INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,990
Russell 2000: 1,575
Monday July 8, 2019 9:24 a.m.
A better than expected jobs report Friday appears to have squashed the Street’s hopes for aggressive action by the Fed to cut interest rates.
So, the Street is back on the “bad news is good news, and good news is bad news” mentality. Jeeeeeeez !
There are other economic indicators and most have been pointing down, like manufacturing (here and abroad), a slump in the Leading Economic Indicator (LEI), encompassing 10 key economic areas, personal consumption expenditures, after-tax disposable personal income, retail sales, housing, and consumer confidence.
Regardless of the back and forth banter between the Federal Reserve Chair Powell and President Trump, the Fed is determined to head off a recession in 2020.
It will try to talk the economy out of recession or cut interest rates to do so.
The market is up 6% since Fed Chief Powell “hinted” that the Fed will cut rates and six months since the Fed abruptly reversed its policy from restraint to ease when signs of economic weakness flashed.
Interest rates have plunged dramatically in recent months, but the Street wants more, as if that would head off a recession – delay it, maybe, head it off no.
The market is some 30% – 40% overvalued, yet buyers press on as if nothing is wrong.
That is classic late-stage bull market behavior – THIS HAPPENS AT EVERY BULL MARKET TOP.
Minor Support: DJIA:26,821; S&P 500:2,977;Nasdaq Comp.:8,126
Resistance: DJIA:26,967; S&P 500:2,996; Nasdaq Comp.:8,171
Friday (July 5)
The Street really doesn’t know what to do next. Recently, it has keyed on the prospect for the Fed reducing interest rates in an effort to head off a recession, which in my opinion has actually started in bits and pieces.
The prospect of a recession and lower Fed rates, triggered a stampede to lock in interest rates before they plunged. This massive buying of bonds ramped up their prices and consequently drove rates down sharply, the 10-year Treasury plunging to 2%.
This also triggered buying in stocks, especially higher yielding stocks, which doesn’t make much sense. If the Fed sees a recession, stocks will be adversely impacted if one actually develops.
The Street wants the party to go on forever, 10 years isn’t enough. This is classic late stage bull market behavior ensuring a bad ending when eventually savvy buyers exit and sellers enter, slowly at first, then increasing as reality sets in, ending in panic and a bear market bottom.
Can’t happen this time ? Don’t bet on it !
This time could be real ugly. There is little the Fed can do to stop a recession and bear market. Lower interest rates from already low levels won’t help much. Reviving QE will have limited impact. Congress already passed a monster tax cut.
This is what happens at bull market tops.
Tuesday (July 2)
The stock market has been hanging tough in face of numerous negatives, including political turmoil, war worries, tariff disruptions and a slump in corporate earnings.
The market has gotten a big lift from an abrupt reversal in Federal Reserve policy, hints of lower rates and administration hype.
So far, the Street has totally ignored the prospect of a recession, even though the Fed’s about face on interest rates indicates it is scared stiff a recession will hit starting this year and in 2020, a presidential election year
Three economic reports yesterday confirmed their fears.
June’s PMI (50.6) hit a 10-year low
June’s ISM (51.7) is still sliding since its peak a year ago.
Construction spend in May slid 0.8% below projections.
In my opinion, an S&P 500 price/earnings -ratio does not adequately discount the angst of a recession. Historically the Shiller P/E at 30.2 is higher than any bull market top except the dot-com bubble burst market in 2000, which led to 50% plunge in the S&P 500.
At some point, the Street will have to face reality. When it does, odds favor everyone will do it at the same time.
The announcement out of the G20 meeting over the weekend that trade talks between the U.S. and China would resume, that further escalation was deferred is giving the stock market a boost today.
The market sensed this late last week as key technical indicators that were stalling got a second wind to the positive and signaled a strong rebound this week.
The key will be momentum, can the rally have legs. The good thing about hype about meetings, prospective agreements, a truce, etc. is it works short-term, the bad thing is investors rush in thinking something good has happened only to discover that it really hasn’t.
The Street wants to party and will do so until well after last call. My responsibility to readers is to warn them of risk when no one sees it.
We are on the edge of slipping into a recession. If we weren’t, the Fed wouldn’t be running scared after abruptly reversing its policy on interest rates to one of ease from one of tightening.
Greed at tops and fear at bottoms makes it next to impossible for investors to begin getting on the right side of the market at key turns. When the market gets “pricey,” investors should raise cash, because at some point, the market is going down. It may be a correction, or a bear market.
When the market has been pummeled unmercifully, investors should begin easing back into stocks – not all-out, or all-in, but gradually, since exact tops and bottoms are hard to pinpoint.
Friday (Jun 28)
Signs of a recession are cropping up everywhere for those who objectively will see them. Yet, the Street keeps buying running stocks up to historically extremely overvalued levels, obviously expecting the Fed to cut interest rates if the economy falls off the cliff.
This is classic late stage bull market stuff, happens at every market top. The unwillingness to buy at extremely undervalued levels is characteristic at bear market bottoms. Humans doing what they do best – being human.
If one must play, they should play with a limited amount of one’s funds while maintaining a healthy cash reserve to reduce the carnage when the market goes straight down.
Monday I asked, “Is the BIG money selling while all else are buying ?”
Yes, according to InvesTech Research which points out that Margin Debt, (borrowings to buy stock) has been falling off over the past 16 months. Margin Debt is taken on by savvy traders who leverage positions to make more money, fully knowing risks are increased. Their exit should indicate they are locking in profits.
Jesse Felder, The Felder Report agrees saying, “Leveraged investors could be signaling a bear market is now underway,” and backed it up with graphs. He noted, “Margin debt is now falling at an annual rate of 15%, a level of de-risking that has always been accompanied by a minimum 20% decline in the S&P 500 over the past half century.”
Thursday (June 27)
On balance, this is not a good week for economic indicators: Jobless Claims and Retail and Wholesale Inventories up, Durable Goods , New Home Sales, Consumer Confidence, Retail Sales, Net Exports, and the Dallas Fed Business Index are down. The third estimate for Q1 GDP at a 3.1% an annual rate of growth is unchanged.
As I have been saying, we are in the early stages of a recession. It will gain momentum in spite of a Fed rate cut on July 31 or September 18 at the latest.
Once underway, the Fed will not be able to stop a recession, slow down its intensity – yes, stop no.
So why is the Stock market hovering at new highs ?
The Street thinks it can ignore a recession and look out to 2020 – 2012.
After all, the average recession going back to 1945 lasts less than a year.
But, as I have repeatedly noted, stocks are overvalued heading into a recession and extremely overvalued at the mid-point of a recession. The Shiller P/E at 29.7 is 80% higher than its historic norm of 16.6.
Humans being human, will get scared when the market tumbles 15%, 20%, 30% and sell driving prices lower.
Wall Street’s problem is they do not want the party to end. Some big hitters will break ranks and sell, others will follow.
In the interim, there will be buyers in response3 to promises of success in trade talks and a Fed rate cut, but most of that is priced into the market.
Wednesday (June 26)
The G-20 will meet Friday and Saturday in Osaka, Japan where Presidents Trump and Xi Jinping are expected to discuss trade, but without any major breakthrough, except a promise to meet for further discussions in the near future.
We should get a better idea of how global economies a faring, as well as input on the impact of Trump’s tariffs.
Fed Chief Powell has insisted the Fed won’t cut its fed funds rate to please Trump, which leads me to believe he will anyhow, not to avoid the President’s criticism, but to head off a recession.
I have warned of a recession for many months, and believe it is already underway.
The Street doesn’t share my concern, it is still in a buy mode, or shall I say its computer algorithms are still bullish.
That will end in a 12% – 18% plunge as everyone on the Street gets a SELL signal at the same time.
When ? Don’t know !
Bad news doesn’t do it, a dysfunctional government doesn’t do it, an overvalued stock market doesn’t deter paying up for stocks.
On a given day no one will show up to buy, and prices will plunge followed by sellers and more downside as it becomes obvious, this should have happened six months ago, before the Fed stepped in with its hype that the “economy is in a good place” to prevent the market from finding a genuine comfort level that discounts a recession.
Tuesday (June 25)
There are just too many balls up in the air for the Street to decide what to do next. This week is loaded with economic reports that could pressure the Fed to cut rates on July 31, which I previously thought was unlikely because there is no press conference scheduled for that day, and for a rate cut they would want one. Should they schedule a press conference, it would be a tip-off they are cutting rates.
Key economic reports today are: New Home Sales (9:00), Consumer Confidence (10:00), Richmond Fed. Bus. (10:00).
The G20 meeting in Japan will be held Friday and Saturday. President Trump and China’s President Xi Jinping have agreed to talk trade at the summit, but expectations of tangible progress are low.
The U.S./Iran issue will remain uncertain at least until next week.
Then too, we have a stock market at all-time highs, which by many standards is over-priced and due for a technical correction after a sharp 8.7%, Fed-induced surge.
The Street is undeterred by all exterior events, at least until it becomes aware how vulnerable the market is. This indifference and self-fulfilling tunnel vision is typical of late stage bull markets.
The market will hang tough until someone breaks ranks to stop buying, worse yet start selling, then it will be straight down.
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.
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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.