INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,953
Friday August 2, 2019 9:08 a.m.
NOTE: this commentary was written on Thursday night and thus does not have the benefit of overnight and early morning news.
We are now in a correction phase of the Fed-induced rally from mid-June to mid-July. Whether that becomes more of a correction depends on just how spooked the Street gets from President Trump’s threat to not just raise tariffs on $300 billion of Chinese goods 10% on September 1, but may even up it to 25% or more.
That sounds like bluster, but the uncertainty that can be created over the remaining 29 days of August is capable of hammering a market that has been run up unnecessarily on hopes of a rate cut.
Obviously with individual, household, business and corporate and government debt at inflated levels higher rates would have been a disaster.
But who can afford to borrow at this point.
Well, possibly Corporations buying back their own stock, but stocks are still pricey, so how much sense does that make ?
We have been riding the crest of a rising wave of unrealistic expectations, also known as a bubble.
I have urged readers to establish a crash reserve in line with their tolerance for risk for over a year.
The pattern has been for the market to snap back after corrections, which some may interpret as a reason to ignore risk. Right ……..but at one’s potential demise.
If in a purely technical scenario, Boeing (BA:334) breaks below 330. it would drop to 307 from which it could bounce to 327 before breaking below 300 to 269. Just a technical opinion – a warning for some, opportunity for others
Minor Support: DJIA:26,437; S&P 500:2,927;Nasdaq Comp.:8,039
Minor Resistance: DJIA:26,631; S&P500:2,967;Nasdaq Comp.:8,137
August 1, 2019 “Fed Scares Stiff of Recession in an Election Year”
While the Fed finally cut its fed funds rate a quarter point to 2.00 – 2.25 percent, to better line US interest rates up with global rates, but more so because they see a recession looming..
But a quarter point wasn’t enough for President Trump who wanted a one-half point cut to ensure 2020 won’t be a recession year.
Early signs of a recession are already present, and while a worsening of the economy may be delayed a smidge, this economy is showing signs of tiring.
The market took a hit yesterday, partly because the rate cut wasn’t greater, but also because the Fed’s action was designed to head off a recession, which has not been discounted by the stock market averages.
As I have been saying, there have been bear markets without recessions, but not recessions without a bear market.
The market should rally briefly then sell off to test yesterday’s lows before attempting to regain the ground it lost yesterday.
Wednesday July 31 “Traders – Sell a Rate Cut”
The BIG day ! The Fed has been hinting at a rate cut since January when it suddenly reversed its policy of raising rates to one of ease – the reason – it wanted to head off a recession that threatened to strike in 2020, a presidential election year.
It’s hype was the main reason Q4’s 20% plunge in the S&P 500 was reversed and it surged 28% in seven months. That’s power – raw power.
The Street expects a rate cut at 2:00 p.m. today.
If it doesn’t happen, the market will take a hit, how much depends on what Fed Chair Jerome Powell says in his press conference at 2:30.
I expect him to have good things to say about the economy even if the Fed cuts its fed funds rate to head off a recession.
If they don’t cut its rate, he will allude to the possibility of a cut in September (no FOMC meeting in August).
One way or another, he will try to stabilize a market that has risen a lot in a short period of time.
IMHO, the Fed has acted irresponsibly over the last seven months. It panicked after Q4’s 20% plunge in the market, as well as in response to rising signs of a recession, Without really acknowledging the latter, it gave the Street reason to believe it would cut its rate and in essence cover its back in the event the market plunged again.
So, here we are at all-time highs, 28% above the December 26 lows and still facing the prospect of a recession, which the market hasn’t discounted.
While there have been bear markets without a recession there has never been a recession without a bear market.
My message to the Fed – let the market find a level that discounts current and possible events – don’t tamper with the level of stock prices. If the Fed can’t head off a recession this stock market has a long way down to go to discount a recession and the Fed is responsible for investors getting hurt.
Tuesday July 30 “Stock Market Bubble to Burst”
I don’t know when the bubble will burst, maybe today, tomorrow, next week, month, or four months from now. Bubbles just keep inflating until – POP !
As a bubble, the more the stock market goes up in face of deteriorating U.S. and global economies and struggling corporate earnings growth, the greater the risk.
Forget that dividends discounted into the future crap, the value of a stock on a given day is what buyers and sellers say it is.
On October 3, 2018, buyers and sellers said the S&P 500 was worth 2,939. On December 26, they said the S&P 500 was worth 2,346, or 20.4% less.
Now they think it is worth 3,025.
If the Fed did not intervene with lip service starting in January this year, the market would trade a lot lower than it is now, much closer to reality in face of the looming adversity the Fed is trying to head off.
Investors, the pros and the manipulators behind the scene ramp up greed and fear to extreme turning points at bull market tops and bear market bottoms.
This time the Fed’s attempt to micro-manage the economy and stock market as we head into a presidential election year has sucked investors into stocks at levels where the downside risk far exceeds the upside potential.
THE UNTHINKABLE FOR THE STREET WOULD BE IF THE FED DOES NOT CUT RATES.
While that should be good news economically, in that it suggests the Fed is not spooked by the economy’s softness, it wouldn’t go over big with the Street which has run stocks up in anticipation of a cut.
My concern is that just one major piece unexpected bad news or that one major institution will break ranks, and sell and the spell will be broken and we will be in a savage bear market that will start off with a 12% to 18% free-fall, then down another 35% down too boot.
That’s the risk I see , risk here deserves respect.
Monday July 29 “Fed Fever Festering”
I have experienced 13 bull market tops, and they all had similar characteristics – one of the most prevalent being that most investors simply believed the bull market would never end.
I have experienced 14 bear market bottoms, and all had similar characteristics – one of the most prevalent being most investors simply believed the carnage would never end.
The tops and bottoms come as a surprise. Buyers tend to jump in quickly after a top thinking lower prices are giving them a rare opportunity to buy more.
After a bottom. sellers tend to dump stocks as a new bull market is underway, thinking they are getting a second chance to lighten up.
We are in a bubble, an extreme characterized by stocks selling at an extreme price earnings ratio (P/E) seen only once in a hundred years, the dot-com bubble in 2000 when many of the Street’s favorites didn’t have earnings to measure, and never did. The Nasdaq Comp. plunges 78%, the S&P 500 50%.
This time is different. It is the Blue chips that are overpriced, with the Shiller P/E above 30, well above any in the past except 1999’s P/E of 44.
On Wednesday, the Fed will announce its decision on a cut in interest rates. The Street is expecting a quarter-point cut, but with the market rising, that could already be discounted in advance and traders may sell heavily.
Failure to cut would cause selling at least after the announcement.
Friday July 26, “Double Bubble Trouble”
On Tuesday, I used Boeing (BA) as an example of late-stage bull market arrogance, where the Street ignores bad news thinking it’ll go away, after all it’s onward and upward in a bull market that has no end.
BA’s stock was on a tear in July even in face of the grounding of its 737 Max jets by major airlines.
Over the next two days, BA plunged to 345 from 373, not due to my comments (!!), but because savvy pros dumped it, happy for the gift of higher prices. Technically, I can see BA dropping to the 270 – 290 area by year-end.
BA is one of this bull markets big winners, a darling of institutions.
The demise of these kind of Street favorites is a warning signal that a bear market is looming. There will be others, nothing is sacred when stuff hits the fan.
On that note, the Street still feels like it is bulletproof, after all, the Fed has made it loud and clear it has its back, that it will jawbone and cut rates to prop stock prices up at least until after election day in 2020.
But a cut in its benchmark rate (Fed funds) has preceded every recession over the last 50 years and no recession has ever occurred without a bear market.
Thursday July 25
“Impeachment Proceedings Would Trigger a Bear Market”
The initial reaction to the Mueller testimony yesterday was seen by both sides as a ho-hummer, short on optics and new news.
A closer look at questions and answers indicates it provided the fodder for impeachment proceedings and that could be the first time the Street realizes another four years of Trump is at risk.
While the U.S. Senate would never vote to convict, the Republican Party may decide it must quickly run someone else or risk losing the presidency and the Senate.
More than two-thirds of this bull market’s gain of 353% has occurred under a Democrat president (Obama), but its extension has occurred since the election of Trump at a time the stock market was becoming overbought on a historical basis.
It is soooo much more overvalued today with the Shiller price/earnings ratio higher than at any time ever except the ridiculous dot-com bubble burst in 2000.
At the time, the Street and everyone else expected the market to keep surging. It didn’t, the S&P 500 dropped 50% and the Nasdaq Comp. dropped 78%.
I am trying here to build a case for a sizable cash reserve of 30% – 50% or higher if an investor sees a need for cash in the near future (college, retirement, big purchase) and cannot ride out an extended bear market which can, and will begin without notice.
Tuesday (July 23) “Market Bubbling Over ????”
Even in face of a pending horrendous earnings report, Boeing’s (BA) stock is up sharply over the last 10 days. Axios reports BA will post a $5 billion after-tax charge in Q2, after the grounding of its 737 Max jets by Southwest (LUV), American (AAL) and United (UAL).
Its Plans to buy back are on hold while its chief competitor, Europe’s Airbus, has delivered 150 jets to airlines so far this year.
Perhaps, the Street is overlooking BA’s present problems, but are BA’s problems over ?
This is late stage bull market arrogance. We have seen it at market tops before.
There were some very savvy investment professionals turned bearish in Q 4 last year. That obviously contributed to the 20% shellacking the market took in 2018’s final three months.
At the time their bearishness was believable – the market was falling out of bed.
Also, at the time, the Fed was raising interest rates with three planned for this year.
But signs of a recession were surfacing and the Fed reversed from restrictive to ease and the stock market took off recouping all of its Q4 loss.
My two most respected sources are urging readers to sit close to the exit, which I have been doing for many months.
There is only so much that can be said about risk at market tops (few listen; likewise there is only so much that can be said at market bottoms about opportunity (few listen).
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 120 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 123 months is 4 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.