INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,288
Tuesday January 14, 2020 8:35 a.m.
Stock market bubbles feed on fear.
Whoa, isn’t fear what drives stocks lower and lower in a bear market ?
Precisely, but it is also fear of missing out (FOMO) on the next move up that drives stocks higher and higher in a bubble.
It’s been 20 years since the last classic stock market bubble so it should surprise no one that few investors and even pros remember the relentless and irresistibly higher push to new highs in stock prices that sucked unsuspecting investors in prior to a devastating crunch in stocks.
The Internet craze in the late 1990s drove dot-com stocks to stratospheric levels, pushing the Nasdaq Composite to 200 times earnings. People quit jobs to day-trade, employees of dot-com stocks became overnight millionaires when their company went public. All that was needed for a stock was dot-com in its name. The Nasdaq Comp plunged 72% between March 2000 and September 2001.
Rising prices draw buyers in and that drives stocks higher. Corrections are short-lived as investors view lower prices as a gift.
Four things are inflating the bubble further and further today. Corporate buy-back of shares has been the single biggest driver of stocks, Fed policy (three rate cuts in less than a year), Street hype (don’t want party to end), and computer algorithms which are mainly programmed with a buy bias.
It is the latter that will likely trigger a bear market as too many algos will eventually be re-programmed to account for risk, most likely when it appears the Fed will raise rates again. Too much money will react to the same sell signal and it will be straight down, a flash crash, the new normal for corrections.
We have not experienced a flash crash bear market since 1987 (Black Monday) when the DJIA plunged 22.6% on October 19, primarily due to a computer related problem called computer programming.
Can’t happen today ? Don’t bet on it !
Bear markets happen. If you have plenty of money to ride it out, don’t care about maximizing gains, or are faced with looming large expenses a bear market may not matter.
If it does, raise a cash reserve (the last thing anyone wants to do now.
a January correction as the BIG money cashes out, investors put gains into 2020, when the public rushes in.
But, as noted in recent blogs, news flow can have a major impact on stock prices. The risk of another major war in the Mid-East has taken a giant leap with the killing of Gen. Soleimani. Worsening economic data that reinforces the warning of 97% of CFOs surveyed recently who expect a recession within a year.
Minor Support: DJIA:28,876; S&P 500:3,280; Nasdaq Comp.9,261:
Minor Resistance: DJIA:28,951; S&P 500:3,291; Nasdaq Comp.:9,287
One reason for the strength in the stock market is there is nowhere else to get a return on one’s investment with interest rates so low.
Well, that means long-term bond prices are near historic highs along with the stock market.
A year ago, the Fed reversed a policy of raising interest rates, panicked and cut the rate of its benchmark fed funds rate to head off a looming recession, even though it claimed the economy was in a good place.
Both bond prices and stock prices soared, and aside from a continuing recession in U.S. manufacturing, retail sales and housing responded favorably.
In spite of the Fed’s efforts, a recession is inevitable, as is a bear market. In a recent survey, 95% of CFOs indicated they expect a recession to hit this year or early next.
But what if the economy suddenly rebounds ?
The Fed will be forced to raise interest rates causing long-term bond prices to plunge possibly 15% – 25% more than wiping out the annual yield of 3.0% – 3.5%. With the stock market as historically overvalued as it is now, a Fed tightening would whack the stock market.
We are witnessing a bubble phenom in stock prices. No one wants the party to end which is classic bubble mentality.
Some will raise a healthy cash position and reduce the horrific impact of bear market which has always accompanied recessions.
Others will pay the price, a 30% – 40% hit in their portfolio which will take several years before they see a return to where the carnage started. Some of those will panic and sell out close to the bottom and never regain their losses.
Friday January 10, 2020 “Buffett Indicator Flashing Sell
Ever try to wade into a stormy surf, worse yet get out a little too deep and try to get back ? When it becomes unhinged, the stock market mimics a stormy surf. It won’t be long before the Street develops respect for its rage.
The disrespect the Street shows for this overpriced market reminds me of just that. No one wants to get in the way of what is coming when the Street scrambles to grab their winnings and beat everyone else to the door.
I cringe at all the lies about EVERYTHING ! What happens when the truth outs ?
Why all the bullishness ? A crisis didn’t happen, so the Street buys ? And what if the crisis is not over ? Only an algo can be so stupid.
Anyone who believes that several harmless missiles lobbed into unoccupied turf is Iran’s response to the killing of the number two leader in Iran is naive. More to come, but done in a manner that does not give the White House enough reason to respond.
U.S. corporations on a roll ? If so, how come 40% are losing money, the highest since the 1990s.
Investors should prepare for the day when all this silliness hits the wall and sets a trapdoor for sellers trying to find a buyer for the stock they bought at higher prices thinking someone would buy it from them at a higher price.
This is classic bull market top stuff. It is next to impossible to stop until something happens. A jolting piece of news (Mid-East, Trump resignation) or simply the BIG money walks away.
NO one believes the party is anywhere near over. I have seen this arrogance/greed a dozen times, it gets ugly.
Greed at tops, fear at bottoms.
The Buffett indicator is flashing SELL ! This is a ratio of market valuation of all stocks to the nation’s GDP. It hit 146% prior to the dot-com bubble burst in 2000 prior to the crash that hammered the S&P 500 down 37% and Nasdaq Comp. 72%.
The indicator reached 137% before and the 2007 – 2009 Great Recession which hit the S&P 500 57% and Nasdaq Comp. 56%.
It has now crossed 150%
Thursday Jan 9 It’s All Lies and Bullshit Time to CYA
Analysts in addition to me, are warning readers to raise cash, some for many months. Some like InvesTech Research have been on the threshold of a sell for months, referring to economic and stock market indicators that are historically at extremes.
Ned Davis Research has always been on top of the market. MarketWatch reported yesterday the highly respected analytic firm stated that the market has never been so overvalued, explaining earnings are overstated due to buybacks by corporations without which earnings may not be growing much at all.
The company noted the ratio of market values to overall profits suggests price/earnings ratios are 80% above the long-term norm.
The price/sales ratio of S&P 500 companies is more overvalued than before the 2000 dot-com crash (S&P 500: down 57%, Nasdaq: down 72%) and the 2007 – 2009 bear market ( S&P 500: down 37%, Nasdaq Comp.: down 56%)
A correction back to reason will occur, but it needs a trigger. A sudden resumption in the U.S./Iran crisis could trigger a correction.
If new negatives whack the market when it is down, we would then have a bear market.
I believe two things. One, the Iran crisis is just beginning. Two, the BIG money will slip away if it hasn’t already and institutions will realize the downside is so much greater than the upside and will sell while their record is still attractive enough to attract new business.
Everyone heads for a narrow exit at the same time, ergo flash crash
Wednesday January 8, 2020 “Crisis Over ?? Don’t Bet on It !”
When tensions were at there highest last evening, it looked like the DJIA would open 300 points lower today, but Iran’s response was a non-event and a statement by its foreign minister, Javal Zarif, that Iran took and “concluded” proportionate measures in self-defense under Article 51 of the U.N. Charter assures the Street it’s safe to buy.
If that is not the case, uncertainty will prevail and the market decline.
I suspect Iran’s response is just beginning, that what is yet to come is less direct, one which doesn’t give the U.S. a reason to retaliate. Reportedly, Iran has a significant presence in all areas of the Mid-East. Yesterday’s missile attack can’t possibly sate its people’s rage for revenge.
Only computers could ignore the dangers here.
The Street may rush in here, assured nothing can stop this bull market which is nearly 11 years old. That’s the kind of thinking that has accompanied every bull market top in the past.
With interest rates at such low levels, investors must buy stocks to either get a dividend yield or to get appreciation in the stock’s value. That works until a bull market is over.
At some point, I expect the BIG money to stop buying and to sell. That is what will usher in a bear market. They may have already started, but corporate buy-backs and the investment of cash that institutions get in a new year stand to offset that selling….for now.
Tuesday, January 6, 2020 “Algos Not Programmed for This”
This is what computer algo investing is all about – a one-way street – “buy.” How could the algos be programmed to anticipate and analyze the risks of the killing of Iran’s General Soleimani and the potential for a wider war in the Mid-East ?
They can’t – only humans beings thinking on their feet can do that. At some point, the algos will have to be re-programmed for risk or set aside for hands-on investing and that’s when we get another flash crash, this time an extended one.
What should happen does not have to happen short-term, but does over the long-term.
This is a phony market, propped up by Street and Fed hype and especially corporate buy-backs. It has been historically overvalued for many months, but as we have seen in 1998-2000 it can get more overvalued.
The key for investors is, when do they raise enough cash to survive the inevitable bear market ? Sell too early and an investor could have made more money. Sell to late and it could take an investor years to recoup their losses.
Monday, January 6, 2020 “Bear Market: Rampage of Ruin”
Once the spell is broken, once the perception that the stock market can not sustain a decline, once the computer algos are tweaked to consider the unlikely, the impossible, to abandon an untethered bullish bias, that’s when an ugly bear market begins, it’s a rampage of ruin.
You aren’t going to hear it from the news media, talk show hosts, publishers of upscale opinion or money managers, their client base doesn’t want to hear it, IT DOESN”T SELL OR DRAW TRAFFIC.
But insignificant market analysts like myself BEHOLDEN TO NO SPECIAL INTERESTS BUT ARMED WITH DECADES OF EXPERIENCE CAN TELL THE TRUTH STARTING WITH – I can’t stand all the lying at the top, all the self-serving hype and manipulation. There is a price to be paid for this and that is where things get ugly in the stock market … and economy and people’s lives.
The difference this time around is the Fed can’t bail the economy and stock market out with a policy change, they blew that a year ago when they panicked by a declining stock market and economy in the early stages of recession.
The result: a deferred recession and an overvalued stock market that becomes more overvalued. Instead of falling out of the 41st floor, this market will be falling out of the 81st floor all because of manipulation.
Rigged ? Yes, at times, not by a secret committee meeting in someone’s corner office in Manhattan or off in someone’s den in Oyster Bay, but by a mentality that this is a new era where buyers will be rewarded by rising prices indefinitely. Once reality sets in, that mindset vanishes.
With so many decisions made by computers today, any withdrawal from an, “Ask no questions – just keep buying” would have an immediate and devastating effect on stock prices. Better hope it doesn’t happen.
As for Iran. The consequences of killing General Solemani are beginning to surface. My concern is that Trump’s decision to strike now is all about impeachment and re-election, not international strategy.
If so, as a nation, as investors, we are at HUGE risk. As I noted Friday (READ “Bear Market to be Worse Than 2007-2009 – Everything is a Lie”) below.
Once this “bulletproof” spell is broken it will be straight down, and a quick Fed orchestrated recovery won’t bail out the bear market or the economy that will suffer as a result.”
Friday, January 3,2020 “Bear Market to be Worse Than 2007-2009 – Everything is a LIE !”
The market will try to shake off the killing of the Iranian General, but this market is more overvalued than at any time over the past 100 years except the dot-com bubble burst 1998 – 2000 which pounded the S&P 500 down 57% and Nasdaq 78%.
I have urged readers to raise cash countless times before this, and have been wrong…….. but not unwise, as time will tell after the market gets crushed by a 35% -48% drubbing.
Bull markets tend to feed on themselves as the Fed, Street, highly leveraged traders and incumbent administration want the party to continue.
Bull markets press on well beyond reasonable value in a state of vulnerability until some event triggers a return to reason, a bear market.
A year ago, the Fed headed off a recession with a complete about face in policy featuring three cuts in its fed funds rate. It bought time, but did investors a great injustice – it delayed the inevitable – a recession and bear market.
Its hype claimed the “economy was in a good place” which was a lie, if it was in a good place why did the Fed cut its benchmark interest rate three times in six months ?
On August 19, 2007, I sensed our economy and stock market were at risk of a severe correction and wrote the following:
“The perfect storm in our financial markets
is looming….It will take a heroic effort internationally
to avert a meltdown of huge magnitude…Trading in
everything may have to be stopped until some sort of
sanity is restored…This can get real ugly…No one has
a handle on the leverage amassed in derivatives ..No
one has a true handle on how precarious the situation out
there is, and that uncertainty feeds on itself prompting
increased selling…With few buyers, stocks tank…
Only when a cauldron of fear begins to boil do you have
a market that is reasonably safe to invest in.”
Two, months later, the worst recession/bear market since the 1930s began taking the S&P 500 down 54%.
On March 10, 2009, with the DJIA at 6,800, I went against panic in the Street and issued a Special Bulletin “BUY,” one day after the actual bear market bottom, a bear market that took 50% off the S&P 500.
Like today, I had alerted readers to an unprecedented buying opportunity for weeks before the bear market bottom. Bottoms are much easier to read than tops because the Street, Fed and party in power don’t want a top to develop.
Thursday January 2, 2020 “Bull Bubble Burst This Week”
Yes, the bubble inflates further, casting doubts on all warnings of overvaluation and sucking every prospective investor in with all the money they have left save those who borrow to buy even more stock.
Not much I can say except this is classic behavior of investors at market tops.
FYI: They are equally feverish at market bottoms except they are then selling convinced the market is going lower.
This scenario has been written about hundreds of times over the years in how to invest successfully books, but greed and fear are a staple in human emotions and in all fairness no one can be blamed for being greedy when stocks are rising relentlessly, or being mortified by stocks that plummet every day.
Memories of the carnage of the 1999/2000 bear market and the 2007/2009 bear market are distant, in fact, I doubt many on the Street today were even employed in the business for the 1999-2000 bubble burst.
Futures trading indicate a big jump at the open, and that should convince just about everyone that 2020 will be a banner year.
That’s unfortunate…very unfortunate.
Tuesday December31, 2019 “2020 To Be Extremely Volatile”
I have been watching year-end activity and still expect an early January correction, which could become a bear market depending what hits it when it is about to rebound.
Fed hype and rate cuts, hype about trade pacts, and corporate buy-backs have kept the bull market intact in spite of slower earnings growth and a recession in manufacturing.
Yesterday’s selling (lack of buying) could be the beginning of what I expected for the first week of January, but volatility is what happens in the stock market in December.
No one wants the party to end. The Fed will have a difficult time stopping a correction this time around like it did in Q4, 2018 when the S&P 500 plunged 20%.
It’s abrupt policy change to that of three successive rate cuts in the fed funds rate not only headed off a bear market, it extended the economic expansion.
All things considered, the market has outrun the looming negatives, political and economic uncertainty, and investors who are ignoring reality that parties like this eventually do END.
Only contrarians can reject the urge to go all-in.
Like I have said many times the Street never thinks bull markets can ever end at market tops and never thinks bear markets will ever end at market bottoms.
As I wrote above, this last leg up Dec. 2118 to Dec 2019 is all about Fed hype and rate cuts trade talk resolution, and corporate buy-backs. What can any one or all of these do with stock prices at all-time highs ?
At some point, buyers will vanish and sellers take over, the result another flash crash.
Friday December 27 “ Party Over – Last Call Jan 3
Classic year-end rally. Expect sellers to show up to put gains into the 2020
tax year. IMHO, early January will mark the end of the 10-year bull market as political uncertainties surface along with renewed worries about a recession.
In a real world, these risks are worth considering. Maybe the Street thinks it can ride out a recession/bear market, but fear mounts as stocks slide and investors begin to panic. A 50% decline takes a double to recover, not to mention years.
To its credit, the abrupt change in Fed policy last January averted a recession, but temporarily.
I am one of the few who believes Donald Trump will not run for the presidency next year, will resign for health reasons or otherwise.
I am most bullish when no one is bullish. Today, everyone is bullish – look at all the buying and at record highs !!!
While the S&P 500 appreciated 32% more under President Obama’s first 35 months in office, Wall Street has strongly endorsed Donald Trump’s election, and stands to be disappointed if he is not re-elected or doesn’t finish his first term.
I think the party is over.
Monday December 23 “ Bull Market Top January 3 ?”
No one believes that, but………….
Most portfolios have been tweaked for tax purposes and to purge losers going into what is expected to be another good year.
This seems just a little too pat for me with some key indicators challenging all-time high levels.
The Shiller S&P 500 price/earnings ratio of 30.9 has only been topped by the 1999 dot-com bull market top of 44. While that leaves the current S&P room to rum, any duplication of that outlandish speculative binge of enormously overvalued dot-com stocks is more than a stretch.
Rising uncertainties as the November presidential elections approach are likely to put a lid on investor enthusiasm setting up a strong possibility of a major sell-off in 2020, and I think that can start in early January starting as early as the 3rd or 6th.
To its credit, the Fed prevented a recession from starting last year with its abrupt change in policy and three cuts in its fed funds rate. Time will tell, whether a recession was avoided or just delayed.
Is it worth the risk of buying now after such a run and with so many uncertainties looming ? I don’t think so. The downside risk far outweighs the upside potential.
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.
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.