Have Street’s “BUY” Algos Been Adjusted For Risk ?

INVESTOR’S first read.com – Daily edge before the open
DJIA: 27,534
S&P 500: 3,339
Nasdaq Comp.:10,719
Russell:1,507
Friday, September 11, 2020   
9:09 a.m.
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brooksie01@aol.com
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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%.
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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.
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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.

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     The bulls charged out of the gate in early trading yesterday looking like they were  ready to run the table, but hit a wall, and it was all downhill from there, taking all three major market indexes  back to test the lows hit three days ago ( DJIA: 27,464;  S&P 500: 3,329;  Nasdaq Comp.: 10,877).
In this tug of war, rally failures are key to who is really in charge.  After a rally failure yesterday where the market indexes closed at the lows for the day, the market is now probing for a level that discounts  known and perceived negatives and positives, the major one being gross overvaluation of equities.
Only six days ago the market indexes were hitting new highs.  How quickly things change.
      MY blog six days ago was headlined , A “W” not a “V” ?, warning  readers of a stall in the rebounding economic indicators from depressed levels and another plunge based on unprecedented job losses, business failures and reduced spending.
I quoted Evercore ISI’s Ernie Tedeshi as pointing out that three times as many jobs have been lost and four times as many people on government unemployment insurance than during the Great Recession of 2007 -2009.
That bear market was accompanied by a drop of 57% in the S&P 500.
Bad stuff can happen
, it has been a long time since the Great Recession.
The 35% plunge in the S&P 500 in February/March this year was over so quickly investors were not aware of its magnitude.
Put another way, the Street doesn’t respect what can happen when a real bear market roils stocks relentlessly to the point investors begin to worry if the market will ever recover, many selling out at the bottom.
BOTTOM LINE:
      The market will open once again on a positive note as some of the Street’s algorithms go into their automatic pilot mode, buying blindly without regard to looming negatives and uncertainties.
Has anything changed ?  Have analysts begun to adjust their algos for risk, resulting in a change to less buying, even selling  due to new concerns that a “V”- shaped economic recovery will be more like an “L” or a “W” ?
If suddenly reliable buying  vanishes, we will see a flash crash until stocks find a level that discounts uncertainties and negatives as economic dominoes continue to tumble once beyond a bounce off Q1 depressed levels.
SUPPORT:
DJIA: 26,967
S&P 500: 3,267
Nasdaq Comp.:10,617
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RECENT POSTS:
Thursday September 10, 2020 (DJIA: 27,940) “Bulls must regain momentum, or….”

When futures trading indicated a strong open for the market yesterday, I wrote that the rally throughout the day had to hold its gain or it would be a sign of weakness, i.e., no room for rally failures if you’re a bull.
      All market indexes exceeded  my resistance projections, but closed below  the day’s highs.  That is not what a robust rally looks like.
Futures indicate lower prices at the open today, so  the bulls will get another chance to demonstrate their strength. If they can override the selling at the open, they may just extend yesterday’s rally.
       Think tug of war where first one side looks like it is winning only to suddenly lose their edge when the other side gains the upper hand.
The simplicity of this analogy may not pass a quad’s need for complexity, but this is a game where humans tend to be human at times as greed and fear take the hand.
The failure of the bulls to close the day’s trading at the highs for the day indicates there are sellers out there, enough to  hold off the bulls.
We will see what the bulls have in their arsenal today.  A sharp reversal of selling between the open and 11 a.m. would lead to more upside.
However if it’s a no show by the bulls, the overdue correction I have been waiting for may by underway.
Expect an  enormous amount of unsubstantiated hype going into the election from the Fed, the  Administration and the Street. There will be talk about an economic recovery, a vaccine for COVID-19 and  a stimulus.
Resistance:
DJIA: 28,047
S&P 500:3,409
Nasdaq Comp.:11,176
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BOTTOM LINE:
      This is now a war between bulls and bears.  The bulls are hoping for a host of “fear-of-missing-out” buyers paying up for the overpriced stocks they buy, the bears are hoping for a rotation of strength out of growth stocks and into more stable industrials.  Both are historically overvalued and especially if corporate earnings fail to snap back quickly.

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Wednesday  September 9, 2020 (DJIA: 27,500) “Phony economy, phony stock market, Phony Administration”

Here is what we are faced with now:
1) the correction over the last 3 days does not erase the extreme overvaluation of the stock market indexes.
2) Buyers will step in as they have on every correction since the March 23 bear market lows and trigger a rally.
3) If that rally is powerful, the market will return to last week’s highs.
4) if the rally lacks conviction, this correction has further to go.
5) The risk of a flash crash is high. These abrupt plunges have become the new normal. So many of these institutions track the same indicators, so it stands to reason the analysts and money managers will react in the same way, first to stop buying, second to sell.
    Expect an  enormous amount of unsubstantiated hype going into the election from the Fed, the  Administration and the Street. There will be talk about an economic recovery, vaccine for COVID-19 and  a stimulus.  All bullshit !  We have seen a “bounce” in economic indicators from Q1’s  extreme lows, but odds are that’s all it is.  I expect a “W” recovery, possibly an extended “L”, but not  a “V”, as reality of the damage done by COVID hits the Street.
6) BOTTOM LINE:
Shouldn’t say this, will lose readers, be vilified by people I know, run off the road, etc., This economy is phony, stock market phony, Fed phony, and Administration phony.
At some point, all the damage that has been done to our unity as a nation, to our pursuit of healthcare solutions, to the rule of law so critical for the preservation of our democratic “republic,” to the foundations of our economy and government, and to outright decency will have to be repaired.
We are in far worse shape than we were four years ago, except the stock market it  has continued to surge.  Something has to give and I think it is the stock market, which is historically overpriced, by 30% – 45%.
Futures trading indicate a rally at the open.  It must be strong and hold its gain through the close. No room for rally failures.
RESISTANCE: Today’s rally should begin to encounter resistance at:
DJIA: 27,717
S&P 500: 3,361
Nasdaq Comp.: 10,978
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Near-term SUPPORT is:
DJIA: 27,200
S&P 500: 3,270
Nasdaq Comp.: 10,570.
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Tuesday  September 8, 2020 (DJIA: 28,133) : “Bulls on the Ropes”

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.

BOTTOM LINE:
       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.
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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.
BOTTOM LINE:
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.
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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.
BOTTOM LINE:
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;
https://thefelderreport.com/2020/09/02/a-speculative-feeding-frenzy-like-weve-never-seen-before/?mc_cid=499dd877f3&mc_eid=36092ac89a
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 ?
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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 Hedgeye Risk Management sees the U.S. economy transitioning from a depression to a recession and not a recovery.
Ernie Tedeschi of Evercore 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.
BOTTOM LINE:
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.
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George Brooks
Investor’s first read.com
brooksie01@aol.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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