Bulls on the Ropes

DJIA: 28,133
S&P 500:3,426
Nasdaq Comp.11,313:
Russell: 1,535
Tuesday, September 8, 2020   
8:18 a.m.

November 15, 2019 (DJIA – 28,004)   I Called for a bear market to start in January, that the initial plunge would be 12%-18% – “straight down.” It started mid-February, dropped 16.3%, rallied then  plunged another 32.8%.
January 20, 2020 (DJIA:29,348) My blog,  “INSANITY,” projected a bear market decline of  30% – 45%. The DJIA plunged 38.4% in 21 days.
With the DJIA at 18,591on March 24, I wrote that , while I see lower prices later in the year, I expect a big rally with the upside potential of DJIA 22,037 (S&P 500 : 2,617) – it went higher.
With the DJIA at 23,942 (S&P 500) on April 15, I
called for  an end to  rally, up 29% but well short of  today.   how far the rally extended.  On May 18, I began to warn of  Bubble #2
August 6, I headline “SELL” with DJIA at 27,201 (S&P 500:3,327). Another “Fed” bubble.

The sharp sell off Thursday and Friday created a greenstick fracture in the major market averages meaning this may be the beginning of a major correction.
The DJIA stabilized after bouncing off a major up-trendline, both the S&P 500 and Nasdaq Comp. recovered after breaking their trendlines.
Essentially, that means the tug of war between bulls and bears is now favoring the bears.
Today will open on the downside to test Friday’s lows
DJIA: 27,664
S&P500: 3,349
Nasdaq Comp.: 10,875)
We must now start to study rally attempts.  Can they follow through, or do they fail.  Obviously, the latter indicates a lower market, in this case a test of the next support level at:
DJIA: 27,200
S&P 500: 3,270
Nasdaq Comp.: 10,570.
These averages should run into resistance starting at:
DJIA: 28,476
S&P 500: 3,468
Nasdaq Comp.11,474.
The future of COVID-19 defies analysis. Potential vaccines will be announced before the election, but practical application before 2021 is doubtful.
The Street is betting on an economic recovery this year, but even if the economy recovers further, continued follow through is doubtful, since so much damage has been done across the board to our economy’s infrastructure.
The timing of another stimulus package is uncertain, trade tensions remain, a number of jobs will never comeback,  and while the consumer has cash, the willingness to part with it  is a big question mark with uncertainty about the market and economy running so high.
Election rhetoric will do nothing  to  calm fears and instill confidence in government.

       Why load up on stocks  when prices are so high and confidence so low ?
The stampede to buy stocks since the March 23 lows has developed into  bubble.
Every effort will be made by the three amigos (Fed, Administration, Street) to prop the market up until November 3. It will get ugly, not the environment where stocks flourish.
Odds are high that the correction will carry further than the levels I noted above.

Friday September 4, 2020 (DJIA: 28,292) “Beware of Hype about Vaccine and Economy
DJIA down 807 pts.  (2.78%)
S&P 500 down 125 pts. (3.51%)
Nasdaq Comp. down     598 pts.  (4.9%)
Don’t tell me the algos have a conscience, or is it a smidge of acrophobia ?
      A correction was overdue with speculative fever surging and fear of missing out driving investment decisions.
Classic bubble mania.
A clue to the health of the market  will be seen today in the intensity of the rebound.
      A token rebound would be to DJIA: 28,597; S&P 500: 3,487; Nasdaq Comp.: 11,597.
Beyond that, would suggest buyers are still in panic mode.
The three amigos, the Fed, Administration and Street, aren’t going to like this with 41 days left before the elections.
    Beware of:
1) in spite of yesterday’s plunge, the market is still overvalued, very overvalued based on a host of time-tested measures of value.
2) investors will be bombarded by misinformation and  baseless hype about  a vaccine and economic recovery between now and November 3.
A rally can give investors a chance to reduce risk by raising cash in line with their tolerance for risk.  A swing from growth stocks to industrials is underway with 20 of the 30 Dow Jones industrials still below pre-COVID levels.
Thursday  September 3, 2020 “20 of 30 Dow Stocks Below February Highs”

Ten of the 30 Dow Jones  industrials are up since COVID-19 ended the 2009 – 2020 bull market in February with a 21-day, 38.4% plunge in the DJIA. Two are unchanged, and 18 are still below February all-time highs.
     Four Dow stocks have added 2,102 points to the DJIA (Home Depot, Apple, Microsoft, Walmart), or about 8% for the average as a whole.

Change from pre-COVID all-time highs in February
S&P 500: + 5.8%
Nasdaq Comp.: + 22.5%
Dow Jones Transportation Index:  + 0.8%
DJIA:   – 1.4%
Market averages that have not beat February highs
Russell 2000:
 – 6.9%
New York  Composite Index of 1,900 stocks:- 6.4%
ValueLine Composite
of 1,675 stocks, an “unweighted” index giving equal weight to each stock: – 15.4%
  The Nasdaq is distorted by a handful of large market cap Tech stocks. While that is true to some extent for the S&P 500, which is the institutional benchmark index.  That said, it’s hitting an all-time high may attract enough volume to enable these behemoths to unload big positions.
Yesterday,  I referred to CNN’s Fear/Greed Index which is well into  extreme territory. Based on a ratio of put option and call option buying, the Index has not reflected this little interest in puts in two years.
     Jessee Felder, The Felder Report takes this put/call ratio to  higher level at;
There appears to be a shift from growth stocks to industrials, which would make sense, since a handful of big-name growth stocks have had huge runs, though so much depends on a vaccine for COVID.
BEWARE of hype by the three amigos, the Fed, Administration and Wall Street to include a vaccine and an economic recovery.
Already we see hype on COVID as  CDC director, Dr. Robert Redfield has told governors to prepare for the large scale distribution  of a vaccine by November 1 (2 days before the elections).
Dr. Fauci, NIAID director, predicts a safe and effective vaccine by year-end.
The conservative Kiplinger letter forecasts  “the strangest  economic recession and recovery of your lifetime” for a Q3 GDP  increase of 19% at an annual rate, “twice as much as during the Great Recession of 2007-2009.”
Q2 declined 31.7% (ann.rate). Kiplinger sees a solid gain in 2021, and a return to pre-COVID levels by 2022.  How’s that for pre-election hype ?

Wednesday September 2, 2020 (DJIA: 28,645)  A “W not a “V”  ?
     This bubble has far exceeded any I could have imagined, rivaling the dot-com 2000 bubble that took the S&P 500 price/earnings ratio (P/E) to 44. The bubble burst on March 24, 2000 leading to declines in the S&P 500 of 50.5% and 78.4% in the Nasdaq Comp.
The S&P 500 PE is now 32.5 times earnings, but that stands to rise in face of slipping corporate earnings.
While the 2000 bubble was powered by dot-com/Internet stocks with no fundamental substance, both bubbles have one thing in common – panic.
CNN’s Fear/Greed Index is well into  extreme territory. Based on a ratio of put option and call option buying, the Index has not reflected this little interest in puts in two years.
Currently, the economy is rebounding from severely depressed levels in March/April, suggesting a “V” recovery.
However, a report by Axios AM today suggests otherwise.  Based on unprecedented job losses business failures and reduced spending, Axios warns of another slide in the economy.
      Darius Dale of Hedgeeye Risk Management sees the U.S. economy transitioning from a depression to a recession and not a recovery.
Erine Tedeschii of Everscore ISI  is concerned with layoffs that have gone from temporary to permanent and a rising rate of ling-term unemployment.
Compared with the Great recession (2007-2009)the three times as many  job have been lost this times  and four times as many people on government unemployment insurance.
The Street is betting that the economy will surge back well beyond  pre-COVID levels.  Problem with that rationale is, COVID is still very much with us, curtailing spending and and  optimism about the future.
While the 21-day , 35% plunge in stock prices in February/March was severe, stocks were not down long enough to create respect for what can happen to a  portfolio in a recession.
After an 11- year long economic expansion and bull market, the Street may have become desensitized to risk.

Monday August 31, 2010 “ Fed Inflates Bubble Further With Policy Announcement”
Stock Market
– Fever increasing, quick money can be made in overheated markets like this, but the risk of a downdraft is high. The Street is betting on a quick recovery, but that WILL NOT happen if the economy is straight-jacketed by COVID-19.  Expect lies and more lies from this administration about a vaccine, treatment, and instant test results. The stock market must be up going into  the November 3 election, and they will stop at absolutely nothing to hype it.
Economy: Rebound within recession. Double dip possible. Current reports are mostly based on changes from depressed levels.  COVID-19 may not go away for a year or more.
What to do: 
Maintain a cash reserve in line with one’s tolerance for risk.
That affords protection against a sudden flash crash, as well as gives one the reserve to buy-in at lower prices.

     Bubble just keeps inflating, and it stands to inflate more after the Federal
Reserve just announced a big change in policy.
   For decades, the Fed was charged with fighting inflation by raising and lowering  its fed funds interest rates, injecting and withdrawing funds from the system in an effort to counter  recessions and expansions.
The policy change, announced at last week’s annual Jackson Hole policy conference, stands to keep interest rates near zero indefinitely, even if inflation rises well above their target rate of 2%.
 This  gives individuals little alternative but to buy stocks if they want some a chance at a return on their money.
The  timing could be disastrous, since by reasonable, time-tested measures of value, the stock market is vastly overvalued, and the Fed’s  action gooses a very pricey  market higher.
 The S&P 500 was overvalued before COVID hammered  it  down 36% in 21 days earlier this year, and it is so much more overvalued now that the S&P 500 is at new highs and corporate earnings are  taking a beating.
I believe in free trading stocks, not micro-management by a bunch of corner-office , balance-your-checkbook-everyday, bankers who never-ever respected the stock market’s need to constantly reflect known positives and negatives, as well as a consensus of the future without their intrusion.   Dangerous mentality !  We saw what happened with bubble #1 (January 2019 – February 2020). Now we are in bubble #2 and they just iced the cake with a very untimely announcement.  They should address asset overvaluation, not add to it.

Risks of a major correction to bring the market back to realistic levels are high, but this is a presidential election year and hype about everything will lure investors into the market.
BIG “IF”:  What if COVID continues to hobble the economy causing one economic domino after another to tumble well into 2021 ?
      After the market got hit in February and March, I did not think it could get close to pre-COVID levels, but massive stimulus by the Fed and Congress drove it higher.
     While I correctly forecast the February  Bull Market top  two months in advance, I have not been unable to do so this time, as investors scramble to buy stocks before they run higher  – a classic bubble pattern.
Fighting the Fed has its perils;
it has too much clout.  But all bubbles burst, either because they inflated too much, or because they get pricked by an event, as COVID did last February.

Apple (AAPL: 499 ) split  4:1 Friday. Why is that important ?
Because the Dow Jones Industrial Average (DJIA) is price-weighted. On Monday AAPL will trade at roughly 125 instead 499, giving percentage moves in it one-quarter the impact it had before the split.

Since the March 23 lows, it has contributed 1,952 points to the DJIA, Friday close (28,653).

More on DOW: EXXOM Mobil (XOM:41), Raytheon (RTX: 62), Pfizer (PFE: 38) are being replaced by:
Salesforce (CRM: 271), Honeywell (HON:168) and Amgen (AMGN: 253).

Friday  Aug 21, 2020 (DJIA: 27,739)  FAANG Stocks Roar – Others Snore”  Warren Buffett says the market cap-to-GDP ratio “is probably the best single measure of where valuations stand at a given moment.”
James Emanuel, author and investor, highlighted it in his Aug.19 post to Seeking Alpha.com, using it as one of a number of hard-hitting indications of over valuation in the stock market.
Currently,  the Buffet indicator stands at 172% versus 109% at the bull market top in 2007 and  141% at the top of the dot-com bull market, and more than twice the long-term average of 82%.  (see full analysis below).
The FAANG stocks are driving the S&P 500 and Nasdaq. Not only are their businesses strong, but they sport huge  market capitalizations which causes them to have a dominating impact on the S&P 500 and Nasdaq Comp.  as a whole.
Since the December 2018 lows the ProShares ex-technology ETF (SPXT) appreciated 29% through Aug. 20, while the SPDR S&P 500 ETF  (SPY, )including the technology stocks appreciated 40%.
The invesco QQQ trust series I EFT (QQQ) soared 94%  in the period. In hindsight, this was the play.
Since the Dec. 2018 lows the FAANG stocks appreciated an average of 161%

Facebook ( FB:+120%), Amazon (AMZN +150%), Apple (AAPL: 238%), Netflix (NFLX: +116%), Google (GOOG: +64%).
The BIG “buy-low/ sell high” question is:
My calculation here starts at the low in December 2018, what would a sane person do with their shares when the Feb./Mar. flash crash hit ?
Would they have sold before the crash, or during it  as the market roared back and they felt they were lucky to get out with a 40% ,  60% gain at some point along the way ?
So, why are investors racing in to buy the FAANG stocks at this level ?  Will this question look silly a month from now – FAANG stocks much higher.

Bottom Line:
I believe we are in the eye of one of the most  dangerous storms of our time. Currently,  economic indicators are bouncing off severely depressed levels. The Leading Economic Indicators bounced  1.4% in July but remain well below highs.  While July’s industrial production  rose 3%  it remains below pre-COVID levels.
The key will be when we come out of the eye of the storm.  Will the bumps off depressed levels follow through with a full recovery or turn down ?  Wall Street seems to think so, but they were wrong last January.
And if the economic dominoes continue to tumble.  Will they be bad enough to trigger a plunge in stock prices as the market searches for a level that discounts the bad news and the uncertainty that lies ahead ?

The following  Seeking Alpha.com  post builds a  case for a major correction of 35% – 50%. This analysis emphasizes “all’ the points I have urged you to take seriously over the last 9 months.
He has the resources and space to do it in the detail that necessary to highlight  the points.
Must reading for serious investors.  Just copy and paste to your browser.

James Emanuel

Thursday August 20, 2020 (DJIA:27,692) “Bubble #2 to Burst Any Time Now”

The stock market hit some headwinds yesterday following the release of the July Federal Reserves’minutes, which cut  its forecast for the economy.  The report, which is always released a month late, referred to the  risk for the economy as “significant.”
Black Rock’s Bob Miller said, “This strongly suggests  both monetary and fiscal policy support will continue to be required for the recovery to remain on track.”
       This is an election year, you can be sure both are going to happen. Democratic House Speaker Nancy Pelosi indicated she would be willing to discuss a compromise on  another relief  package, which should happen within a week or two.
Meanwhile the Street is looking beyond the pandemic to a full recovery.
It was nice to see a stock other than a techy do well. TARGET (TGT) reported strong earnings for Q2, its stock jumped 12.65% in response. Lowe’s (LOW) stock jumped as well after good earnings, both beneficiaries of the pandemic.
However, if you pull 94 stocks out of the S&P 500 that are considered “Technology,” you get a different story about the robust market rally since the March flash crash lows.  While the tech stocks on average were up 20% for the year as a whole, the remaining 408 stocks in the S&P 500 were down on average.
The only outstandingly bullish development I see is the prospect for the Democrats to gain total control of the government, roll up its sleeves and  do the tough stuff that is needed to undue to damage done by this administration and  get America back on a winning track.
       Yes, there will be another stimulus bill and the Fed will do whatever it can to micro-manage the economy and stock market, but those are “props” to an economy that is currently in the “eye” of  a horrific storm.
The key will be what happens when we come out of the eye ?
         Will the economic dominoes continue to tumble ?  If so, the stock market will tumble. The entire disconnect between the market and the carnage in our economy and lives is based on an unjustified, naive assumption that all will be well by Q4 and beyond.
What spaceship is the Street flying on ?  We were on the brink of recession in Q4 of 2018, which the Fed was able to postpone until COVID-19 interceded.   What are we going back to ?
Why would the economy grow from this debacle when it is still unwinding ?
This isn’t high math, it’s common sense and the stock market has yet to begin to discount the adversity of what has happened and the uncertainty that confronts us.
          The adjustment to reality will be abrupt and most likely, a flash crash as institutions become aware (all at the same time) that there is no “V” recovery, it’s not even an “L,” it’s down, then sideways for the economy and stock market until the dominoes are no longer tumbling.
       OK, so no one wants to hear this ! Right ?  Why not just take a little off the table just in case I am right ?   In February and March, you saw what  can happen to the bluest of chips – DJIA down 38.4% in 21 days.
George Brooks
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.








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