misinformation”
Reuters reported Wednesday that the phase one trade deal   may be pushed into 2020.  Whoa ! Didn’t Trump’s economic guru Larry Kudlow announce last week that the U.S. and China were “getting close to reaching a trade deal….that “It’s not done yet, but there has been very good progress and the talks have been very constructive.”
Misleading statements like these  go back at least  to February with  Kudlow’s hype on trade progress like “fantastic”, good headway”, “positive surprises”, “lots of momentum” raising hopes for investors only to be dashed by news of no progress.
While the Fed is truthful, it falls short of being forthcoming.  The economy is not in a good place.
What happens when the Street discovers this endless spew of nonsense is no less that a Ponzi scheme to buy time until November 2020. 
Too much is at stake for  investors, some who have been chased into stocks in search of a return, others up in years and unable to afford a huge hit to their portfolio, yet others caught up in the cruise control bull market mania, only to get skewered by a massive plunge to reality in the stock market as a recession, already underway, becomes reality.
IT IS NOT TOO LATE TO RAISE CASH, A LOT OF IT, EVEN THOUGH RETURNS ON CASH ARE NEXT TO NOTHING.
The stock market sells at a price/earnings higher than any in the past except the dot-com bull market top in March 2000, which was followed by a 50% plunge in the S&P 500 and 78% plunge in the Nasdaq Comp.
       BOTTOM LINE:  This stock market does not discount any negatives, not a recession, not a stall in earnings, not impeachment, or  an endless haggle over trade.
Does the market “know all” ?
       That’s what  “they” say.  But the record says something different with  eight bear markets since 1980, two with drops in excess of 50%.
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Wednesday November 20 “All It Takes Is For A Few Big Hitters to Break Ranks and Sell”
      I wish I could bring good news, who likes to start the day with negativity ?  There are pockets of strength with recent jumps in Boeing (BA: +8.3%, Disney: DIS: +15%, Lam Research: LCRX: +22%), but sudden moves like those are part buying for appreciation potential. As well as short covering.
This is late stage bull market behavior. The Street doesn’t want the party to end. MarketWatch reports that the Hulbert Stock Newsletter Sentiment index reflects bullish readings of 65.6%, that’s higher than 95% of the readings since the dot-com bubble burst that preceded drops of 50% for the S&P 500  and 78% for the Nasdaq Comp. between 2000 and 2002.
IMHO, this bull market has been driven to extreme valuations by corporations buying back stock and hype, by the Fed on interest rate policy and the Administration on trade hopes.
IMHO, we are on the threshold of a bear market and recession, if we aren’t in one already.
The normal tendency for investors is to hang in as long as possible to make just one more score before the downturn starts.
That’s where the pummeling  begins and it doesn’t end until fear triggers a lot of selling at the bottom of the bear market.
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Tuesday  November 20 “Reminds Me of 1973-1974 (S&P 500 – 49.9%)
       In my “Folly Sci 20/20”, I  contended that President Trump will not be the Republican candidate  in 2020.  If that is the case, odds are good the Republicans will lose control of the White House and most likely  control of Congress.
While the stock market has done well during Democrat presidencies (depending on when you start your calculations), the Street currently favors Republicans.
Whether Trump runs and is beaten or resigns for health or other reasons, the news  would rock the stock market.
This stock market is on cruise control driven by computer algos that obviously have not been programmed to consider a market without Trump.
          In the early 1970s, it was the “One Decision” stocks, the “Nifty Fifty,” stocks that investors should buy and hold forever.   This market reminds me of that one-way mentality.  Price/earnings ratios  for the Fifty were as excessive then as they are now for the S&P 500, which at 30.4 for the Shiller P/E  is 82% above the arithmetic mean.
Holding them would have ultimately been profitable (Polaroid and Xerox exceptions), 7 bear markets and  4 recessions over 15 years stood to force their sale at some time.
CONCLUSION:  At some point, reality will set in – there are no new eras for stocks, never have been.  Recessions happen and bear markets  consistently accompany recessions.
I have been wrong about the timing of a bear market.  This market mania will continue for days, weeks or a month or two until the spell is snapped by an event or until buyers are a no-show.
The first week in January comes to mind, possibly because the current scene reminds me of 1973, the beginning of the 1973-1974  bear market ( recession  Nov. 1973 – Mar. 1975), a period  marred by  President Nixon’s resignation in face of impeachment proceedings and the OPEC oil embargo.
When it breaks, there will be little time to react, in fact the first jog down will look like a buying opportunity before a straight down 12% -18% plunge.
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Monday  November 18  “Bulls Fear Nothing…Is There a Message here ?”
The Federal Open Market Committee (FOMC) meets Wednesday but no presser is scheduled.  Even so. a follow up commentary  can be expected.  I see nothing new except platitudes about the economy being in a good place (it isn’t).
       Leading economic indicators for October will be reported Thursday  at 10 a.m. and are expected to mark the third straight decline in this important index. It is doubtful  the Street will react.
The main focus here is on trade talks which the Administration claims are going well ??
In spite of the fact House impeachment proceedings are not going well for President Trump, the Street does not seem to care.
All told, the Street is not concerned with anything, and that is classic bull market arrogance/denial.
When the bear strikes, it will be straight down 12% -18% for openers.
When ?
Early January is a good bet.
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 Friday  Nov 15  “Bear Market….. WHY ?
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.
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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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George Brooks
Investor’s first read.com
A Game-On Analysis, LLC publication
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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.

 

 

 

 

 

 

 

 

 

 

 

 

 

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