New Normal – Flash Crash – Comes Without Warning

INVESTOR’S first read.com – Daily edge before the open
DJIA: 26,384
S&P 500: 2,905
Nasdaq Comp.:7,976
Russell 2000:1,579
Tuesday, April 16
, 2019   8:47  a.m.
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gbifr79@gmail.com
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Summary:
TODAY:
      I really don’t trust this market. It cruises along on auto-pilot, as if nothing can interfere with its serenity.
That can change in a heartbeat with a one/two week 12% plunge. This is the new normal, and all it takes is for a piece of unexpected bad news, or for buyers to walk away, looking to return after a correction..
 So far, the Street is not spooked by the prospect of Q1 earnings coming in negative. However, disappointing earnings will punish stocks as with Goldman Sachs (GS), which reported Q1 net of $5.71 vs. $6.98 a year ago on a 13% drop in revenues. GS declined 7.93 points (3.8%) in trading yesterday.
At 31.3, the Shiller price/earnings ratio is more overvalued than at any time in the last 180 years, except during the dot-com bubble in 1999.   At some time earnings will have to catch up with Shiller or valuations will have to adjust downward.
The new normal is the flash crash, where vicious corrections develop out of nowhere. That’s a good reason for investors to have a healthy cash reserve in advance, but that’s hard to do when everyone else is making money.
The Street got a rude awakening in Q4 with a 19.2% 3-month plunge in the DJIA, a 20.2% plunge in the S&P 500, and an even bigger drop in the Nasdaq Comp. (23.9%).
These mini-crashes happened in April/May 2010 with the S&P 500’s  8-day, 12.6% plunge; August 2011 with a 6-day 15.8% plunge; 2015 an 18-day 11.5% plunge; 2016, a 13-day 12.9%; 2018, a 10-day 11.8% plunge.
Fortunately, the market recovered each time, but abrupt plunges like these are scary and the overwhelming tendency is for investors to sell out a good part of their portfolio after the plunge, when it looks like a bear market is under  way, and they don’t get back in until the market has risen substantially.
Bottom line: Don’t get greedy, maintain a decent cash reserve even in steady markets, because the flash crash can happen at any time, and we are now in a place where that can happen.
TECHNICAL:
Minor Support: DJIA 26,341; S&P 500: 2,901; Nasdaq Comp.: 7,963.
Minor Resistance: DJIA:26,426; S&P 500: 2,912; Nasdaq Comp.:7,992
A break beyond support or resistance increases the odds that the market will move further in that direction.

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MONDAY:

Q1 earnings are underway. They will not compare well with 2018, but the Street expects this, so the impact on the stock market is uncertain.
      Earnings next year are expected to rebound, but no one knows at this time by how much.
The Street may simply ignore earnings reports this year and project valuations out into 2020.
      At 31.3, the Shiller price/earnings ratio is more overvalued than at any time in the last 180 years, except during the dot-com bubble in 1999.   At some time earnings will have to catch up with Shiller or valuations will have to adjust downward.
The Street got a rude awakening in Q4 with a 19.2% 3-month plunge in the DJIA, a 20.2% plunge in the S&P 500, and an even bigger drop in the Nasdaq Comp. (23.9%).
The new normal is the flash crash, where vicious corrections develop out of nowhere. That’s a good reason for investors to have a healthy cash reserve in advance, but that’s hard to do when everyone else is making money.
FRIDAY:

MarketWatch published an article, “Risk of earnings recession rises, as S&P 500 profits to fall for first time in 3 years.”
This is not news to readers here, I have warned of this for months, but now the Street sees it.  Will they care ?
Yes, the market has been going up, possibly because of expectations of a trade deal or Fed rate cut, or even because they are looking ahead to 2020, but FactSet’s senior earnings analyst, John Butters notes that companies have been cutting guidance more than usual causing leading analysts to make bigger cuts to their forecasts.
He goes on to add, that more important for the outlook for the stock market is that blended EPS growth estimate for the second quarter slipped into negative territory on Wednesday, to minus 0.2% (that is news to me, FactSet had been tracking  a plus 0.1%)
I think the trade deal and expectations of a rate cut to head off a recession before the 2020 elections are mostly built into current market prices, though a brief rally would accompany the news anyhow.
I do think  the Street is ignoring 2019 earnings and focusing on 2020 when it expects  a strong earnings rebound, which may push the market up in coming weeks.  The key will be, will the BIG money use that push to sell ?
If the Street suddenly begins to revise 2020 projections downward, it spells bear market.
As  noted below, the  Shiller price/earnings ratio is calculated by the S&P 500’s price divided by a moving average of 10 years of earnings adjusted for inflation.  At 31.13, it is higher than it was when the market plunged 20% in Q4 last year,  higher than it was before the Great Recession’s 50% plunge, as high as it was in 1929, but not yet as high as the dot-com bubble burst high in 1999, which hit the S&P 500 for 51% (Nasdaq:78%), a time when high priced stocks with near zero earnings dominated the market. It is close to twice as high as its mean of 16.6.
THURSDAY:
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We are in the late stages of the longest bull market in 155 years and it will be hard to shut off. Speculative frenzy usually drives late stage bulls to absurd  highs.
We are well into that stage.  As noted below, the blue chips are overvalued given the outlook for earnings and a softening economy, worse abroad.
This is the point prudent investors get sucked in by the media headlines and others brag about their newly discovered  genius as stock pickers, but eventually get their clock cleaned.
Most savvy traders know how to play it, quick to bail out before getting picked off second base. Major corrections and bear markets begin with a sharp sell-off that looks like a buying opportunity at first, since bull markets have relentlessly rebounded. Thinking this is a gift (never are in this business), investors jump in only to get ripped by the next down-leg.
One or several more tempting surges may occur – easy does it, one of these will be a “trap door.”
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 WEDNESDAY
This bull market has two pieces of news that can move it up. A trade deal, which is mostly built in to current price levels, and a Fed  rate cut, which I also think is built in.
Currently, the Street is looking beyond 2019 earnings slump to a stronger growth rate in 2020. If a recession hits late this year or in 2020, the Street will have to chop their estimates down drastically. With prices at these lofty levels, that spells bear market.
There is no fear on the Street of a bear market and that’s bearish. The only surprise now can be an ugly one.
For this reason, speculative sentiment can run stock prices higher, but it won’t be justified.
TUESDAY:
The Street and corporations with major stock buy-back programs would like to run the market up to new all-time highs. That would result in front page coverage in all major news media and a stampede of buyers.
This would offer the BIG money a chance to sell as much stock as it wants without depressing prices.  It also fattens stock portfolios and options exercise perks of  executives in the upper tier of corporate management.
The environment for sensible investing stinks. This kind of panic is typical of stock market tops, but investors simply can’t resist the temptation to go all-in.
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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.
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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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George Brooks
Investor’s first read.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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