INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,984
Thursday September 26, 2019 9:11 a.m.
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.
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.
Minor Support: DJIA:26,906; S&P 500:2,978; Nasdaq Comp.:8,043
Minor Resistance: DJIA:27,107; S&P 500:3,003; Nasdaq Comp.:8,129
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.
Monday Sept. 23 “Bubble Trouble – Fed Mismanagement”
Well, we are back in the Fed-micro-managing mode, which features low interest rates and possibly a return to QE.
As a rule, this is good for the stock market.
Here’s what few economists and Street pros are acknowledging.
Earlier this year, the Fed reversed its policy from one designed to prevent the economy from overheating to one of propping it up. At first this took the form of verbal promises to cut rates if needed to one of actually cutting rates twice.
PANIC ! That, or just over zealous intrusion by the Fed on the marketplace.
This kind of stimulus is normally employed when the country is in a recession and the stock market in the crapper.
So, what if the economy goes into recession ? That has never happened without a bear market, which in this case could be a hummer, since stocks are at all-time highs and historically very over-valued.
The Fed will not have any tools in its kit to employ the bring the economy out of recession and stocks out of a bear market.
Bottom line: longer recession and bear market.
All this attempt to keep a business expansion going has the potential to create a huge bubble in stock prices, perhaps greater than the 2000 bubble which was followed by a 50% drop in the S&P 500 and 78% drop ion the Nasdaq Composite.
Be ever so careful here. If this bubble inflates it will be tough to resist going all in, which would simply be the human thing to do.
Friday Sept. 20 “How Much Risk Can You Afford”
Politico’s Morning Money featured an article this morning, “Economists see sustained low growth, but no recession.”
The article quoted economists from the IMF, World Bank, central banks, rating agencies, mainstream economists, Fitch’s Global Sovereign Group, and the OECD, all giving reasons for continued growth albeit at a slower pace.
At the end, Politico adds this addendum, “Be smart: Economists almost never see recessions coming. Ahead of the global financial crisis [2007 – 2009], economic leaders from the Fed, Treasury Department and major retings agencies gave no warning of what was to come.
This time may be different. However, the question for investors is, can they afford to be wrong after 10 years of economic growth and a bull market that is by historic standards vastly over valued ?
The question for reasonable investors, how much risk can you afford – 10% – no sweat …..20% – “ugh”…. 30% – horrors….40% ?
Nasty corrections happen , bear markets happen, and most of the time they strike when just about no one expects them.
Thursday Sept. 19 “Follow the Bouncing Ball”
Our economy is much like a golf ball bouncing on a pavement, each bounce is pronounced but recovers less than the one before it, eventually there is no bounce and you have a recession.
Determined not to let this happen, the Fed cut its fed funds rate, the second in three months, to range between 1.75 percent and 2.09 percent, down from 2.0 percent to 2.25 percent, a clear indication it is concerned about a recession.
Fed Chief Jerome Powell indicated additional cuts may be necessary if the U.S. economy slides further.
The economy has been a mixed bag for nine months with manufacturing in a recession but employment still strong. Consumer sentiment bounced in September from a three-year low.
Bottom line: The Fed must fear a recession to act as strongly as this, and there has never been a recession without bear market.
It doesn’t help that the 36-member Organization for Economic Co-operation and Development just slashed its forecasts for global growth, warning of “entrenched uncertainty” with downside risks mounting.
CEO confidence has been in a tailspin hitting a three-year low, as reported by Axios Markets The Business Roundtable survey of 138 CEOs recorded its biggest quarter/quarter decline since 2012.
U.S./China trade talks will resume in coming days. Expect a lot of market-moving hype about potential progress, which will stands to produce new highs in the market, further inflating the bubble.
Wednesday Sept. 18 “Fed in a Quandary”
Last week President Trump urged the Fed to cut rates to zero, or lower. I wrote that would be insane.
Monday, I speculated the Fed won’t cut its benchmark fed funds rate today at all, something the Street has been hoping for, having run stocks up over the last two weeks.
While the Duke University/CFO Global Business Outlook finds 53% of those surveyed expect a recession within a year. The 10 year business expansion that began in July 2009 is not going without a fight, and that may cause the Fed to pass on a rate cut today.
The University of Michigan’s consumer sentiment index bounced in September, albeit from a three-year low, U.S. industrial production edged up in August and a 0.3 percent rise core consumer prices (excl food and energy) in August brings year/year increase to 2.4 percent.
Pre-open trading in futures is a ho-hummer, so it looks like the Street expects a rate cut or doesn’t care.
The Fed and U.S. banking system is struggling to cope with a scarcity of bank reserves, which Axios reports have been declining for the last five years. Axios.com’s “Markets” also reports the Fed could indicate it plans to stabilize the level of reserves today resulting in an increase in bond purchases on the order of quantitative easing (QE) in the opinion of Gennadity Goldberg, senior U.S. rates strategist at TD Securities.
If there is a bottom line here, it is confusion, things happening that were unexpected and that spells uncertainty, a stable market’s nemesis.
Yesterday, I headlined, “A Bubble Waiting to Be Pricked,” an obvious reference to the fact stock prices are historically overpriced and vulnerable to a nasty decline.
When several major institutions abandon their inflexible “buy” algorithms and sell. You’ll know it when you see it – straight down 12% – 16% in days.
Tuesday Sept. 17 “A Bubble Waiting to Be Pricked”
Yesterday, I headlined, “Any Chance the Fed Won’t Cut Rates Wednesday ??”
Clearly that is NOT what anyone on the Street expects, but clearly it is possible.
As noted yesterday, the core consumer price index rose higher than expected in August, up, 0.3% for the third straight month and 2.4% from a year ago.
Treasury yields jumped sharply last week in face of profit taking after a big Fed-induced bond rally this year.(bond prices move inversely to yield).
If the Fed does not cut rates, expect the market to take a big hit since it has risen sharply in expectation of Fed action to cut, as well as in anticipation of progress in the US/China trade talks next month.
Would it stop lending or borrowing ? Probably not, it may enhance it, since borrowers would scramble to get loans ahead of further increased borrowing costs.
In fact, the downtrend in rates probably discouraged borrowing as lower rates were anticipated.
Two weeks ago, I warned of the dangers of buying the long bond, noting a reversal to the upside in rates would crush the value of bonds.
I doubt that would happen, since we may already be in a recession, or at least the early stages of one.
Bubble bursting ? Too early to tell. October looms, anything can happen.
When it bursts, it will be straight down 12% – 16%. That is because, so many big investors would get a “sell” signal at the same time.
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.