One More Spike Before Fall Plunge

INVESTOR’S first – Daily edge before the open
S&P 500: 3,185
Nasdaq Comp.:10,617
Russell: 1,422
Monday,  July 13, 2020    7:45 a.m.

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%.
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.
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
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.

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.

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.
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.

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, – 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.
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.
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.
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.
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.
Monday  July 6, 2020 (DJIA: 25,827)  “Ignore Hype By Fed, Administration and Wall Street, Market Sell Off This Month, Plunge Into Year-End”
The stock market will start declining  this month
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 the November 3rd Presidential Election.
     Why ? While the Fed, Administration and powers on Wall Street will stop at nothing to prop it up until after the November 3rd elections, an overvalued stock market must discount known and worsening fundamentals.
      Based on what ? Let’s start with 58 years experience in the trenches of this business, 52 as a writer of market analysis.
For another, the market was historically extremely overvalued BEFORE Covid19. With corporate earnings plunging, it is even more so. Last month 80%  of the S&P 500 companies did not  provide “guidance,” however, projects a plunge of 44% for Q2 and 22% decline for CY 2020.
Obviously, with the S&P 500 only 7.4% down from an all-time February high of 3,383,  the Street is looking beyond 2020, but no one can know at this point what earnings will be, especially if economic dominos keep tumbling.
After a plunge of 22% in  earnings in 2020, earnings would have to rebound 28% next year to get back to pre-COVID levels where the P/E would still be 50% overvalued based on time-tested criteria.
      The huge rally in the stock market since the March 23, lows ( DJIA: 43% DJIA and S&P 500 and 54% in the tech-distorted Nasdaq Comp.), was partly due to the algo buy-the-dip, short covering, but mostly actions by the Fed and Congress to prevent outsized damage to the economy and stock market in a Presidential Election Year. Would this have happened in any of the three other years of the election cycle ? That is something to consider after  November 3rd.

What to do ?  Protect positions, raise cash in line with one’s tolerance for risk.
      Prepare for an outstanding buying opportunity which may be months or a year away. As I did on March 10, 2009 with the DJIA at 644., I would like to call that bottom.
This is a global problem.  Commenting to Bloomberg Sunday, Federal Reserve Bank President Thomas Barkin likens the recession to” riding the elevator down and taking the stairs back up.”
 BLUNDER that could stifle the economic recovery:
        In the haste to re-open the economy in time for the election, the Administration and many states did the one thing that stands to  deal a crushing blow to  an economy that is already on the ropes.  They re-opened too soon, resulting in a resurgence in the COVID pandemic and now the need to take measures that will curtail the COVID spikes but hurt the economy.
Perhaps the early re-opening could have been pulled off if  everyone was forced to take precautions including masks and social distancing.
Too many refused to do that – Nationwide spikes in infections is the result !
While  consumers are flush with cash, they are unwilling to come out and spend to the degree that will raise the economy out of recession any time soon.
But the economy was due for a recession before COVID.  Without aggressive intervention by the Fed in early 2019, the economy would have been in a recession last year, it was on the threshold  of one in Q4 2018 at a time the S&P 500 was down 20%.

     Does a 7.8% decline from extremely overvalued all-time highs in February  discount the damage that has been done, the dominos that will continue to fall and the uncertainty of what lies in wait in the future  ?
The Fed, the Administration and Wall Street will do  everything it can to prop the market up until the November 3 elections.
I don’t think it will work
. At some point money managers will not be able to justify new buying  and will be forced to raise cash to protect their client’s portfolio values, which is their fiduciary responsibility.
So, I see a major sell-off of 30% – 45% from here as reality sets in.
Our economy  and CONFIDENCE has been dealt a body blow of unprecedented proportions.  It is there for anyone without blinders to see.
          The only yardstick for analyzing risk now is common sense.
One more push up is likely, and would present an opportunity to raise cash. There will be hype about earnings not being as bad as expected, hype by the Fed, Administration and Street about a great recovery and proposals for more government checks to businesses and individuals – all in vain.
NONE OF THIS would happen in any other but a presidential election year.
Friday: Holiday
Thursday  July 2, 2020 (DJIA: 25,734)
“V” Not Going to Happen -August Top ? Plunge Into the Fall
      Fueled by bumps in economic indicators from depressed levels and looking out beyond current problems, money managers continue to buy, fearful of getting beat by competition.
The buying will continue until late summer when the Street realizes COVID-19 has shuttered a significant part of the economy, AND a possible Democrat sweep of the presidential and Senate races will adversely impact the stock market.
I see a plunge starting in August and ending after the November 3 elections.
The three amigos,  the Fed, Administration and  Street will hype the economy and stock market, panicking if it doesn’t work.
COVID-19 spikes are forcing states to re-think “coming out” plans, which will be economically devastating in light of their increasing fiscal problems.  More importantly, if they do or don’t, the consumer is becoming more and more wary about the risk, triggering a domino effect.
It’s all in the “dominos” falling creating an open-ended problem economists can’t measure.
There will be trading opportunities for those buying overpriced stocks and selling them to investors willing to pay a higher price.  This has long been called the “greater fool theory,” i.e. a fool pays too much for a stock but finds a greater fool to buy it from him.      No one wants to miss out.
Classic bull trap.
       This market “is”  rigged by the three amigos, but that should end within 6-7 weeks when institutions ignore the hype lock in profits.
Whenever, a market ignores fact and reality over and over, it is being manipulated or simply driven by fantasy, and greed.
Most likely the DJIA will jump above June’s 27,580 and S&P 500” 3,222 before topping out.  This trap would suck a lot of innocent, excited  investors in as the smart (BIG) money sells and moves to the sidelines.  That will create a vacuum for stocks to fall freely, triggering a flash crash as the “public investor and Robinhood investor begin to panic and drive prices lower past the elections into early December.

George Brooks
Investor’s first
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.

















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