INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,940
Wednesday, October 2, 2019 9:08 a.m.
Yesterday’s abrupt reversal and crunch is an example how vulnerable this overpriced market is. I think it was more a matter of buyers walking away when the ISM report hit, than overwhelming selling. That’ll come at lower levels when doubts and fear mount.
We had the same freefall in late July/early August. No one wants the bull market to end and will stay as long as possible, but are quick to run for cover when it looks like a bear market or severe correction will strike.
There is sizable support between DJIA: 25,500 and 26,200’ S&P 500:2,850 – 2,920; and Nasdaq Comp.:7,770 – 7,830.
That’s where buyers showed up in August. That band of support will be broken at some point.
Conclusion: Expect one or several sharp rallies to be triggered by optimistic comments by the Fed, the Administration, the Street.
The Fed will promise or hint at lower interest rates, the Administration will claim progress in trades talks, and the Street will forecast an earnings rebound in 2020.
We are dealing with something we have not dealt with for 45 years – a dysfunctional government as impeachment proceedings move forward.
This is NOT something the Street’s algorithms were programmed for. Expect these algos to be tweaked in coming weeks and that stands to be for less buying as well as some selling.
The whole idea here is to prop the market up and delay a recession until after the 2020 election. Nonsense ! We are in the early stages of a recession, it will get worse next year.
Confidence drives stock prices. Confidence will take a huge hit in coming months, and that will eventually take a huge toll on stock prices.
TECHNICAL: There will be the typical knee-jerk buying reaction by institutions today, but yesterday’s surprise plunge was a jolt to confidence. Playing rallies here is for the nimblest of traders.
Minor Support: DJIA:26,306; S&P 500:2,923; Nasdaq Comp.:7,953
Minor Resistance: DJIA:26,628; S&P 500:2,956; Nasdaq Comp.:8,050
Wed. Oct. 2 “Bull/Bear Tug of War to be Resolved Soon”
So far, impeachment proceedings have not dented the veneer of the Street’s bullishness.
Richard Nixon was re-elected a bit more than three months after the first signs of wrongdoings by his administration, the arrest of five men trying to bug the Democratic National Committee’s Watergate hotel and office complex offices.
A bear market started two months later, one that lopped 50% off of the S&P 500 Index.
Nixon resigned August 8, 1974 before he could be impeached. A recession (Nov. 1973-Mar. 1975), the Yom Kippur War (Oct.1973) and OPEC oil embargo (Oct. 1973-Mar. 1974) contributed to the market’s demise.
What we are face here is similar in that a recession and bear market loom, but far different, far more divisive and far more injurious to investor confidence with impeachment proceedings underway.
Once things start to unravel, there is no stopping the carnage until the plunge has run its course. Negative news is relentless, putting a lid on rally attempts and driving prices lower.
The big difference today is so much of the decision process is computerized, which means no change in the balance between bulls and bears until the algos are re-programmed.
That will happen as fear and reality mount.
Bottom Line: The Bulls are desperately trying to hold the line. Even if the market breaks above minor resistance (DJIA: 27,020, S&P 500: 3,000), there is another line of resistance a little above that (DJIA:27,300, S&P 500: 3,008). TECHNICAL
Sad to say, but IMHO the Fed and Administration have surrendered their credibility with an inconsistent and flow of information. Be wary of press releases from either. They are designed to prop the market, which will plunge without the hype. The Fed has lost its clout about rates and why would China cave to trade concessions with Trump’s power sapped by the prospect of impeachment ?
Monday Sept. 30 “Ignore Fed and Administration Hype, Cash 80%”
The Street tends to shrug off a lot of things that could end up hammering stock prices: war, recession, a bear market resulting from overvalued stocks facing an earnings recession that can be worsened by a recession, and now the potential for the impeachment of the nation’s president.
That’s what a 10-year long bull market can do to the people who benefitted the most – corporate management and Wall Street.
At some point, the BIG money will hit the silk and it will be straight down 12% to 16% before investors can say ouch. That’s just the first leg down.
That’s because the Fed, Street and Administration have propped this market up with hype about the economy and the magic of interest rate cuts !
Investors are being conned ! There are no new eras ! Bear markets happen !
All it takes is for several major institutions to break ranks and sell and others will follow.
The impact will be instantaneous as computer algos, mostly programmed to track the same bullish metrics, will get the sell at the same time.
The hype will continue in an attempt to prop the market hopefully through 2020 election year.
Impeachment a real possibility, and that will lead to more divisiveness and stifle consumer and investor confidence.
This one has the potential to get real ugly.
Stock markets recover from bear markets, so why not wait it out ?
For one, over the last 46 years we have had three bear markets with the S&P 500 dropping 50%. Many investors got shaken out near the bottom not to return until long after the market lows. Those who held on didn’t see portfolios regain losses for years.
Depending on one’s tolerance for risk, a cash reserve of 80% is justified.
Friday Sept. 27 “Street’s Arrogance to Risk to Precede the Fall ?”
Naturally, current events surrounding Donald Trump and the prospects for the U.S. House initiating impeachment proceedings flashes back to the early 1970s when President Nixon was the subject of the same thing.
Nixon took office in Jan. 1969. Incidents leading to the House Judiciary Committee passing three articles of impeachment: obstruction of Justice, abuse of power and contempt of Congress were filed on July 27, 1974. On August 8, 1974, President Nixon resigned, but was later pardoned by President Ford.
Perhaps the formation of the White House “plumbers” unit in the fall of 1971, intended to plug leaks in the White House set the stage for a series of shocking events between the White House and Congress and the press, including the formation of the Senate Watergate committee, high level resignations, coverups, payoffs, erasures of tapes, the “Saturday Night Massacre”, and a Supreme Court ruling.
Ironically, Nixon was re-elected on November 11, 1974.
A bear market (1/1/73 – 10/4/74) intervened taking the S&P 500 down 50%; a recession started in November 1973 and ended in March 1975.
Contributing to this chaotic era was the Yom Kippur War (Oct 6 -26) and OPEC’s oil embargo (Oct. 1973 – Mar. 1974) and a four-fold increase in the price of oil. Wild stuff !
Just how this will play out this time in uncertain. We are in the early stages of a recession, which the Fed acknowledges and is responding to with rate cuts.
A bear market may have already started, and who knows, maybe another mid-east oil crisis if war breaks out between the U.S. and Iran.
The market is historically overpriced. The prudent thing to do here is to have a healthy cash reserve (30% to 85%) depending on one’s tolerance for risk.
The new normal for corrections is the flash crash, a near vertical plunge in prices as highly leveraged institutions stop buying, worse yet – start selling with the result being a 12% – 16% plunge followed shortly after by a failed attempt to rebound, then another huge plunge.
So far, the Street is ignoring the risk, perhaps in denial after being spoiled by a 10-year bull market.
Today’s market will start on the upside with algo-buys automatically nibbling at lower prices over the last 8 days, but bulls must push up beyond DJIA 27:306, S&P 500:3,021 and Nasdaq Comp. 8,243 to get the market moving upward again.
While impeachment is grabbing the headlines, the bulls are hoping for good news on U.S./China trade talks October 10.
Thursday Sept. 26 “Market Takes a Pretty Good Punch, but……”
Looks like a jousting match between Trade talks and impeachment proceedings to determine which dominates the direction of stocks.
While there is enough weakness in certain economic indicators to warn of recession, the Street doesn’t care (yet).
All recessions to date have been accompanied by bear markets.
Expect news releases about improved U.S./China trade prospects anytime the market slides down. Absent that, the Fed will step in to stabilize the market, it’s the new norm.
The other side of the coin is the market will respond to bad news on trade, as well . For some reason, the Shanghai Composite stock index dropped sharply yesterday, which may suggest uncertainty about upcoming U.S/China trade talks.
The market is demonstrating it can take a pretty good punch what with recession talk, trade uncertainty and now impeachment.
But at some point, the market will keep going down. It will happen out of nowhere, because the Street’s algos will get a sell all at the same time and whoooosh.
What to do depends on one’s tolerance for risk. Anyone needing funds from their investment account near-term better have a healthy cash reserve. Senior citizens not in a position to ride out a bear market should also have a good cash reserve.
YES, with more unsubstantiated hype about trade, the market can (likely will) move higher, but that only extends the market’s overvaluation. Corporate earnings are down this year and estimates for 2020 are being slashed by the Street.
Wednesday Sept. 25 “Street Doesn’t Care About Impeachment, Just Trade.”
Axios reports the Street wants a trade deal, more importantly it points out that the S&P 500 has risen 3% month to date, all the while U.S. Treasury prices have fallen (yields risen) suggesting an increased investor appetite for risk.
To-date, U.S. equity ETFs have seen an $18 billion inflow of money while bond ETFs have experienced a slowing in new funds.
This pattern reverses much of what happened earlier in the year when equity ETFs (excepting February) were hit with net selling and bond ETFs net buying.
What’s going on ?
It could be the Street is front-running the Stock Trader’s Almanac’s “Best Six Months” (November – April), a highly consistent, time-tested pattern for market timing – buy November 1 – sell April 30.
The pattern is challenged by three issues – a trade deal or not, recession, and the move by the U.S. House to impeach President Trump.
Good news/bad news on a U.S./China trade deal has triggered short-term buying and selling, but political news has little impact except for big buying when Trump was elected in anticipation of lower taxes and deregulation.
The U.S. House is only in the preliminary stages of deciding if it will pursue impeachment of Trump, so I doubt this news will have much impact near-term.
Global recession is real, but the U.S. economy is taking its time to make the slide. Acceleration of that trend would tip the market into a full-fledged bear market or nasty correction.
What does all this mean ?
You know the answer – have a major cash reserve even though odds favor higher prices via institutional buying ahead of the “Best Six Months.”
When this overpriced/ aging bull market cracks it will do so without warning.
Tuesday Sept. 24 “So Far, Market Has Gone Nowhere in 20 Months”
Aside from rebounds from corrections, the DJIA and S&P 500 have gone nowhere in 20 months ! The Market rebounded this month after a 6.8% correction in August but is once again running into sellers, this time in the DJIA 27,300 (S&P 500: 3,025) area.
It needs a major piece of good news on trade to break out to new highs, but even that may not be enough to trigger another leg up in the market.
The Fed waved what it thinks is its magic bull wand, but its second cut in the fed funds rate begs the question – “why” ?
Europe continues to slide toward recession, as does U.S. manufacturing.
InvesTech Research warns of excessive valuation in the S&P 500’s Price/Sales and Price/Earnings Ratios , both well in excess of prior market tops.
Additionally InvesTech refers to the Buffett Indicator of Market cap to GDP which is close to 80% above its norm and challenging the 2000 dot-com bubble high.
EVERYTHING I AM SEEING HERE IS PHONY – a house of cards built on subterfuge, manipulation, lies at the top, greed and delusion about values and the economy/stock market being bullet proof from a horrendous crunch.
When the truth outs, it will be straight down 12% -16% in a Powell Minute.
What really, really frosts me is the hype by the Fed, Administration and the Street to suck investors in at these overvalued levels.
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 3.6% 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 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.