INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,933
Wednesday, April 24, 2019 8:59 a.m.
The S&P 500 and Nasdaq Comp. should hit new all-time highs today, but the DJIA has a ways to go to beat 26,951.81.
The S&P 500 has only to top 2,941.91, the Nasdaq Comp. 8,133.29.
What does this mean ?
A lot of press and White House hype, and possibly a flurry of buying.
What should investors do ?
Raise some cash if they haven’t already.
The Street is excited about earnings reports to-date coming in better than expected. Generally, the Street low-balls projections for this reason, i.e. easier to beat.
United Tech (UTX) was up 2.3% and Coca Cola (KO) up 1.7% on earnings beats. Verizon (VZ) beat projections, but was down 2.1%
The Street was heartened by a 3.3% jump in New Home Sales Tuesday, but ignored a 5.4% drop in Existing Home Sales Monday.
In late stage bull markets investors tend to focus only on good news, not wanting to consider the party will soon end.
TECHNICAL: (No change from Thursday)
Minor Support: DJIA 26,587; S&P 500: 2,926; Nasdaq Comp.: 8,048
Minor Resistance: DJIA:26,737; S&P 500: 2,943; Nasdaq Comp.:8,156
A break beyond support or resistance increases the odds that the market will move further in that direction.
The risk of a flash crash will exist for at least 6 weeks. ………………………………………………….
Tuesday (Apr. 23, 2019)
We are still locked in a cruise control market where algorithms make the decisions and execute the orders, resulting in a market that automatically notches up without regard for over-valuation or the potential for bad news.
One of the first things I learned when trading the market was to RESPECT it, because it can suddenly turn ugly.
What we are seeing here is a combination of late-stage bull market arrogance and greed. Amazing that Q 4’s 20% crunch wasn’t a wake up call. Give the Fed credit for converting a technical rally into a full recovery of all that was lost, as it abruptly changed its policy from rate increases to no rate increases.
I don’t see respect here, what I see is an investment community that thinks every correction will be followed immediately by a rebound. That is a good way to get blindsided and buried with losses.
Investors simply do not want to heed warnings in late-stage bull markets; they believe they can stay for just one more score before it’s over.
They never sell…..……… until the losses become unbearable, which is often the time they should be buying. Humans being humans.
No one wants to liquidate their entire portfolio, but why not establish a healthy cash reserve just in case the BIG money walks away and the Street tweaks its algos to lock in gains and cut back its buying.
Monday (Apr. 22, 2019
Q1 earnings are posting, but it is too early to determine if the Street is looking beyond an expected poor showing this year to 2020 when it expects more robust growth. In recent weeks, the Street has been ratcheting down its projections for Q1 and Q2. If that spills over to 2020, it would be bad news for the bulls.
The Fed’s reversal of policy from steady increases in its benchmark interest rte (fed funds) to one of ease has forced mortgage rates down to levels more attractive to home buyers.
Existing Home Sales for April will be reported at 10 o’clock today and New Home Sales reported tomorrow at 10 o’clock, which may give us a read on whether the industry is bouncing back.
We are on a recession watch, and housing is a key indicator. The Fed will try to prevent a recession, which is why I expect a rate decrease this year.
Either way, the market is historically overvalued with the Shiller price/earnings ratio more overvalued than at any time in the last 100 years, except during the dot-com bubble (1999-2000), which precipitated an ugly bear market taking the S&P 500 down 50% and Nasdaq Comp. down 78%.
I didn’t like yesterday’s market action. Patient sellers showed up throughout the day after a spike up in early trading. (See “Technical” below).
At any moment, a flash crash can develop taking the market down 12% – 16% in a week or two. Be prepared.
The Street would like to pump prices higher, even to new all-time highs, so the big players can use the news media hoopla to sell big positions at lofty prices.
The minutes from the FOMC March 20 meeting were released yesterday showing most board members resigned to keeping rates at current levels.
I don’t buy that. Given even a smidgeon of bad news, the Fed will cut rates determined to head off a recession in 2020, a presidential election year.
A heavily redacted Mueller report will hit today, stirring controversary from both sides.
If the market gets hit, it will be because it is overvalued and due to get hit, not due to the Mueller report unless it is so damaging to Trump’s prospects in 2020 he won’t run for re-election or will face certain defeat.
That is all assuming the Street is still bullish on Trump. While they got their massive tax cut, the S&P 500 has appreciated 63% through April 12 under Obama vs. 28% under Trump in the two president’s first term.
About my Headline: The new normal has been the flash crash, a vertical plunge in prices that happens so fast investors are down 12% – 16% before they can say “sell.”
Under these conditions, it is prudent to maintain a cash reserve in line with one’s tolerance for risk to take the sting out of a flash crash and give an investor some cash to buy-in at lower prices.
The market averages are notching up, a pattern that reflects automatic buying by institutions, i.e., computers are making decisions to buy and occasionally sell stocks without much human input – kind of an artificial intelligence without the latter.
So, what are these computers programmed to do, other than blindly buy ?
Don’t know. I still contend, self excluded, that the human brain is the best computer on earth, not the fastest, but generally free to think weigh in on the unexpected. Put another way, computers can hit a fast ball, but not a sinker.
What is my point ?
Cover your backside, because this will have a bad ending, when reality sets in. We may have to hit new all-time highs to trigger sellers, intent on taking advantage of the hype by the press about new highs, to unload big positions as the public rushes in absolutely sure the bull has a lot further to go.
EARNINGS: For 2019, FactSet expects a gain of 3.7%. Currently, it tracks 2019 earnings gains/losses at Q1: -4.3%, Q2: -0.4%, Q3: +1.4%, and Q4: +8.3%. For the year, FactSet expects earnings growth to be +3.4%
A Morgan Stanley study shows a downturn in S&P 500 earnings growth has consistently triggered a plunge in stock prices. Analysts have been slashing 2019 earnings projections, however he Street is betting on a rebound in 2020. If they start slashing projections for 2020, we have the next leg of the bear market.
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 116 months, the second longest on record and 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 hit a low of 3.7 percent in November, jumped to 3.9 percent in December and to 4.0 percent in January. Now, averages include months below and above 3.8. What’s more, we won’t know when the current recession if we have one begins because that conclusion is reached by the Nat’l Bureau of Economic Research (NBER) long after the fact.
>Bear markets lead the beginning of recessions by 3 to 12 months. The current bull market at 119 months is four 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.
>The current economic expansion has lasted 123 months. That’s 65 months (2.1x) longer than the average expansion (58.4 months) going back to 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 3.8 Months.
> 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.
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