Cash Reserve a “Must” In Flash Crash Markets

INVESTOR’S first read.com – Daily edge before the open
DJIA: 26,113
S&P 500: 2,889
Nasdaq Comp.:7,845
Russell 2000:1,532
Tuesday June 18, 2019
   8:09 a.m.
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gbifr79@gmail.com
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TODAY:
The biggest contributor to losses in the stock market is investors are humans. At extreme market highs, they get greedy. At lows, they get scared. It’s normal !
When stock markets are pricey relative to standard benchmarks, it is necessary for analysts like myself to warn of risk, because corrections in today’s stock market are so sharp and severe, all but the very nimble trader can  protect their portfolio before it takes a nasty hit by a plunge straight down.
So far, in this 10 year bull market, corrections have been followed by a an immediate rebound.
        The next one, or maybe the one after than WON’T ! It will come out of nowhere without warning as major investors stop buying and begin selling.
There will be no immediate rebound because the economy will be in a prolonged recession and the Fed unable to mount an effective stimulus.
         A drop in interest rates from an already low level will do little, and especially where individuals, corporations and the government are already over burdened with too much debt. We may see one severe recession or two smaller back-to-back recessions.  It will be a spender recession caused by inadequate cash and insufficient borrowing power across the board.
NOT SELLING ANYTHING,  I’M IN IT FOR THE LONG HAUL ?
      OK, that’s fine if you don’t mind waiting years to get even. But the “human” factor can thwart that dubious strategy.  Investors get scared after a 30% drop, thinking it will drop even more.   They Sell and never get back in until the market is once again hitting new highs !
The most disciplined investor will sell most of their portfolio when the market gets frothy and wait for big correction or bear market has run its course to move back in. Others will raise 30% cash, or so,  to reduce the damage when a correction occurs. .  The problem here is, sitting on cash in a late-stage  bull market when others are making money is not easy, they end up going “all-in.” That’s the primary reason investors get caught.
CONCLUSION
We have a presidential election and general election coming up next year and the Trump administration, Federal Reserve and Wall Street will stop at nothing to prevent a recession/bear market. The Fed will cut its fed funds rate and the others will unleash relentless and unsubstantiated “hype.”
It will be so very, very difficult for investors to NOT GET CAUGHT at the top of this bull market before a 35% -50% bear market.
No matter what, that’s why I urge a cash reserve relative to one’s tolerance for risk – -now.
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TECHNICAL

        At this point, it is hard to tell if a rate cut is already built into the market, which jumped 4.9% after Fed Chief hinted at a rate cut on June 4, in fact his comments reversed  a 7.6% May plunge in prices.

Minor Support: DJIA:26,049;S&P 500:2,896;Nasdaq Comp.:7,843
Minor Resistance: DJIA:26,207; S&P 500:2,907;Nasdaq Comp.:7,861

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Monday  (June 17)
Friday’s economic reports  did not give the Fed enough reason to cut its fed funds rate.  While  Retail Sales and Industrial Production (manufacturing) were slightly better, Business Inventories continued to exceed the growth in sales this year and Consumer Sentiment slipped a bit from a month ago.
Even so, the latest Duke University/CFO Global Business Outlook indicated 48.1% of the CFOs surveyed expect the economy to enter a recession by mid-2020, 69% by the end of 2020.
USA TODAY reported on June 13 that Morgan Stanley’s Business Conditions Index dropped 32 points to 13 from 45, the biggest one-month decline on record and to the lowest level since December 2008, the heart of the Great Recession.
As I noted last month, Gary Shilling is bearish citing sluggish consumer spending, the deflationary impact of tariffs, declines in capacity utilization, industrial production and commercial and industrial loans, an inverting yield curve, and the prospect for declines in  Q2 and Q3 GDP, high levels of individual,  corporate and government debt, historically high price earnings ratio, , the high ratio of publicly owned  nonfinancial debt to assets, disastrous fiscal policies caused by the 2017 Tax Cut Jobs Act that gave corporations a 40% tax cut, but only a small cut to individuals.  Shilling was one of the few economists to warn readers in advance of the housing bubble and Great Recession/Bear Market  of 2007 – 2009.
WHEN WILL A RECESSION HAPPEN ?
It already is happening but in slow increments with a Federal Reserve that is desperately trying to head it off.
So, there is still a good chance the Fed will cut its fed funds rate on the 19th.
Why is this important ?
The Fed has clout, and in my opinion the Fed is cowed by the Trump administration and will do everything in its power to avoid Trump’s vitriol.
As I have warned countless times, once the Street begins to bail out, it is straight down. They all track the same indicators and will all get a SELL at the same time.
       I am hearing impatience from investors, doubt that a recession is looming, doubts that this bullet proof market can cave in and drop 25% 45%, just because the Fed has a magic wand and because the economy has not  imploded yet.
These doubts happen at market tops, memories are short, especially after an extended bull market. This is classic late bull market behavior.
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Friday (June 14)
This 10-year old economic expansion is long in the tooth, but thanks to Fed nurturing is slow to enter recession.
The stock market has experienced intense volatility since early 2018 when if plunged 12% followed by wide swings up and down, rallied to new highs in October 2018 before plunging 20% in Q4 2018 only to regain all that was lost, even hitting a new high in April this year.
Essentially, it began to anticipate a recession that failed to materialize twice in 18 months.
May Retail Sales were reported at 8:30 today and were up 0.5% vs. April’s gain of 0.6%.  Ex-auto they were up 0.5% vs. 0.3% in April.  Very little can be gleaned from this report.
      Industrial Production won’t be reported until 9:15 a.m., after I release this blog.  Business Inventories and Consumer Sentiment come at (10:00 a.m.).
Clearly, we have had more important economic reports, but this is what the Fed will be dealing with going into its FOMC meeting next Tuesday, if bad, these reports may just be what the Fed needs to justify doing what they really want to do anyway – cut the fed funds rate.
On March 21, the Fed signaled it would leave its rate at 2.5% through 2021 but the increasing prospects of a recession may force it to cut its rate, which had been cut to o.25% in response the 2007-2009 recession where it stayed for seven years until increased to 0.5% in December 2015.
The Street is mixed on a cut in rates.  Those not believing the Fed will cut rates next Wednesday point to Fed Chief Powell’s tendency to patiently wait for more and more  numbers.
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Thursday  (June 13)
What would prompt the Fed to cut its discount rate next Wednesday ?
Politics for one, but they can’t be that obvious.
A better answer: Friday’s economic reports, which  will be key – they must show weakness to justify a rate cut.
       Weakness in these reports suggests we are already in the early stages of a recession, so the Fed will have an excuse to cut its rate.  It’s their last chance before September 18, since there is no presser in July and no FOMC meet in August.
But really, what does a cut in rates do for the economy ?
Just the Fed’s decision not to cut rates in 2019 has driven the 30-year mortgage rate down to 3.82%  from November’s 4.94%, and homes are selling. Two homes on my street sold in a matter of days and above asking.
The housing industry is getting a new life after rising rates by the Fed over two years crushed sales and re-financings.
But how much of a boost would the rest of the economy get by a cut  ?  Individuals, businesses and governments, are already debt heavy, why would they  borrow more ? Granted, Corporations would use lower rates to borrow to buy back their stock, but an across-the-board stimulus to the economy is a stretch.
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Wednesday  (Jun 12)
Jump ball today
though there were patient sellers during the last two days. This makes sense since the market rebounded  more than 6.5%  in six days in response to Fed Chair Powell’s strong hint the Fed will cut its fed funds rate in the near future.
I expect the cut to be on the 19th, otherwise it won’t happen until September 18, since there is no press conference after the July 30-31 meet and no meeting in August.
That leaves a week for traders to decide how they will play a likely rate cut on the 19th.  I may be one of the few who is calling for a cut this soon, though a softening economy and an election next year give the Fed a green light.
      Sharp plunges, some of the flash crash variety, come unexpectedly, so investors should have a sizable cash reserve to offset the adverse impact of a plunge, as well as, provide buyers a chance to pick up  stocks at lower  prices.
AS ALWAYS, be prepared for undue hype out of the Fed and White House.
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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 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.
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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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