INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,248
Tuesday February 4, 2020 9:09 a.m.
A three-day, 14% plunge in the Shanghai Composite Index was reversed yesterday triggering a sharp rally in global stock markets including those in the united States.
Yesterday’s rally wasn’t very impressive, but the prospect for today’s open is.
The sharp reversal in China’s stock market in face of the spread of the Coronavirus epidemic will run U.S. stocks up at the open, the key will be is the China impact only temporary ?
More important are the reports on the economy this week. Both manufacturing gauges (PMI, ISM) bounced in January after six month slides. The Construction Index rose 1.4% in December, but all of 2019 was down 0.3%, the worst since 2011.
Factory orders come at 10 a.m. today, the ADP Employment Report tomorrow at 8:15 and Employment Situation Report at 8:30 Friday.
TECHNICAL: Today’s rally is triggered on what is happening in China’s markets, however the longer term direction will depend on the economy.
There is major resistance at DJIA 28,800 (S&P 500: 3,284).
This is a risky rally to “chase”, especially at the open which may be the high for the day.
Minor Support: DJIA:28,276; S&P 500:3,237; Nasdaq Comp.:9,237
Minor Resistance: DJIA:28,517; S&P 500:3,253; Nasdaq Comp.:9,281
Monday February 3 “A Golf Ball Bounce or Old Softball Bounce”
We have seen sharp breaks like this numerous times in the past, some much sharper than the two in late January.
The key will be in the strength in the attempt to rebound.
I don’t think Coronavirus has much to do with it other than some uneasiness going into the weekend.
The Fed, Street, bull pundits, Administration and the press have spent all the hype they have in their arsenal to keep the party going late into the night.
At some point a correction will continue down with eager investors jumping in thinking lower prices are a gift before realizing they have been snookered by a bear market and it’s too late to head off huge losses.
Again, the read here is the intensity of rebounds – is it a golf ball bouncing or an old playground soft ball ?
Big week for economic reports. ISM Mfg, PMI Mfg and Construction Spend at 10:00 today; Factory Orders at 10 tomorrow ADP Employment at 8:15 a.m. Wednesday, Employment Sit. 8:30 Friday.
Friday January 31, “Bulls Must Reverse Bad Start Today”
The market shrugged off concerns yesterday about Coronavaris and rallied with gains by Microsoft (MSFT), Goldman Sachs (GS) and Visa (V) leading the way.
Futures indicate lower prices at the open. Technically, the direction of the market today is important. Yesterday’s sharp bounce back improved the short-term picture, but a sell off would raise odds the market is headed lower.
The bulls are hanging tough but are at risk.
The key here is the fact the market is historically overvalued by a lot.
Whether today’s market is a forever bull market or just another bull that sucks everyone in with their last ounce of savings only to devour a third or a half of it in a ruthless plunge.
With computer algos calling a lot of the shots, the market may never cede to the bears, clearly if the algos relentlessly signal “buy.”
But what if the economy begins to suck some serious wind and corporate earnings stagnate as consumers (70% of economy) run out of cash and borrowing power ?
The algos only have to signal “defer purchase” to create a vacuum that ordinary selling pounds stock prices down.
And if the algos signal “sell” ? Bombs away !
One of the characteristics of all bull market tops is that just about everyone pro, and amateur, can’t see any downside risk. I have experienced every bear market since 1962 and they sported that characteristic.
Thursday January 30, 2020 “January Bull Market Top”
As I have emphasized for over a month, I believe January would mark the beginning of a major correction with an initial drop of 12% – 18% and 35% – 45% if a bear market develops. The latter would require new political, economic and international negatives.
I think the Street is in denial about a “forever bull market.” This is so typical at bull market tops. It is only human to want the party to go on forever, to add a multiplier to one’s portfolio notching it up 15% -20% over the next year.
This bull has lasted far longer than I expected.
I did not expect the Fed to panic a year ago, abruptly reversing policies, pumping money into the system and eventually cutting its benchmark fed funds rate. To its credit, the Fed headed off a recession/bear market, but expended tools it will need when the economy begins another slide.
Stock markets turn down ahead of the beginning of recessions.
As noted last week, I have encountered internet access problems related to a change in residence which I hope were resolved today.
On numerous occasions going back more than a year I have warned about a digital meltdown where our access to the internet, GPS, etc. will vanish. Hard copy of information is necessary, including ANYTHING that needs to be accessed or where of ownership critical.
I do not feel many individuals could function today without electronic devices much less think without asking an one of many devices for an answer.
No blog published between Jan 23 and today.
Thursday January 23, “Word Out From Davos: Desperation for Yield”
So that’s why the Street is buying stocks at extremely overvalued levels. OK, so you buy a stock to get a 1.5% – 2.5% yield but lose 35% in a bear market. Really ?
InvesTech Research has been warning readers about a recession/bear market referring to a host of economic and stock market indicators, all screaming “excess.”
InvesTech draws a parallel to the dot-com tech bubble of the 1990s which ended in a 50% drop in the S&P500 and a 72% plunge in the Nasdaq Comp.
It refers to the non-inflation adjusted S&P 500 P/E at 24.6 in the 91st percentile over 92 years as one of the most overvalued markets in history.
Corporate profits of all corporations peaked in 2014 and are lower today than in 2012.
Margin debt (borrowing to buy stock has slipped indicating the BIG money is exiting.
The ISM Manufacturing Index and New Orders Index are in the fifth month of contraction the lowest level since 2009. While services are still positive, both the ISM Non-Manufacturing and New Orders indexes have been declining from 2018 highs.
InvesTech’s founder, James B. Stack, concludes his January letter with,” It has clearly turned into silly season in higher risk assets….instead of having a single bubble, there are multiple bubbles of dangerous proportion lurking in the shadows…and the Federal Reserve has injected a moral hazard into all of them in 2019 with its implied guarantee of support and assurance of loss. One can only guess the fallout will occur, or the consequences when the next recession strikes.”
I agree totally. I have been urging a cash reserve of at least 30% for over a year, and in some cases 50% – 100%. While very early, I would rather be wrong with cash in reserve than declining stocks which when the downturn hits will be straight down.
Tuesday January 21, “The Times Do Not Justify Excessive Valuations
I called for the beginning of a major correction in the first week of January, but it didn’t happen. I still think it will and depending on what negatives hit the market when it is down and attempting to rebound, it could become a bear market.
Bull bubbles burst for two reasons. Major negative news can do it, or the bubble just gets too large and bursts on its own.
Uncertainties and impeachment didn’t do it which leaves bursting because it has exceeded all reasonable justification.
The latter has been true for many months based on reasonable measures of value. Based on the Shiller price/earnings ratio the average of 10 years of S&P 500 earnings adjusted for inflation.
There are other ways to do the math, but relatively speaking it is scary-high.
This market cannot stand any BIG money selling or simply not buying.
That would result in a flash crash (12%-18%) straight down. At 31.9, the Shiller PE is 90% above the mathematical mean. It is higher than all bull market tops except the 1999 dot-com bubble high of 44.
The Buffett indicator is flashing RED. It is a ratio of market cap (shares outstanding X price) to the nation’s GDP. At 153%, it far exceeds market tops of 137% (2007) and 146% (1999).
CONCLUSION: What’s so good about today to justify such excessive valuations ?
The Fed had to slash interest rates to avert a recession a year ago and head off a bear market that had a 20% head start. Even so, the economy is still struggling.
Our nation’s governance is a huge question mark with our country as divided as during the Vietnam War. Our infrastructure is visibly crumbling and we have no money to repair it. We have alienated long-standing allies and abandoned treaties that would improve our global competitiveness and security.
These deserve respect and demanding respect is what the stock market has done consistently over a hundred years.
Monday January 20 “Fed’s Panic Creates Bubble That Will Hurt Investors”
The Fed’s action a year ago to reverse its policy by slashing interest rates pulled the economy and stock market out of a recession/bear market with a presidential election only a year out. I strongly believe it just delayed the inevitable.
It’s action triggered a resurgence in the housing industry and related industries, but so far did little for manufacturing.
It extended a bull market from historically overvalued to a bubble status and sucked a lot of unsuspecting investors in believing the best is yet to come !
The problem with Fed tampering is it goes counter to normal economic and stock market trends. Eventually, a price will be paid. People, businesses and investors will get caught up in the new era bulletproof mentality and get overextended, as they have so often over the years and get crushed.
Recessions happen, bear markets happen.
The two hardest things for investors to do is walk away from late-stage bull markets and start investing when bear markets have devastated stock prices.
The United States is mired in a political/governance crisis, with major league damage to its credibility and long-standing relationships worldwide.
That deserves respect !
What deserves attention is, the Fed panicked a year ago and implemented anti-recession measures before a recession got underway. By its action it pumped stock prices higher before a bear market got underway.
These are things they normally do when recessions/bear markets have run their normal course need to be reversed. They will have no more arrows in their quiver when a recession does come. Recessions/bear markets happen, always have, always will.
Meanwhile, the bubble in stock prices may expand further before a straight down 12% -18% correction and a bear market depending on what hits it on the way down.
“Don’t fight the Fed” they say. Maybe they have too much clout – too many think-alike, pompous bankers, too removed from reality.
Friday January 20, 2020 “INSANITY !”
Yes, that is what this rush to buy stocks is all about as the stock market far surpasses levels that have turned markets down in the past.
That is what happens in bull markets, investors scrambling to buy anything even borrowing to buy stocks fearful of missing out on another score.
This is classic bull market behavior, but it has been 12 years since the Street has seen a bull market top, so memories of danger don’t stand a chance of saving investors from what lies ahead – a 30% -45% crunch, this time one without an immediate rebound.
THIS IS MY “I CAN’T STAND IT ANYMORE” POINT WHERE INVESTORS WITH CASH SIMPLY MAKE THE PLUNGE ABSOLUTELY SURE THE MARKET IS GOING MUCH HIGHER.
The same phenom overpowers investors at bottoms when investors just can’t stand to hold stocks another day, hour, minute and sell everything just at the time the market is turning up.
Tops and bottoms are the greatest challenge investors (pros included) face.
I expect a January bull market top, thought it would have occurred in the first week of the month. Hype by the Administration stand to pump prices higher, a reality check of how little the two trade pacts will contribute to the economy will be ignored.
I continue to believe the BIG money will cash in its chips this month, that 2020 will defy the odds mark a huge correction. Depending on what news hits the market when it attempts to rebound from that correction, we could sink further into a bear market.
The stock market has a way of punishing investors who disrespect it, and the arrogance of the bulls now is hitting extremes. The new normal is the “flash crash” computerized decisions by enormous institutions to not only to stop buying but the sell.
That spells –“straight down” 12% -18% ……for openers.
Thursday, January 16, 2020 “The Biggest Sell Signal of All Time”
Whether the signing of Phase One of the U.S./China trade agreement will pull U.S. manufacturing out of its recessionary slump is questionable. Manufacturing is in the worst slump since the Great Recession (2007-2009).
The rebound would have to be pronounced to justify the lofty multiples that stocks sell for. The announcement yesterday did little to boost stocks even though the market averages hit new highs early in the day.
The financial press likes to bark about the market hitting new highs even if only by a fraction. The result, a further inflation of the bubble.
It is possible the Street will realize the trade agreement will have little impact on the economy and sell much to everyone’s surprise, not mine.
My market analysis encompasses many factors – technical, fundamental, economic, monetary, psychological, seasonal and political. The key is to give the proper weighting to these inputs.
The market is least sensitive to politics, which is unfortunate since the current instability of our political system starting at the top can break this market which is already on the edge of a cliff, fundamentally and possibly economically.
Clearly, the Fed has enormous clout.
Two things bother me. One, the Fed lied. They told us the economy is “in a good place,” yet proceeded to slash rates and pump more money into the system.
For me, that destroys its credibility. Can I believe anything they say in the future. Two, what can they do if this weak economy slides into a recession ?
These are measures the Fed employs in recessions and at bear market bottoms. Either they panicked or are politically motivated.
By their actions they have jacked up a market that is historically overvalued, sucking unsuspecting investors in in face of what I think could be a devastating bear market.
YES, I HAVE BEEN VERY EARLY ON MY WARNING WITH THIS ONE. WITH BEAR MARKETS, EARLY IS BETTER THAN LATE. IT’S BEST TO BE WRONG WITH ONE’S MONEY IN THEIR POCKET THAN IN A PORTFOLIO THAN DROPS 30%.
Everything I am seeing is phony, bullshit and lies. THAT SHOULD QUALIFY AS THE BIGGEST SELL SIGNAL OF ALL TIME.
Wednesday, January 15, 2020 “Survey: CFOs See Recession in 2020
A Deloitte consulting firm survey recently found 150 CFOs of large firms seeing a recession starting in 2020. That could well be, since 9 of the last 10 recessions have occurred with a Republican in the White House.
Historically, the stock market turns down and up before recessions begin and end with a lead time varying generally around 3 to 6 months.
Since there has never been a recession without a bear market, that would support my warning of a bear market starting this month. While I picked January 3rd as the date for it to start, January is a month where a lot of funds become available for investment, and news of trade deals is likely to bring in extra buying.
But these are not normal times. Impeachment proceedings stand to divide a country which is already divided and a recession looms, one that has been delayed by the Fed’s policy panic a year ago.
The pros like to sell into bubbles and investor euphoria so announcements by the Administration about trade deals and outlandish projections about economic prosperity as a result would provide just that kind of opportunity.
I hear and read it relentlessly – “New Highs, this bull market can’t end.”
Yes, I have heard the same disbelief before every bull market top going back to 1966. The pattern repeats itself – memories are short and people are human.
This is not because people are stupid, it is because they are human and succumb to greed at tops and fear at bottoms.
These are very dangerous times for the United States, and a government under siege. Only an out of control late-stage bull market can ignore the risks investors face today and they will pay a huge price for their folly.
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.