One More Push Before a Crunch ?

INVESTOR’S first read.com – Daily edge before the open
DJIA:26,671
S&P 500: 3,224
Nasdaq Comp.:10,503
Russell: 1,473
Monday July 20, 2020    9:21 a.m

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brooksie01@aol.com
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November 15, 2019 (DJIA – 28,004)   I Called for a bear market to start in January, that the initial plunge would be 12%-18% – “straight down.” It started mid-February, dropped 16.3%, rallied then  plunged another 32.8%.
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January 20, 2020 (DJIA:29,348) My blog,  “INSANITY,” projected a bear market decline of  30% – 45%. The DJIA plunged 38.4% in 21 days.
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With the DJIA at 18,591, I wrote that , while I see lower prices later in the year, I expect a big rally with the upside potential of DJIA 22,037 (S&P 500 : 2,617).
With the DJIA at 23,942 (S&P 500) on April 15, I
called for  an end to  rally, up 29% but well short of how far the rally extended.  On May 18, I began to warn of  Bubble #2
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NOTE: 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.   One other point, it is remotely possible President Trump will resign presumably for health reasons.  The impact on the market would be a big down for 90 minutes, then a very  sharp rally as the potential for long-lost unity in America would become a possibility.
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TODAY
 Last Thursday, I reminded readers that on July 6, I warned of a market sell off this month, but after one more spike up before the plunge.
I picked July 27 as the day for the beginning of the plunge which could add up to a decline of 30% – 45%, as memories of the February/March flash crash re-surface.
My reasoning is simple.  In February, the S&P 500 was historically more overvalued that at any time in the past except for the 2000 dot-com bubble.
We have so many more problems today than we had in February, why should the S&P 500 sell within 5% of February’s level ?
Aided by a half dozen monster tech stocks, the Nasdaq Comp. is in a world of its own, most of them beneficiaries of the COVID-19 shutdown.
At some point, I expect the stock market to begin discounting the damage done by COVID and measures undertaken to counter it.
I think that has to happen soon, that’s why I picked July 27, right in the middle of Q2 earnings season.
We live in an unreal world, anything can happen, investors should prepare for the worst and be glad if  less than that happens.
I expect one more push up before the big crunch. Two things are certain – uncertainty and the bizarre.
Bottom Line:
The market will attempt to nice jump up  today, as I have expected before the beginning of a sell off. Q 2 earnings will be ugly, but the Street has likely low-balled projections enough it can report “better-than-expected” results.  What a con-job !   What an unreal world.

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RECENT POSTS:
Friday July 17, 2020 – No post
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Thursday, July 16, 2020  (DJIA:26,870) “Market Turns Down July 27.”   On July 6, I warned of a “Market sell off this month, plunge into year-end.”    In the interim I have called for “One more spike before the fall plunge.”
“When:
Today, a week from now, how about July 27 when earnings are pounding the turf ?”
“How far down ? 30%-45%”
“For how long ? Beyond November 3rd presidential election.”

Yesterday, a
MarketWatch headline  featured CNBC’s Jim Cramer’s call for a market top on July 28.  Referring to a Larry Williams chart, Cramer first sees the possibility of a 4% -5% spike before the market rolls over and heads down on  JULY 28th.
Well, you heard it here first !  It’s nice to know he is on the same page as I.
Bottom Line:
Between now and November 3, I expect more stimulus.  While that would help individuals, it would be further confirmation that our economy is in a lot more trouble than the Street believes (or admits) it is in now.
A lot can happen between now and July 27, but the bear market rally in the S&P 500, DJIA, NY Index, DJ Transports is stalling in an irregular sideways trading range, kind of like a long rotten limb of a tree that could snap at any time if given a little pressure.
This pattern resembles that of 2007 where we had irregularity, several breakouts on the upside, and two rally failures before the big plunge.
What will snap that “limb” ?
The realization that a “V” and stock market and economic recovery is going to be more like an “L.”
COVID-19 came at a time the economy was in its 11th year of expansion, a time when a recession was long overdue, more than two times the norm.  The economy was on the threshold of recession in Q4 2018, before the Fed came to the rescue with hype about the economy being “in a good place,” interest rate cuts and an unofficial QE.
COVID and measures to counter it, have had a severe impact on the economy BUT not the stock market – that has YET TO HAPPEN.
         But it will with a major slide into October/November. I picked July 27 as the start !!
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Wednesday July 15, 2020 (DJIA: 26,642) “Vaccine -a Game Changer ?”
Of course !  The question is, how much is the expectation of a vaccine already priced in a market that is only 6% below the level where the devastation of COVID-19 triggered a recession and hammered the S&P 500 down 35.6% before the rebound ?
While the market is up sharply in futures trading before the open, it cannot afford another rally failure.  Buying the open is risky.

Reportedly, there are 150 vaccines under development. Monday, Pfizer (PFE) and BioNTech received FDA permission to fast track two candidates.
After the close yesterday, a drug developed by the National Institute of Health and Moderna, Inc. announced it will begin a 30,000 person final testing for an experimental vaccine that has demonstrated  the ability to produce what are called neutralizing antibodies in the bloodstream of 45 volunteers molecules key to blocking infection comparable to those found in COVID survivors. The government hopes to have results of tests by year-end.
Expect daily disclosures of efforts to develop treatments and vaccines. Expect these announcements to goose the market at times.
What does this mean for the market ?   Hope and frustration.
Hope for the obvious reason, frustration because test results may not be known for months and there is always the possibility a vaccine wont be available for distribution until well after that.
Bottom Line:

This is the spike I referred to Monday, the one that will lead to a peak from which the market will sell off into the fall.
Standing in the way will be the Fed, Administration and Wall Street and announcements about potential vaccines and treatments for COVID-19.
Even so, stock prices can only become so overpriced that buyers walk away, opening the door for a huge sell off.
The markets responded to a one-day reversal on the downside Monday with a one-day reversal on the upside.  The key will be whether the market can  sustain a follow through today, especially with  the tech stocks, which cannot afford another rally failure.
        Kind of like a tug of war over a stream where first one side gets their feet wet, then the other side.  The key is follow through.
We are right smack in the middle of Q2 earnings season. While they will be ugly, the Street has already low-balled projections in an effort to minimize their impact.
What to do:  The nimble and savvy, can play, but sit close to the exits. Newcomers seeking their fortune can play until they get wiped out.  The rest can raise a cash  reserve in line with their tolerance for risk.
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July 14, 2020  (DJIA: 26,085)  “Wall Street’s Darlings De-Faang-ed”
BIG spike and reversal in the popular growth stocks yesterday.
Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), Google (GOOG), aka FAANG stocks, closed down for the day after huge spikes up early in the day, resulting in one-day reversals, generally a bad sign.
I had a little sparring session with the Seeking Alpha folks yesterday.  Seems like there is just a bit too much bravado about owning Apple, Netflix and the stay-at-home stocks that needed to be challenged.
There is a lot of human nature in this zoo. Any time someone feels it is safe to boast about owning a winner, the stock is due for a comeuppance.  Funny how that works.
Even so, yesterday’s blog, “One More Spike Up Before Fall Plunge, ” was referring to just  this kind of action, a big surge upward that fails to hold.
It will be important to see if these stocks can  press to new highs or if yesterday marked their all-time high.
I expect the same thing to happen to the rest of the market that happened to the  FAANG stocks, but less  dramatically.
I thought July 27 would be a good target date for the 30% – 45% slide to start, but there are a lot of balls up in the air – more stimulus, Fed/Administration/Street hype.  Lies about future earnings as Q2 reports hit the street. There is a presidential election in 18 weeks.
I am seeing the same cockiness, arrogance and denial now, that I have seen at the top of the last 14 bull markets, in varying degrees but more so in 1968 1973, 2000, and 2007.
Today’s market is different in that the Fed is trying to micro-manage it. I don’t think a bunch of corner-office bankers are smart enough to do that without creating chaos.  Markets should be allowed to find a level that discounts known and perceived positives and negatives, not micro-managed to accommodate a vision.
The result is a bubble with horrifying results when pricked. I believe the Fed was responsible for Bubble #1 between December 2018 and February 2020. I believe it is responsible for Bubble #2 between March 23 and today.
The Fed needs to be de-FAANG-ED.
Bottom Line:
The bulls won’t go gently. At some point here, today, tomorrow in a week, buyers will be a “no-show” – enter flash crash #2.
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Monday July 13, 2020  (DJIA:26,085)“One More pike Before Fall Plunge”
Oh my, what a difference 11 years makes. If these guys would just walk around the block  and draw on common sense for arriving at decisions.
A Sunday Bloomberg article, “Wall street Forges a New Deal With Data in Coronavirus Age” highlights how far from common sense the Street has gotten.
Now the direction of the market will be decided by restaurant reservations on Open Table, TSA checkpoint data, international dining bookings, , COVID-19 reproduction rate, daily deaths, the positivity rate ( share of tests coming back positive), hospitalization and capacity rates, gasoline use data, traffic congestion, credit card usage, and yes,  Transport Authority turnstile entries.
How about the fact that a 6% decline in the S&P 500 does not come close to discounting what has happened, is happening and the damage it will cause in the future ?
The Nasdaq Composite is 3.8% above the February 19 level where the flash crash started ?  Granted, the index is hugely distorted by a handful of big-cap tech stocks,  but stocks were overvalued before the crash and are more so now with corporate earnings plunging and with little hope of a quick rebound.
        With all the uncertainty that bedevils this business, one thing is consistent –
Greed and fear.  Greed (and denial) at tops and fear at bottoms.
So, what will it take for the stock market to plunge ?
Humans being human.
Current fundamentals suck and the future is anyone’s guess.   It is difficult for money managers to justify investing at these levels faced with such overvaluation, adversity and untethered uncertainty.
        At some point  here,  fiduciary responsibility will override the urge to clip another percentage point or two for portfolios and buying will Vanish ergo a freefall as everyday selling finds buyers are a “no show.”
Memories of what happened in February/March with a  21-day 35.6% drop in the S&P 500 will resurface and sellers will  race to the exits adding to the initial plunge.
The result: a 30% – 45% plunge (starting July 27 ??) will occur heading into October.

Bottom Line:
Bear market bottoms are accompanied by gloom and doom, so much so, no one in their right mind can justify buying stocks based on current and potential developments.
Ironically, we have gloom and doom at a time the Nasdaq Comp. is hitting new highs  with the S&P 500 is within 6% of an all-time high.
Obviously, the Street is looking beyond the pandemic  crisis.  How far beyond is it willing to look ?   This looks like denial to me.  If several big hitters bail out, they all will bail out.
The Market Averages:  No matter how bad Q2 corporate earnings are, the Street will claim they are better than expected (SOP).  Will Companies return to a policy of guidance ?
In this environment, I expect one more push up before a sell off can occur, the DJIA rising above the spike on June 16 of 26,611  and the S&P 500 above June 9’s 3,222.   This is Wall Street’s definition of cognitive dissonance.
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Friday July 10, 2020 “Bubble Burst Looms – COVID-19 Repeat ?”
The level of stock prices does not take into account the amount of short-and long-term damage that has been done to the economy, as well as the uncertainty that mounts as dominos tumble.
But stock prices are what the Street thinks they are until that changes.
As long as investors buy the favorites and don’t sell the also-ran stocks, the market will go up.
At some point, institutions will decide prices are too rich, cannot be justified , and they will stop buying. Since most track the same indicators they will all decide not to buy at roughly the same time, ergo a flash crash.
As stocks tumble, fear creeps in and other investors sell, driving stocks lower.
When ?
The Street’s infatuation with tech stocks and generally the big blues reminds me of 1970 -1974’s “one-decision” stocks, the “nifty fifty” buy ‘em and never sell them.
       At the time, I was head of Economic and Stock Market Studies for John Winthrop Wright’s Wright Investors’ Services.  We cranked out study after study detailing why those stocks were overvalued, and for a while it seemed that we were dead wrong, they kept becoming more and more overvalued.
It took the 1973 -1975 recession and bear markets (1973-1974) and (1976-1978) to destroy the myth of the Nifty Fifty.
Included where some that are no longer around: Eastman Kodak, Polaroid, Sears Ch.11), Burroughs, Int’l Tel.& Tel.,  Black&Decker, Int’l Flavors & Frag., Gillette (merged/acquired), American Home, Coca-Cola, IBM, Johnson& Johnson, Xerox, McDonald to mention a few.
Once out of institutional favor, it took 8 – 10 years for these stocks to recoup their peak losses.
The stock market is like a stormy sea – respect it !
The current buy-hold myth will find its way out the rear exit, in time.
There is a reason for the bromide, Buy Low, Sell High.” It vastly increases the odds of success.
The fact the S&P 500 was able to drop 35.6% in 21 days strongly suggests the market was overpriced in February, as it is again today in the midst of a recession and a scary future.
Fear like this is usually present at market bottoms not tops.
BOTTOM LINE:
This is the “Sell High” part of the bromide, or at least raise cash to a level in keeping with one’s tolerance for risk.  It’s another man-made BUBBLE, and it will burst in spite of efforts by the Fed, Administration and Street to prop it up until after the November 3 elections.

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Thursday July 9, 2020 (DJIA: 25,706 “Bear Market Rally Top Looms”
This is the phase in the economy I referred to here several months ago where reports on the economy would make good reading, not because the economy was in an upward growth pattern, but because current data was going up against extremely depressed data.
       I always want to look at raw data, because percentage changes vary depending on what their starting point is.
Of course current and near-term data will make good reading, the big question is whether this is a blip or an indication of a sustainable recovery ?
       If COVID’s rampage hammered the economy earlier in the year its resurgence will do even more damage now because people and companies “are on the ropes,” and it won’t take much to finish them off.
       It’s all about the tumbling of dominos, all about businesses and  industries reeling from the impact COVID has on companies they support, about their customers and their customers, etc..

Today, Bloomberg.com – Business ran an article, “Covid-19 Is Bankrupting American Companies at a Relentless Pace,” listing companies and organizations that have gone bankrupt  due to COVID, but giving insight to how dominos tumble.   THAT IS WHERE THE ULTIMATE DAMAGE IS DONE.
The S&P 500 remains within 6.3% of all-time highs, the Nasdaq Comp., heavily skewed by a handful of huge tech stocks, is 6.6% above the highs hit on February 19.
The Street is in denial !   Presumably, it believes the stock market is immune to COVID’s wrath.
I don’t think the stock market has begun to discount the potential devastation that looms.
But it will. Once money managers realize that a 30% – 45% plunge is possible, even likely, they will stop buying thus creating a huge gap between buy orders and sell orders, leading to selling, resulting in yet another flash crash.
Normally, gloom is accompanied by rock bottom stock prices, a time when no one wants to buy stocks.  Not so here. Even “first timers” are speculating, and making money.
CLASSIC !  These are market top signals, not market bottom signals.
BOTTOM LINE:
I see a big slide in stock prices beginning anytime this month. The Fed, Administration and Street will hype the market at every turn to prevent a plunge before the November 3 elections.  Ignore them.
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Wednesday July 8, 2020 (DJIA: 26,067) “What Will Trigger the Next Flash Crash ?”
What will trigger the next flash crash ?
Anyone paying attention to what is happening, with any sense of stock valuation and  historic precedent , is aware that we are faced with enormous, unprecedented uncertainty and  risk.
The S&P 500 is only off 7.3% from its all-time high when it was at least 50% overvalued based on time-tested measures of value. That does not come close to             discounting the enormous damage that has been done to the economy and the dismal outlook for the future.
Knowing this, money managers,  can be  liable for the violation of their fiduciary responsibility to preserve capital if we get a severe plunge in the stock market that isn’t followed immediately by a rebound.
At some point, they will have to stop buying and that will kick off the next flash crash.
   The flash crash is the new normal for the stock market. Characterized by an abrupt free fall in stock prices which can reach double digits in days, the flash crash gives no warning or chance for investors to protect positions.
So far, all flash crashes have been followed by a recovery, the most dramatic one being the recovery from this year’s February/March plunge (DJIA: -38.4%, S&P 500: -35.6%, Nasdaq Comp.: -32.6%).
The DJIA rebounded to within 6.7% of its bull market top; the S&P 500 to within 4,8%, but the tech-heavy Nasdaq Comp. actually rose to  new highs.
       The next flash crash may not rebound quickly.
While most individuals and businesses are flush with cash after Fed and Congressional stimulus, a lot of damage has been done to confidence. The consumer appears to have hunkered down waiting for it to be safe to come out and spend and socialize like in pre-COVID times.
Odds are, the damage to the economy will continue as dominos tumble.
We are in a recession.  There never was a recession that was not accompanied by a bear market.
I think the DJIA, S&P 500, New York Composite, New York Transports, ValueLine Geometric (unweighted) are in a bear market, the Nasdaq Composite is not, because it is heavily weighted by a few monstrous companies that are distorting the index.
BOTTOM LINE:
All it takes is for institutions to stop buying and the market drops 8%-12% further in days.  Haunted by the 21-day 35% drop in the S&P 500 in February/March, institutions and individuals will become sellers, pounding stocks even lower.
Every effort will be made to avert another plunge before election day. Expect hype by the Fed, Administration and Wall Street.  A cash reserve in line for one’s tolerance for risk is necessary.
Be prepared for another plunge, as well as a buying opportunity at lower levels.
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Tuesday July 7, 2020  (DJIA: 26,067) “In December I Called For a January Bull Market Top, I Now See the Bear Market Rally Top This Month
I am repeating my Monday post below with the exception of the following.
July starts the beginning of Q3, which normally brings in the investment of new funds. However, today looks like it will begin on the downside, which may be reflecting profit-taking of certain stocks after sharp Q2 gains.
Yesterday, I indicated FactSet projected a decline in S&P 500 earnings for 2020 at 22%, that it would take a rebound from that of 28% to get back to pre-COVID levels. However Axios now reports analysts  are projecting a 28.6% plunge in 2020, which would require a  40% rebound.
Note: I repeated Monday’s post on Tuesday.
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George Brooks
Investor’s first read.com
brooksie01@aol.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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