Market More Overvalued Now Than in February

INVESTOR’S first – Daily edge before the open
DJIA: 24,206
S&P 500: 2,922
Nasdaq: 9,185
Russell: 1,307
Wednesday,  May 20, 2020    8:33 a.m.

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.
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.
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.
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 daily before the open for 11 years. ……………………………………………………………………………………………………………………………………………..
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.
Yesterday, Boston Fed president said, “If consumers are afraid to eat out, shop or travel, a relaxation in laws requiring business closures may do little to bring back customers and thus jobs.”  
That’s my point, as well.   The economic landscape has changed for years. Wall Street doesn’t get it.  In order to discount the adversity and uncertainty we face, face, the market must go lower. It is still overvalued based on pre-COVID-19 conditions, more so now.
This doesn’t have to be complicated, it’s common sense. The Street doesn’t want the party to end, they were making too much money.
Along with the Fed and of course the Administration, they desperately want the President and Senate to retain control of the country.
       But no matter what party an investor is affiliated with, the risk of another chilling plunge lies out there, and a healthy cash reserve is imperative.
If  a new bull market of consequence is underway, there will be plenty of opportunities to make money.
The biggest contributor to poorly timed investments is the fear of missing out on an opportunity (FOMO).
Bottom line:
The Street is back in its cruise control buy mode, i.e. buy at the market, buy on dips.  It is  looking beyond the COVID abyss to a return to life and business as usual.  Can’t happen ! Too much damage has been done to confidence.
There is no good reason to chase stocks here. That does not mean the market can’t still go up from here in face of  economic news that improves from severely depressed levels and Fed, Administration and Street hype.
      Fed and government aid merely masks the underlying weakness of the economy.
Another leg down to test the March lows looms. I think it can start at any time, why risk it ?

Tuesday  May 19, 2020 “Bubble # 2” (DJIA: 24,597) Wall Street is doing what it has always done when the market declined over the last 11 years – buy with the confidence the Fed is going to have their backs.
     The Fed is doing what it has always done ensure they are right.
So it was in 2019 when the Fed’s nurturing inflated the biggest bubble in blue chip stocks ever  with comments like, the “risks have subsided,” the economic outlook is  “rosy,” the  “economy is in a good place.” Add promises of interest rate cuts then delivering three later in the year with the market posting new highs on a daily basis, and you have what a bubble needs.
We can be grateful the Fed is there to prevent a depression, flooding the markets with money, as Fed Chief Jerome Powell told 60 Minutes Sunday, but what was not addressed was the fact an extremely overvalued stock market was moving up when every aspect of the economy was moving down.
      Of course the question “why” was not asked by 60 Minutes,  and Powell didn’t raise it, but he did exactly what he did throughout  2019 when he nurtured the bubble, he made sure the Street knew the Fed had its back, so they bought.
While Powell acknowledged the economic recovery may not kick in until 2021, that a lot depends on a vaccine, and that there will be bankruptcies, he was quick to  assure the Street that:
– “You  wouldn’t want to bet against the American economy,”…
“The Fed has policies that can go a long way toward minimizing” economic adversities.
“It’s a reasonable assumption the economy will begin to recover in the second half of the year,”
“There’s a lot more we can do…we’re not out of ammunition by a long shot,”
“No, there’s really no limit to what we can do with these lending programs”
“We’ll get back to the place we were in February, we’ll get even get to a better place than that, I’m highly confident of that, and it won’t take that long to get there.”                      

Granted a big part of yesterday’s gap open was hurried short covering, but what we have here is of Bubble #2,  and then Flash Crash #2.
We have a “V” shaped recovery in the stock market but the prospects for an “L” shaped recovery in the economy after the initial “coming out” bump as some people return to business and life as usual.
The Fed headed off a  recession in early 2019 after a 20% drop in the stock market and a weakening economy. All they did was delay it, possibly because 2020 was a presidential election year.  After 11 years (132 months) of economic expansion, we were due for a recession, the average expansion since 1945 lasting 58.4 months.
       But this won’t be a normal recession – too many people  hurt worldwide, hurt too deeply, too many dominos tumbling.
Bottom line:   OK, so what’s my point ?
I think we are headed for another leg down, one that discounts economic and personal devastation unprecedented since the Great Depression. Some money managers will see this risk in advance and sell, others will wait until the plunge in stock prices gains momentum then sell.
This has the potential for Flash Crash #2 and it won’t end until the major market averages are down 55% – 60%.
Reportedly, 100 biopharmaceutical firms are scrambling to find a vaccine and  with out doubt several will find one.
At these levels, the stock market does not come close to discounting adversity> The Street is jumping the gun.
Monday May 18, 2020 (23,517) “Powell Back in the Bubble Business ?” My headline Friday was “Yesterday’s Rally Must Hold…..or Straight Down.”   It held, managing to post a gain after a sharp sell-off in the morning.
Today brings a big jump at the open following Fed Chief Powell’s comments on 60 minutes Sunday. While he acknowledged unemployment could reach 25%, and a recovery may stretch out into 2020, he said there is no limit to what the Fed can do to lend money to the financial markets, adding it wouldn’t be a good idea to bet against the American economy.
All that the Fed can do to head off a depression is obviously of utmost importance, but I think Powell is remiss in not addressing the overvaluation of stock prices, just as he was throughout the inflating of 2019’s stock market bubble, a bubble I believed he owned lock stock and barrel.
As I have said repeatedly, this is a presidential election year, expect the Fed, Administration and Wall Street to hype the stock market going into the November elections.
The risk here is, investors will take the bait and go all-in in time for another leg down.
        It takes only a smidgeon of common sense that 39 million workers applying for jobless benefits and a 30% – 40% hit to the nation’s GDP in Q2 will have lasting negative impact.
Every American will feel pain going forward even if COVID-19 doesn’t re-appear in the fall. Every corporate function will be adversely impacted by what has happened even without regard for the  impact of dominos tumbling in the future.
Does this justify a vastly overvalued stock market ?  That’s what we had in February, that’s what we have now, except the stock market is so much more overvalued now.
The Street is in denial…..none of this happened….there is no reason for the 11-year old bull market to end…..this was a mere aberration to the norm to be treated with an asterisk when publishing future historical data.
All of what is happening is cutting deep, it’s causing consumers to pull back on spending, it’s causing corporations to change spending priorities and revamp supply chains, or try to based on uncertainty.
The S&P 500 is down 15.6% from its February all-time high when it reached a level of overvaluation seen only once ever excepting the 2000 dot-com/Internet bubble.  That does not begin to discount what we are seeing now.  INSANITY !
Bottom Line:  “Sell in May and go away” may have to wait for a month or two.
Numbers on the economy will become easier to beat several months out since comparisons will be going up against the current low data.  Even so, the damage done to lives and the economy is nowhere near reflected in the current level of stock prices.
      Instead of an erosion in stock prices going into the fall, it looks like it will take another flash crash to discount what lies ahead and that is even with improving prospects of an announcement of a number of  vaccines  in development.



Friday  May 15, 2020  “Yesterday’s Rally Must Hold ….or Straight Down”
      Yesterday’s abrupt reversal of an opening plunge is what technicians call a one-day reversal, which is positive at least short-term.
However, more than half the 377 point  rise in the DJIA yesterday was accounted for by five of the 30 Dow stocks (United Healthcare (UNH: +12.60), American Express (AXP: +5.78), Visa  (V:+3.81), Home Depot (HD: 4.38)  and JPMorgan (JPM:+ 3.49 points).
Trading in the futures today indicates a sharp drop at the open, so today’s trading will either confirm the validity of yesterday’s one-day reversal or dismiss it as an aberration.
Some of the Street’s biggest hitters declared their bearishness yesterday.  (Stan Druckmiller, David Tepper, Bill Miller, Paul Singer, Leon Cooperman,  and Paul Tudor Jones).
Billionaire Lean Cooperman sees a risk of as much as 22% from here. That counts to 2,225 in the S&P 500 (DJIA: 18,427) or a test of the March lows.
I see a greater risk as falling dominos worsen economic projections and accelerate the plunge in the bear market’s second leg down.
Granted, a rebound a bit above the March lows is likely  (DJIA: 18,213, S&P 500: 2,191, Nasdaq Comp.: 6,631), but expect that level to be broken in the fall.
Rallies in response to news of a COVID-19 treatment/vaccine and more stimulus will interrupt the slide down this summer, but the stock market must go lower to adequately discount the damage done to the economy and lives of people and wide range of businesses.
         Corporate buybacks will all but disappear removing a huge driver of stock prices upward.   Money managers will be reluctant to take undue risks and more likely to be sellers on balance.
The “hot money” will find it more difficult to manipulate prices as economic news worsens and the allure of stocks diminishes as portfolios and 401k accounts  get hit again and again.
Bearishness will increase until no one in their right mind wants to buy stocks or even talk about the market –  That’s when a “bottom is in.”
Thursday  May 14, 2020 “Could Fiduciary Responsibility to Preserve Clients’ Capital Cause Money Managers to SELL”
    Fed Chief Jerome Powell warned investors yesterday that, “The scope and speed  of this downturn are without precedent, significantly worse than any recession since World War II.”
    His statement put the kibosh on the dramatic 34% bear market rally underway since March 24 after a 38% plunge in only 21 days roiled the investment community.
He also said the Fed would “continue to use our tools to their fullest” until the COVID-19 crisis is over.
He added that additional fiscal support (Congress) would be costly but worth it.
To me, this indicates the Fed is scared stiff that a depression looms, and warrants all stops be pulled to prevent one.
All this at a time the stock market is extremely overvalued by 33% to 55% depending on time-tested yardsticks used to measure value.
The economy is in the “deep stuff.”
To correct this imbalance, the stock market must decline.
If just the norms are hit, that calls for a decline in the S&P 500 to 1,890 in the case of a 33% overvaluation or 1,270 if the 55% overvaluation is corrected to the arithmetic mean.
Let’s strike a level in between the two or 1,580.
That would call for DJIA of 13,000.
But, according to Fed’s Powell, this downturn in the economy is without precedent in modern times, so the arithmetic “mean” may be high , thus calling for lower prices yet.
       Can’t happen ?  Institutions wouldn’t let that happen ?
Clearly, that is logical, that’s what they have always done…
Unless they PANIC.
Money managers have a fiduciary responsibility to preserve their client’s capital.  If the economic scenario traced out by the Fed is as bad as feared,  money managers will:
1) Stop buying
2) Sell
That would create another flash crash leading to panic and a spike down to the levels I noted above.  No money management firm can afford to be sued, none can survive if others outperform them by avoiding a devastating plunge in portfolio values.
The Fed will pull all stops to prevent that from happening. In a key election year, Congress will attempt to head off a disaster before November.  Don’t bet they can pull it off.


Wednesday May 13, 2020  “Bear Market Rally Over ? CYA”
Short….and sweet – This stock market has not nearly discounted what has happened, its consequences and what may happen in the future as dominos continue to tumble.
      The Fed, Administration and powers on the Street will hype the economy’s prospects until the November election, and may have some success for a while.
The S&P 500 is only 15% off its bull market high. That is not enough of a discount for this economic catastrophe. The Fed and Congress can only prop hopes so long, then reality sets in.
Another leg down to test the March lows is imminent.
Tuesday May 12, 2020 “Risk Rises as Market Moves Up”
While investors were stunned by a 38%, 21-day plunge in the DJIA (35% plunge S&P 500) in February/March, the markets did not stay down long enough for investors to feel the kind of pain that bear market bottoms dish out.
With a sharp rebound in stock prices ever since the March 23 lows, investors are confident the market will be higher a year from now, at least according to Dion Rabouin’s Axios Markets report today.
While an April New York Fed survey found 31% of those surveyed expect job loss and historically low expectations for income and spending, difficulty in getting credit and debt delinquencies in the coming year, they still had confidence that the stock market would be higher a year from now.
Really ?
     That’s what an 11-year old bull market can do to expectations, i.e., they expect the stock market to rise no matter what.
     Again, let me emphasize  the fallacy behind  John/Jane Q’s expectations, as well as the majority of Wall Street’s projections for the stock market lies in overvaluation of stocks.
It was in February when the Shiller price earnings ratio was 31, or 80% above the mean, prior to the flash crash and it is more so today.
Presently, the S&P 500 earnings defy a reasonable estimate for earnings in coming quarters, but they will be much lower, ergo the P/E higher.
Is there good reason for the stock market to be overvalued now in light of the damage that has already been done and the uncertainty that results ?
Is it a good bet against the risk of another leg down that more realistically discounts real value ?
Bottom Line:  Short-term the market can edge higher, driven by short covering and FOMO (fear of missing out). Risk rises dramatically with each tick up – Careful !
Monday May 11, 2020  (DJIA: 24,331)  “A Sucker Rally – Market at Risk of a 30% – 40% Plunge”     
 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.
       The big boys on Wall Street think they can look beyond what is happening now to a recovery and another pocket-lining bull market and endless economic recovery.
Maybe that worked in the past, but we have not been faced with this level of pain and uncertainty since the 1930s.
The market was extremely overvalued in February before the bear market started and with earnings plunging, is even more so now.
I see the economic recovery as an “L” not a “V” or “U” as most economists expect. I expect another leg down in the stock market to discount their disappointment.  IF the Street suddenly realizes the recovery won’t begin later this year, and not in 2021, they will panic.
Money managers have a fiduciary responsibility to preserve client capital, so they will  1) stop buying, and 2) SELL.
That calls for DJIA below 10,000, the S&P 500 below 1,500 and Nasdaq Comp. below  4,000.
Bottom Line:
Along the way we will have more Fed/government stimulus. It is a presidential election year, and the powers at the top are terrified. There will be news of COVID-19 treatments and vaccines that will raise hopes of an end to our dilemma.
BUT, consumer confidence has been seriously jolted and buying of anything other than the necessities will rule for a long time. With unemployment poised to top 22 million, a person does not have to lose their job to be afraid of it happening to them.  Expect a consumer strike. They are now discovering they can get along on less.
CONFIDENCE in the future drives economic expansions and bull markets.
It will take time, maybe years.  Meanwhile, the market will have to adjust to that and it isn’t going to be pretty.
Friday  May 8, 2020  (DJIA: 23,875) “
Sell the Bad News –  Wall Street Wrong  – Consumer Strike Imminent….Not Going Back to Way It Was
How could the stock market go up when economic news just keeps getting worse ?
As a rule, the big money buys when the news couldn’t get worse, that’s when they find the best bargains.
After a surge of short covering in March, the big houses on Wall Street stepped in to buy and with a few exceptions, are still buying.
JPMorgan Chase, Goldman Sachs and Morgan Stanley are bullish, with the opinion that markets will continue to look through bad news about the depth of the economic downturn with a reversal of the  recent damage by the end of the year.
        Citigroup is more cautious, crediting the market’s strength to an unprecedented governmental policy response but skeptical that the markets can be propped up indefinitely.
To my surprise, Minneapolis Fed president Neel Kashkari told Axios Markets “It is becoming clear that we’re in for  a long, gradual recovery…he wishes we had a quick bounce back.
Scott Clemons, Brown Brothers Harriman, agrees saying, “The market has too quickly celebrated success on the healthcare front, without  fully appreciating how hard it is to turn the economy back on.
I totally disagree with the big boys on this one,
suggesting more than once that they walk around the block with eyes and ears open to see what is happening.
This one is different and can’t be treated with the usual, “how to time a market bottom 101” playbook.
Both the stock market and economy took a huge hit starting in February when COVID-19 pricked a highly overvalued stock market bubble. At the time, both the stock market and economy were 11 years old, the economic expansion more than twice the norm, the bull market four times the norm.
          We were due for a recession/bear market, even without COVID-19.
What has happened and is continuing to happen will vastly impact consumer spending patterns and businesses that support them.
In short, a normal recession has now become the worst since the Great Recession of 2007-2009 which drove the S&P 500 down 57%, and possibly the worst since the devastating Great Depression.
It all depends on the tumble of dominos – how far and how long they fall.
The Fed, the Administration and the powers on the Street have a lot of clout, and this is a presidential election year, so the hype will continue.
Bottom Line    Too much has changed to go back to the inflated stock prices. Too much has changed to go back to economics as usual. I see another leg down. Depending on whether the institutions panic, we are looking at new lows and a DJIA below 12,000 possibly 10,000.
Thursday  May 7, 2020 (DJIA: 23,664) A “Coming-Out Party….Then a Plunge
       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.
Outcoming Party
       We  have to have an “outcoming” rally first with news coverage of lines of people waiting to access restaurants, public events, kids taking a ballfield to play their game, record sign-ups for cruises, parties inside and outside, interviews of maskless people braving the risk to return to the way things were.
Fiddlesticks ! After the bump, COVID-19 will still be there. Without a quick fix that stops it in its tracks, fear and uncertainty will prevail.
Even with a “fix,” lasting damage has been done and will continue.
Beware of “Hype”
Expect the Fed, the Administration and powerhouses on Wall Street to pull every stunt in one’s devious playbook to  prop the stock market up through election day.
Wall Street, spoiled from a fed-nurtured , 11-year old bull market won’t let go, pushing stocks as the only place to put one’s money.
I agree it is, but at much, much lower prices.
Still Overvalued
NO, this is NOT an opportunity of a lifetime. The stock market was absurdly overvalued before the bear market started in February, and is much more overvalued now.
       The Fed and government can throw all the money they can “create” at our economic nightmare, but consumers are so shellshocked they’ll go into survival mode and slash spending especially on big ticket items.
This is why the liberation of states from stay-at-home mode will only trigger a temporary bump as government rescue efforts run their course, and the nation sinks deeper into recession.
Institutional Panic ?
       I see a second leg down that will take the  DJIA below 12,000, and 10,000 if the Street panics. That counts to the S&P 500 to at least 1,500, and the bulletproof Nasdaq Comp. below 4,000.
Here’s why a panic can happen.
Managers of money have a fiduciary responsibility to preserve client’s assets.
If they suddenly see the possibility of the recession we are in now turning into a severe recession or a depression, they will sell. All will get the sell signal at the same time and that means – straight down, flash crash #2.
Worst Since 1930s
 This bear market stands to be the worst since the 1930’s Great Depression.  Adding to the severity is the fact all this happened after the longest bull market/economic expansion on record.
Jobless claims for the last week reached 3.17 million.  While that is down from 3.85 million the prior week, it is ominous for the future. To date, the grand  seven week total exceeds 33 million jobs lost.
Not only does this impact the job losers, it sends a chill into those who already have a job.
Bottom Line
     The market is up at the open as the Street anxiously awaits the re-opening of business.    As my headline suggests, a coming out party will precede the second leg down in this bear market, however the party may first have to reach a fever pitch before “last call.”
George Brooks
Investor’s first
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.





















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