INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,926
Tuesday August 14, 2019 8:15 a.m.
Why worry about buying, I wrote yesterday, “The Fed is there with another cut in rates, or verbal hype, and it has been a long time since this administration floated an untruth about optimism on trade talks.”
Within 90 minutes of my post, the administration announced it would postpone the 10% tariff on $300 billion of Chinese goods scheduled for Sept. 1 until Dec. 15. The DJIA shot up372 points erasing Monday’s 391 point loss.
It is clear to me the announcement was timed to prevent another leg down in the market, something this administration and Fed do not want so close to a presidential election year.
As noted Monday, the Fed and administration manipulate the market all the time.
I have argued for letting the market find a level that discounts current and potential negatives. Eventually, the market will do that anyhow, but not until a lot of investors get sucked into stocks by the hype.
At some point, I noted, the Street won’t take the bait then whoosh down the market goes to a level that does discount the negatives.
THAT JUNCTURE MAY HAVE COME TODAY . PRE-OPEN TRADING INDICATE A BIG DROP AT THE OPEN IN FACE OF THE INVERSION OF THE 2-YEAR AND 10-YEAR YIELD CURVE, THE FIRST INVERSION SINCE 2007.
Expect the Fed or administration to counter with a commentary that rebuts the seriousness of the yield curve inversion.
A purely technical scenario: Boeing (BA: 333) failed to hold its early day rally and closed on the downside – not good. A break below 331 sets the stage for further weakness to 325 where it should find some buyers. BA desperately needs news to reverse an engineering credibility gap after the grounding of 371of its 373 Max aircraft. Risk here is a drop below 300 to 270 where some bargain hunters can be expected but not enough to prevent a drop to the 342 area.
The Trump administration and Fed will release whatever info it can muster up to stabilize this market and it may work temporarily.
TODAY: The big hit at the open is caused by news about the inverted yield curve, a bearish indicator but one with inconsistent timing.
Minor Support: DJIA:25,687; S&P 500:2,866;Nasdaq Comp.:7,801
Minor Resistance: DJIA:2,617; S&P500:2,903;Nasdaq Comp.:7,947
Resistance based on a rebound from selling early in the day.
Tuesday August 13, 2019 “Street’s Algos Unflappable Until Overridden By Selling”
Buyers will rule UNTIL someone breaks ranks and sells, triggering a stampede to sell. This is a “I won’t sell if they don’t sell” mentality. The Street’s algos are unflappable until overridden by common sense.
So far buyers are there on pullbacks even though they are paying up for stocks. Why worry, the Fed is there with another cut in rates, or the verbal hype, and it has been a long time since the administration floated an untruth about optimism on trade talks.
Both the Fed and administration manipulate the market all the time, as well as huge pools of leveraged money.
But, comes a time, all that doesn’t work, buyers are chased away by fundamental, domestic and international developments, and big investors scramble to lock in profits.
This negative rant must get old after a while, but all I am saying is, there are soooo many signs of trouble that aren’t discounted in valuations, and that situation won’t last forever.
When this aging and overpriced bull market heads down to a level that reasonably values stocks, it will happen suddenly, 12% – 18% in a matter of days and that will more than sting.
Monday August 12 “There Are No New Eras for Stocks”
If this market were trading 25% lower in face of hurtful tariffs, struggling global economies on the threshold of recession, stagnant corporate earnings, excessive individual, corporate and government debt that limits future growth, international tensions and a government under fire, I would feel more comfortable about buying, simply because these negative would be largely discounted.
By historical yardsticks, this market is overvalued, possibly by more that 25%. The Shiller price/earnings ratio is 29.5 versus a mean of 16.6, that’s higher than before the 2007 – 2009 bear market, and as high as the market before the ’29 crash. While the market is not as overvalued as the 44.2 P/E in December 1999 when the dot-com bubble burst causing a 50% plunge in the S&P 500 (78% plunge in Nasdaq), there is enough good reason to have a healthy cash reserve.
A NEW ERA FOR STOCKS ? That’s what the Street generally thinks at market tops. With algorithms doing so much of the Street’s thinking, this market can hang tough….until something unexpected outside of the algo programming metrics and you have a stampede for the exits….and no buyers.
The only thing new about this era is the degree to which the market has been casinoized. Bull and bear markets happen. We are overdue for the latter. All it takes is for a couple of major institutions to ditch their algos, break ranks and sell – the others will follow. That justifies taking steps to protect one’s portfolio with a cash reserve of 30% +. Depending on one’s tolerance for risk, that could be greater.
Friday August 9 “Easy Does It !”
Was the recent four-day, 6.7% loss in the market the beginning of a major correction (12% – 18% downer), or a bear market, down 35% – 45%, or just another blip in a 10-year old bull market ?
On the positive: The bulls have weathered a lot of bad news (trade news, threat of recession talk, Iran, impeachment) and are still hanging tough.
Negative: The bulls may be at the breaking point where just one more negative could trigger a breaking in ranks on the Street where a few big funds sell, prompting others to do likewise, and whoosh !
The DJIA Has recouped two-thirds of its August loss, the S&P 500 and Nasdaq Comp. a bit more.
There is overhead supply above yesterday’s close fueled mostly by in ramp up in the trade war between the US and China.
While today will start off on the downside, the real test will come later in the morning. If the bulls step in aggressively, they can run the market back up to the old highs.
Failure to do so would lead to a test of the August lows of DJIA 25,440, S&P 500: 2,822, Nasdaq Comp.:7,662.
Thursday August 8, 2019
“Absolutely NO ROOM For a Rally Failure Today”
Let me pose this question one more time.
Why is the Fed is such a hurry to cut interest rates ?
Is it because it wants to make it easier for corporations to borrow money to buy back their own stock running the price up to enhance the value of Executive holdings and options ?
Is it because the Fed wants to punish investors in fixed income investments ?
NO ! It’s because the Fed is scared stiff the economy will be in a recession in 2020, a presidential election year.
According to AXIOS Markets (Dion Raboun Aug. 7) and CME Group’s Fed Watch, the Street is pricing in a 50% likelihood that the Fed will cut rates three times by year-end. Raboun added, the “only reason for the Fed to cut rates by one percentage points or more in a year would be that the U.S. economy is in peril.
The Street’s algos are programmed to buy at the market, but especially on dips in prices.
If the money managers, brokers and analysts see a recession, they will have to change the algos, and since there has never been a recession without a bear market, their action will trigger a free-fall in stocks far worse than what we have seen in recent days.
It will happen, if not this time down, then in the near- to intermediate term future.
The Fed is artificially and irresponsibly propping this market up with a lot of inaccurate rhetoric and now with rate cuts.
They should let the market adjust to known and perceived negatives and find a level that discounts them. That would be a way to head off the flash crash which is a straight down phenom that does serious damage.
Wednesday August 7 “White House/Fed Hype May Not Be Enough”
Yesterday I warned that after this week’s crunch in the market, the administration and Fed would release whatever info they could muster up to stabilize the market. Sure enough, St. Louis Fed president James Bullard played the rate card, saying, “Further rate action may be desirable.” which helped bump a sagging market up to an upbeat close.
Trump’s economic adviser, Larry Kudlow, told CNBC yesterday that the United States will remain committed to resuming negotiations with China in early September after stating Monday that the economy is in a strong position with money pouring in from abroad seeking safety and higher interest rates.
If that is the case Larry, why is the Fed in a hurry to cut interest rates ?
There is a trade off here, the Street can celebrate rate cuts, but has to cope with a recession and there has never been a recession that has not been accompanied by a bear market.
So far, government hype has worked. When it fails to move markets, it is time to head for cover.
A purely technical scenario: Boeing (BA: 332) briefly broke below 330 again yesterday but failed to follow through on the downside. Based on price action, it looks like it will rally to 339 before dropping to 307 where another rally should take place before dropping below 300 to the mid-200s. Just a technical opinion – a warning for some, opportunity for others.
Tuesday Aug. 6, 2019 “The Party Is Over – Use Rally to Raise Crash Reserve”
This is the rally I referred to in Yesterday’s blog, “Technical Rally Possible at Any Time – Highly Risky.” That is exactly what this is.
Expect the Trump administration to release anything possible designed to stabilize this free-fall. My guess it will be plans to renew tariff talks with China or comments by China about the yuan
The White House-friendly Fed will trumpet talk of one or two more rate cuts by year-end both attempts to stop the carnage.
BEWARE: WHEN HYPE AT HIGH LEVELS FAILS TO GOOSE THE MARKET, IT IS TIME TO RUN FOR THE HILLS.
This is looking more and more like the beginning of a bear market, keeping in mind fed rate cuts preceded every recession going back to 1955.
It looks like the BIG money is starting to jump ship, breaking ranks with the quant/algo types who desperately need to reprogram their computers before getting crushed by reality.
A lot of investors have gotten hurt by the Fed, which irresponsibly sucked investors into the market with its hype first, talk of rate cuts and an economy that is “in a good place,” then with last week’s rate cut.
This is all amateurish folly. While able to move markets with just a few words, the Fed simply is unable to understand market action and gross overvaluation of stocks.
They should acknowledge the seriousness of the weakness in our economy and global economies and let the market find a comfort level, but NEVER gloss it over and encourage investors to jump into a market that is overvalued. Shame !
The Fed did a great job in the 2007 – 2009 Great Recession/Bear Market, but failed to prepare for the recession that looms today by overstaying QE.
The horse has left the barn (the bear his/her den). If this is not the big downer, it is previews of coming attractions.
This is why I have continually urged a sizable crash reserve. The new normal now is the flash crash, a vertical plunge in stock prices that strikes without enough warning to do some selling.
So what does an investor do now ? A trader can act swiftly moving in on weakness to buy technically oversold stocks, then just as swiftly take profits on a rebound.
If this is the beginning of a 35% -45% crunch investors, indifferent to risk, are in for super angst.
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 120 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 3.6% which was hit in May. 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 123 months is 4 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.