Oh My, Not Another Perfect Storm ?

INVESTOR’S first read.com – Daily edge before the open
DJIA :27,088
S&P 500: 2,999
Nasdaq Comp.:8,196
Russell 2000: 1,557
Friday  July 12, 2019
   9:14a.m.
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gbifr79@gmail.com
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TODAY:
Three of the Dow’s 30 stocks, Goldman Sachs (GS +4.54), United Healthcare (UNH +12.41), and Boeing (BA +6.65) accounted for 160 points of the Dow’s 227-point rise (70%) yesterday
, while the broader based S&P 500  advanced less than a third as much, the Nasdaq Comp. declined as did the unweighted Value Line Composite.
Yesterday, the DJIA gave the impression the market was hotter than it was, and that distortion could be a warning sign.
This is the fourth time the DJIA and S&P 500 have probed this area since January 2018 after interim  plunges of 12% (Jan/Feb 2018); 20% (Q4 2018) and 8% (May/June 2019).
       The last two rebounds were mostly orchestrated by comments by Fed Chief Jerome Powell who came close to guaranteeing the Street the Fed will cut interest rates.
Again, I ask – WHY does the Fed see a need to cut rates ?
Again, I add -the Fed must expect a recession, and clearly they don’t want that to happen just prior to, or during a presidential election year.
         Sooooo, at least verbally, the Fed is talking the stock market up, sucking investors in to stocks even knowing there is a high risk of recession conditions that have always hammered stocks.
The responsible thing to do
would be to outline what the economy’s problems are -manufacturing, home building costs (tariffs), consumer spend, excess debt at all levels, and risk for equities.
With interest rates tanking, investors are seeking a return in stocks, which thanks to Fed hype, are providing that through appreciation and to a lesser degree– a dividend yield.
Ironically, it is the institutions who are getting sucker punched this time, the little guy has been selling having sold $25 billion of stocks in the week ending July 2 as the market was hitting new highs.
Yet, another PERFECT STORM !
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FYI:
Value Line unweighted average ????   Yes, we have the DJIA which is price-weighted giving big moves in higher priced stocks more weight than the same percentage move in a lower priced stock.
Then we have the Standard & Poor’s 500 and Nasdaq Comp. which are market-value weighted (shares x price), then the Value Line Comp. which gives equal weight to all stocks in its composite. The percentage change for each stock is averaged out to get the change in the average.  ……………………………………………………………
TECHNICAL
Minor Support: DJIA:27,003; S&P 500:2,976;Nasdaq Comp.:8,167
Minor Resistance: DJIA: 27,167; S&P500:3,007;Nasdaq Comp.:8,213

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Thursday  (July 11)  Fed – Drunk With Power ?

Should the Fed intentionally drive up stock prices at a time it has changed its interest rate policy to head off a recession ? If this is not intentional, these bankers are clueless about risk.
The Fed’s rhetoric was mostly responsible for turning  the market around in January after a 20%, Q4 plunge in the S&P 500 last year, likewise after a 7.6% plunge in May/June.
But why now with the market averages at all-time highs should it soft-peddle the increasing evidence of a recession with comments like, “a number of government policy issues have yet to be resolved, including trade  developments, the federal debt ceiling, and Brexit ?”
Why not tell it like it is ?  The 10-year economic recovery is over.  Global economies are slumping.
LET THE STOCK MARKET FIND A LEVEL THAT DISCOUNTS THE REAL PROBLEMS LOOMING OUT THERE.
TELL US, WE CAN HANDLE IT. THE MARKET WILL TRADE LOWER, BUT WILL EVENTUALLY WHEN THE TRUTH IS KNOWN.
        Lower rates help borrowers, but hurts people on fixed income. Borrowing at the individual, corporate and government is uncomfortably high, so more borrowing to goose the economy is limited.
The Fed claims independence, Fed Chief Powell denies he is political, but is doing everything to head off a recession in a presidential election year, and sustain a bull market on top of that.
It is what it is. My problem is all this rhetoric is driving stocks up, sucking investors in at a time business sucks and that IS NOT IN ANYONE’s INTEREST —-except the BIG money which is probably selling into the strength. Damn !
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Wednesday    (July 10)
Today, it’s all about Fed Chief Powell, who testifies  before the House Financial Services Committee today.
The Street is hoping for a clue how the Fed will rule on cutting the Fed Funds rate July 31.
Expectations were running high for a cut until a better than expected Jobs report threatened move the Fed away from a cut which might be premature if the economy is getting a second wind.
Powell has been catching flack from President Trump for not cutting rates sooner.  While Powell denied Trump’s pressure is influencing his decision, he and his directors have verbally rescued stocks on two occasions.
A Rate cut decision will come at the end of the month, and the market is up at this time, so I doubt he will say much to goose stocks higher.
The Fed must be careful here, its credibility is at risk after its reversal in January after a December rate cut.
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Tuesday  (July 9)
As long as the Street’s computer algorithms are programmed to buy at the market and on dips, the market will  avoid a bear market.

At some point, the outlook for the economy and corporate earnings will become bleak so bleak these algos will have to be reprogrammed to adjust for risk by selling.  Since many of these institutions key on the same indicators, they will all begin selling at the same time.
This selling  pressure combined  with a sudden absence of buying will take the market straight down  12% -16%.
That becomes the juncture where the Street will decide how bad things really are. If the economic outlook is worsening, the market will have to sell off enough to adjust for that, you then have a bear market – down 35% – 45%.
At its extreme,  very few of the gutsiest investors will be buying, just like very few are selling now assured the institutions’ algos will not let a bear market happen.
WHEN ?
At some point, some major institutions will break ranks and sell, setting off a stampede.  There is no good reason for the S&P 500 to sell at 30 times earnings when a recession looms, corporate earnings are turning  negative, debt at the individual, corporate and government level is too high, a Mid-East war possible, and uncertainty escalating about the ability of our government to address pressing problems.
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Monday     (July 8)
A better than expected jobs report Friday appears to have squashed the Street’s hopes for aggressive action by the Fed to cut interest rates.
So, the Street is back on the “bad news is good news, and good news is bad news” mentality.  Jeeeeeeez !
There are other economic indicators and most have been pointing down, like manufacturing (here and abroad), a slump in the Leading Economic Indicator (LEI), encompassing 10 key economic areas, personal consumption expenditures, after-tax disposable personal income, retail sales, housing, and consumer confidence.
Regardless of the back and forth banter between the Federal Reserve Chair  Powell and President Trump, the Fed is determined to head off a recession in 2020.
It will try to talk the economy out of recession or cut interest rates to do so.
The market is up 6% since Fed Chief Powell “hinted” that the Fed will cut rates and six months since the Fed abruptly reversed its policy from restraint to ease when signs of economic weakness flashed.
Interest rates have plunged dramatically in recent months, but the Street wants more, as if that would head off a recession – delay it, maybe, head it off no.
The market is some 30% – 40% overvalued, yet buyers press on as if nothing is wrong.
        That is classic late-stage bull market behavior – THIS HAPPENS AT EVERY BULL MARKET TOP.
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Friday   (July 5)
The Street really doesn’t know what to do next.  Recently, it has keyed on the prospect for the Fed reducing interest rates  in an effort to head off a recession, which in my opinion has actually started in bits and pieces.
The prospect of a recession and lower Fed rates, triggered a stampede to lock in interest rates before they plunged. This massive buying of bonds ramped up their prices and consequently drove rates down sharply, the 10-year Treasury plunging to 2%.
This also triggered buying in stocks, especially higher yielding stocks, which  doesn’t make much sense. If the Fed sees a recession, stocks will be adversely impacted if one actually develops.
The Street wants the party to go on forever, 10 years isn’t enough. This is classic late stage bull market behavior ensuring a bad ending when eventually savvy buyers exit and sellers enter, slowly at first, then increasing as reality sets in, ending in panic and a bear market bottom.
Can’t happen this time ?  Don’t bet on it !
This time could be real ugly. There is little the Fed can do to stop a recession and bear market. Lower interest rates from already low levels won’t help much.  Reviving QE will have limited impact. Congress already passed a monster tax cut.
This is what happens at bull market tops.
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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 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.
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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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