Looks Like a Bubble, Acts Like a………….

INVESTOR’S first read.com – Daily edge before the open
DJIA: 26,281
S&P 500: 3,112
Nasdaq Comp.:9,615
Russell: 1,452
Friday,  June 5, 2020    8:35 a.m.
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brooksie01@aol.com
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November 15, 2019 (DJIA – 28,004)  My blog headline:  “Bear Market…Why?”  Here I Called for a bear market to start in January, that the initial plunge would be 12%-18% – “straight down.” It started mid-February.
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January 20, 2020 (DJIA:29,348) My blog,  “INSANITY,” projected a bear market decline of  30% – 45%. The S&P 500 plunged 35% in 21 days.
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Currently, I expect this bear market rally to top out in May and  the bear market  to post a decline of 50% -60%  before bottoming out in October.
A game changer would be a sharp reversal in the growth of COVID cases and the lifting of  measures designed to counter it.  Additionally, the ability of people and businesses to adapt and innovate.
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Brief bio: In investment business 57 years, writing about stock market  for 52 years, including  investment publishers, brokers, research firms, investment bankers, plus my own investment advisories,  mostly as independent contractor to maintain independence of analysis.  “In the trenches” for every bear/bull market  since 1962. Started before  quote machines  as a tape reader/trader, posting charts by hand. Primarily  a technical analyst, but research includes fundamental, monetary, economic, psychological factors. Research recommendations/profiles of hundreds small companies.
Love rough and tumble… telling the story. CNBC-TV, Been writing investors first read.com daily before the open for 11 years. ……………………………………………………………………………………………………………………………………………..
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TODAY
It is imperative that investors assess the level of risk they can  tolerate and be sure their level of cash addresses it now, so they are ready for the next leg down whether it comes tomorrow or months from now.
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For most of last year and into February, I warned of a Fed-induced stock market bubble that would drive the S&P 500 to levels of overvaluation seen only once ever except the dot-com/Internet bubble in 2000 .
I called attention to instances where Fed Chief Powell’s comments goosed stock prices upward well beyond levels that were justified.
In November,  I called for a January 2020 top to the 11-year old bull market. It didn’t happen until February with a 38% plunge in the DJIA, 35% plunge in the S&P 500. If COVID-19 didn’t prick that bubble, something else would have, obviously though not with such a dramatic result.
As it did in early 2019, the Fed stepped in assuring the Street it had its back triggering yet another bubble as the market averages have recouped most of the February/March losses.   It’s Bubble #2.
Shorts are panicking, but investors as well, sucked in by the fear of missing out going right back in near the level that led to this year’s flash crash..
With the enormous damage done by COVID-19 and efforts to counter it,  there is no way current prices can be justified except that the Fed has promised to intervene at least until after the elections.
The stock market is a bad place to be in denial.  We saw the result of a bubble bursting in February.  Anyone around for 2000’s bubble burst shudders at a repeat of its 57% plunge in the S&P 500, and 78% plunge in the Nasdaq Comp.
       Over the years the Fed has tried unsuccessfully to manage the economy and the market, but following the Great Recession, it has tried to micro-manage it. With rhetoric, interest rate changes and QE.
I think the  Fed has contributed to flash crashes, which have become the new normal.  The Fed inflated the bubble between December 2018 and February 2020 leading to this year’s crash, and are once again inflating yet another bubble which stands to have the same result when reality sets in that our economy is in far worse shape than in February.
 WHY is the Fed inflating both its balance sheet and the stock market  ?      Is the outlook for our economy really that dire ?
Or, after being appointed to the job of his dreams by President Trump, does Fed Chief Powell feel compelled to do his part in getting President Trump re-elected.

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RECENT POSTS:                                                    
Thursday June 4, 2020 “Market Almost Acts Like It’s Rigged  For November”
What will prick the current stock market  bubble ?  Hopefully, not another pandemic.
    More than likely, institutions will simply stop buying since they can’t justify paying up for stocks, thus creating a vacuum for a flash crash, which is the new normal.
As noted Monday, Bespoke Investment Group told clients that 74% of the S&P 500 are now overbought and there is not a single oversold stock in the index, the first time this has happened since 2007.
Also Monday, Citigroup’s Manolo Falco, co-head of investment banking urges corporate clients to raise as much cash as possible before reality of the pandemic sinks in for investors.
Falco’s “reality” is  the Honeymoon which Harvard’s Jacob Furman, former chair of the Council of Economic Advisers, warned would mislead investors prior to  a “long and painful slog” when workers are not re-hired  and businesses are not going to open
Jesse Felder (The Felder Report) sees the potential for an S&P 500 plunge of 44% to 1,750  from current levels and he bases this in part on  the “Buffett yardstick” a ratio of the S&P 500 to the nation’s GDP which just hit an all-time high of 200%.
Axios Markets reports FactSet estimates for the earnings of the S&P 500 for the first five months of 2020 have fallen to $128.03 from $177.82, or 28%, the lowest going back to 1992 when FactSet started the calculation.
     Joe Brusuelas, chief economist for RSM International told CNN , “The market is broken, it no longer reflects a forward outlook that is truly aligned in the real economy.  That’s a problem, because at some point, he says, the public will say these markets are rigged.”
      Precisely my point with the Three Amigos (The Fed, the Administration and the Street).  Why  ?  November elections. All three have a lot to lose.
      Axios also reports, Close to six million white-collar jobs are at risk with layoffs due in coming months.  “It will get worse before it gets better, says Yelena Shulyatyeva, senior economist Bloomberg Economics.
      Bubbles have an irresistible  lure, tormenting investors fortunate enough to have cash.  some in the business refer to it as “Fear of Missing Out,” my term is  the “I can’t stand it anymore” urge to either get into the market as it appears to be running away,  or as I am sure in mid-March when stocks were plunging, the urge to get out.
      Fundamentals do not support the current level of stock prices, clearly there a number of respected analysts  who believe this rally will yield to a sharp correction, even a test of the March lows.
      As noted this is the “bounce” phase of  the bear market.  The momentum is building so we may erase all the February/ March loss.
A lot of this is short covering.
Bottom Line:
Bubbles just have to run their course until they are pricked like COVID-19 pricked the December 2018 – February 2020 bubble.  Or they may just burst.
Investors do not want to get caught by a bubble burst again like that in February/March.
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Wednesday June 3, 2020  “Honeymoon Stage of Coming Out – Then Reality
1)We are in the honeymoon phase of the national bailout and simply will not know how much  traction the re-opening will gain.
2)Even so, the Street, spoiled by a fed-nurtured 11-year old bull market, is betting the economy  will rebound strongly and continues to pay up for stocks even though stocks are more overvalued now than they were in February before a 35% 21-day crash.
3) But there is little justification for either the economy and the stock market to  sustain strong growth any time soon, given the damage done by COVID-19
4)The Fed has stated it will step in to whatever degree it takes to prop up the economy in spite of its top-heavy balance sheet.
5)Has the Street asked why would the Fed and U.S. government be taking such an unprecedented steps to save an economy if the risks of a major depression were not likely ?
6)That said, why is the Street so quick to pay up for stocks in face of such uncertainty ? The Nasdaq Comp. will punch to an all-time high with the DJIA and S&P 500 not far behind.
7)This looks like bubble #2, the first being the 2009-2020 bull market bubble that ran from December 2018 to February 2020 and was mostly orchestrated by the Fed itself in an effort to head off a recession that was starting to take hold in Q4 of 2018.

Bottom Line:
Beyond an initial surge from deeply  depressed economic  data, there must be a follow through.  A “bounce” is a given, but the core of our economy, global economies, has been skewered  at a time the 11-year old economic expansion was running out of steam.  Without COVID-19, odds are we would be in a recession anyway.
Essentially, the message from the Street is it is willing to risk clients’ money  buying stocks that are far more overvalued now than they were before the crash in face of a badly damaged economy. I just don’t understand “why.”
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!”Tuesday June 2, 2020 (DJIA: 25,475) “Market Needs To Adjust To Reality”           Simply stated, fear drives stocks down beyond reason at bear market bottoms and greed drives stocks well beyond historic norms at bull market tops.
Where this gets challenging is measuring the extremes.
Time-tested  yardsticks like the price/earnings ratio, price/sales, investor sentiment (bulls/bears) have been helpful over the years in  relative sense.
What is complicating today’s assessment of the stock market is the fact the Fed and U.S. government has dumped  an unprecedented amount of money into the economy.

The Fed in particular has promised it will stop at nothing with its QEinfinity to prevent a recession.
As a result, the stock market has rebounded dramatically from its March 23 lows with  the  DJIA  only off 14% (S&P 500 off 10%) from the February bull market highs.  The Nasdaq Comp. is off less than 3% from its highs and will likely erase the 21-day 32.6% Feb/Mar. plunge and  punch to new all-time highs.
Bottom line:
     In spite of how serious a toll COVID-19 took on our economy and will take as economic dominos tumble relentlessly going forward, the stock market is more overvalued now than before the 35% flash crash plunge earlier in the year.
At the time the Shiller price/earnings ratio was higher than at any time ever except the 2000 dot-com/Internet bubble that once pricked led to a 57%  drop in the S&P 500 and 78% drop in Nasdaq Comp.
In February, we were not faced with the dire economic outlook that we are today, so why should the stock market NOT reflect that ?
I have lost count of how many times I have said this, simplistic as it is, but reason will prevail. The key is to be prepared for it what it strikes.
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Monday June 1, 2020 (DJIA: 25,383)  “Stock Market Bubble Insanity”
     Axios Markets  reported today that JP Morgan’s Marko Kolanovic has reversed his March bullish stance, warning that reopening efforts look insufficient and that the threat of supply chain and international trade breakdowns justify equities trading drastically lower.
    Bespoke Investment group told clients that 74% of the S&P 500 stocks are now overbought and there is  not a single oversold stock in the index, the first time this has happened n since 2007.  

      Our present economic and stock market situation is best summarized in Axios by Jacob Furman, Harvard professor and former chair of the Council of Economic Advisers who said  the U.S. is in the honeymoon stage of the economy’s recovery where some furloughed workers are called  back, but there are a lot more workers who aren’t called back to their jobs, businesses that aren’t going to open, so once past the first phase you are in for a long and painful slog.
While the economy and individual’s lives are in shock, there is a bounce taking place as people come out of seclusion and businesses re-open.  That’s normal.
To the best of my knowledge, COVID-19 has not vanished as evidenced by spikes in various states.
Since its spread is caused by close contact, I see no reason why more spikes won’t occur. The question is, what are states going to do about it ?
     Another shutdown is out of the question, but consumer wariness isn’t.
An economy cannot take a hit as great as this and not have a domino effect for months, years.
Hundreds of numbers can be crunched, but common sense screams one thing:
Aside from a brief but brutal 35%+ plunge in the stock market, it is not currently discounting the adversity of what has happened.  NO ! Not with a mere 14.2% drop in the DJIA, a 10.3% drop in the S&P 500 and a 3.5% drop in the Nasdaq Comp., the latter significantly skewed by a half dozed heavily capitalized growth stocks.
The Fed, Administration and Street (Three Amigos) want the party to continue at least through the November elections, that’s reality regardless of political affiliation.
Bottom Line:  It is another bubble just like the one in 2019 and early 2020.
      It will pop, either it will get pricked by an event like it was in February by COVID-19, by a massive return of it, or the realization that the gears in our economy are so clogged by debris the economy must go further south before a recovery is possible – an “L” recovery.
       This is what happens after 11 years of an economic expansion and bull market. The powers in business, finance and politics can’t accept a bear market.
Again, I say, the market was vastly overvalued in February and is so much more overvalued now that prices are going up and corporate earnings going DOWN.
      Reports on the economy that will be released in coming months will compare well with prior months/quarters simply because they are going up against the extreme numbers posted in March and April.
That will be misleading, but will stoke hype by the three amigos that will inflate the bubble even more.
      Anyone compelled to “play” must be aware that risks are very high and maintain a sizable cash reserve and “sit close to the exits” as another leg down looms.
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Friday May 29, 2020 (DJIA:25,400) “Assumptions” – Where Wall Street Analysts Get It Wrong.

Can’t blow holes in a detailed report, a point of view, an argument ?
Check its “assumptions.”
     Many of the bullish  stock market analyses I have read are impressive for detail, graphs, charts,  proprietary formulas,  and convenient comparisons to past events.
Here’s where I think they get it wrong.
Assumption #1That Covid-19 is not a metric that poses a major threat going forward. The Street was aware of its potential to adversely impact the economy and stock market back in February but gave it little weighting then, less so now.
What do they know that the smartest biopharmaceutical executives don’t know ?  How can this pandemic be so cavalierly dismissed  so early in the crisis.  Even if its severity declines, the uncertainty and damage it has done will topple dominos for many months to come.  It is primarily transmitted person-to-person, but it didn’t vanish, so what happens when people  get up close and personal again ?
Assumption #2 – That the economy can recover in Q3 and Q4.
Yes, reports will show improvement but primarily because they are being compared with disastrously low numbers in the past, however so much damage has been done in such a short time, the fallout stands to be intense and endless.  Q1 GDP is down 5% at an annual rate. Q2 is projected to drop 40%.  Does the Street think that won’t have an impact going forward, that it won’t topple a zillion dominos ?  Walk around the block guys with eyes open !
Assumption #3 That the Fed will have everyone’s back if the crisis continues or new ones erupt.
The Fed has already printed reams of USD’s on top of a top-heavy balance sheet which now stands at $& trillion, up from $1 trillion in 2002.  Why would they do this if they weren’t petrified at what the see ahead.  Why would any analyst treat this casually.
Assumption #4 – The Street entered 2020 totally oblivious to the fact the S&P 500 was more overvalued than at any time ever, except the dot-com/Internet bubble that burst and sent the 500 down 57% and Nasdaq Comp. down 78% in 2000 – 2002.
The S&P 500’s P/E is even more overvalued now with stocks rising and earnings cascading, YET, the Street dismisses this as an expansion of P/E’s, not to fret a bit, this is an aberration, a glitch in the big picture to be treated with an asterisk  looking back five years from now.  This is a time-tested yardstick not to be used in one instance but ignored in another
Bottom line:  This is what happens after an 11-year economic expansion and bull market. The Street does not want the party to end – spoiled by Fed nurturing for 11 years.
The “Three Amigos” I referred to on Wednesday (The Fed, Administration, and Street) will pump this market up  as much as possible, before the election, inflating a bubble that will once again be pricked and once again roil investor’s portfolios.
I expect a test of the March 23 lows.  Depending on news flow and whether money managers panic, those lows could be broken. This IS NOT business as usual, not like anything we have seen since the 1930s.  Too much ongoing damage has been done to the core of our economy.
No one knows where this can lead. Investors are best served by being told the jury bis out, to maintain a cash reserve they may desperately need if it goes worse than “badly.”
Once again the three amigos are inflating a bubble. It will burst with the predictable result – flash crash #2, or if we are lucky a more gradual slide to new lows.
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Thursday May 28, 2020 (DJIA25,548) “Bubble #2 Driven by Fear of Missing Out and  “Hype”
The acronym for that is FOMO.  I opt for the “I can’t stand it anymore” response to extremes in the market that generate greed or fear forcing an investor to act in haste.
Investors who raised cash before the February/March crunch, as well as those who sold out at lower prices are panicking about the persistence of the market’s rebound, and understandably so.
Fear of missing out (FOMO)
is driving stock prices upward with a lot of hype from the Three Amigos, the Fed, the Administration and the Street.
I expected a test of the March 23 lows by now, even a break below if money managers panic.
I still expect another leg down, however we are now dealing with Bubble #2 and that will either have to run to an extreme or be pricked by a news event.
That can happen at any time and could result from spikes in COVID-19, worse than expected economic/corporate news, or the realization by the Street that the Republicans will lose control of the presidency, Congress and some governors up for re-election.
      Bubble #1 was pricked by the COVID-19 pandemic in February,  resulting in a flash crash, taking the DJIA down 38%, truly an unprecedented event.
But COVID-19 is still here. If it spikes after the nation’s “coming out” it will be devastating and  flash crash #2 will result. This time the institutions will panic.
More than likely, a second leg down will be more gradual and related to the realization we are not returning to where we were earlier in the year.
I think the Street has it wrong on this one.
They had it wrong in February.
Fully aware of the threat of COVID-19, the Street was projecting yet another banner year for the stock market in 2020 even though it was historically enormously overvalued.
But Corporate earnings are plunging  now with no guarantee of a “V” recovery other than a Q3 bounce.
Lifestyles, personal wealth and confidence have been seriously impaired, yet the STOCK MARKET IS EVEN MORE OVERVALUED TODAY THAN IN FEBRUARY AND GETTING MORE SO WITH EVERY TICK UP.
The Street dismisses that as an aberration, an “expansion in the price/earnings ratio.”
That’s a dangerous assumption !
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Wednesday   May 27, 2020 (DJIA:24,995“Three Amigos Inflating Bubble #2”
I believe the lambs are being led to the slaughterhouse on this one.  It has the makings of “Bubble #2.”  In addition to record short covering, this recovery has been driven repeatedly by hype from the “three amigos” – the Fed, the Administration, and the Street, for example:
 The Fed: St. Louis Fed president, James  Bullard said yesterday he sees jobless rate returning below 10% by year-end.
The Administration:  Trump’s adviser Larry Kudlow says the administration is looking very carefully at a “return-to-work” bonus.
The Street:  JPMorgan’s CEO, James Dimon announced he sees a good chance for  a rapid recovery of the U.S. economy this year.
Others piled on:
Allianz economic adviser El-Erian  said he  is Risk-On ! noting
 Stocks are surging on good news across the board.
Axios Am reported today the Mitch McConnell  sees the possibility of a fifth coronavirus relief bill. Would all this be necessary if we were not in the deep stuff ?
      Add to that, headlines on MarketWatch, “Airline stocks take off as COVID-19  restrictions ease, more travelers fly.” This is the industry that Warren Buffet dumped recently.
The S&P 500’s index crossed above its 200-day moving average, which is a bullish signal  for technicians. The Nasdaq Comp crossed it months ago, but the DJIA is lagging.
Bubble #2:
This has the makings of another bubble just like the bubble I warned readers of before Februarys flash crash. When it gets pricked, the result will be the same – another flash crash (straight down).
      How far can it run before the burst depends on news flowMore hype from the three amigos pushes stocks higher. Reports of company problems, bad earnings,  horrendous economic projections, spikes in C-19 can prick the bubble.
Once again, it is about what value the Street wants to put on stocks in face of how much damage has been done to individuals, companies, communities, local, state and federal governments and to the perception of the future.
       If the stock market was extremely overvalued by time-tested yardsticks in February “before” taking the C-19 hit, it is many times more overvalued now.
C
orporate earnings are taking a beating and will not return to pre-COVID levels any time soon, because irreparable damage has been done to the internal workings of our economy in spite of how much money the Fed and federal government throws at it.
Bottom line: The DJIA is still down 15.5% from the February all-time highs, the  S&P 500 down 11.8%, New York Composite index of 2,000  stocks off 18.2%, Dow Transports off 21.6%, Russell 2000 18.8%, Value Line Composite 23.4%.   It’s still a bear market, except for the Nasdaq Comp., which is dominated by a handful of mega growth stocks and is only down 5.1%.
As stocks rise, they will encounter more and more sellers from investors who saw the market  plunge in February/March and traders who bought in at lower prices. That is what is called resistance or overhead supply.
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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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