Risk Rises as Market Moves Higher

INVESTOR’S first read.com – Daily edge before the open
DJIA: 24,221
S&P 500: 2,930
Nasdaq: 9,192
Russell:1,321
Tuesday,  May12, 2020    9:19 a.m.
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brooksie01@aol.com
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November 15, 2019 (DJIA – 28,004)  My blog headline:  “Bear Market…Why?”  Here I Called for a bear market to start in January, that the initial plunge would be 12%-18% – “straight down.” It started mid-February.
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January 20, 2020 (DJIA:29,348) My blog,  “INSANITY,” projected a bear market decline of  30% – 45%. The S&P 500 plunged 35% in 21 days.
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Currently, I expect this bear market rally to top out in May and  the bear market  to post a decline of 50% -60%  before bottoming out in October.
A game changer would be a sharp reversal in the growth of COVID cases and the lifting of  measures designed to counter it.  Additionally, the ability of people and businesses to adapt and innovate.
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Brief bio: In investment business 57 years, writing about stock market  for 52 years, including  investment publishers, brokers, research firms, investment bankers, plus my own investment advisories,  mostly as independent contractor to maintain independence of analysis.  “In the trenches” for every bear/bull market  since 1962. Started before  quote machines  as a tape reader/trader, posting charts by hand. Primarily  a technical analyst, but research includes fundamental, monetary, economic, psychological factors. Research recommendations/profiles of hundreds small companies.
Love rough and tumble… telling the story. CNBC-TV, Been writing investors first read.com daily before the open for 11 years. ……………………………………………………………………………………………………………………………………………..
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TODAY
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.
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    While investors were stunned by a 38%, 21-day plunge in the DJIA (35% plunge S&P 500) in February/March, the markets did not stay down long enough for investors to feel the kind of pain that bear market bottoms dish out.
With a sharp rebound in stock prices ever since the March 23 lows, investors are confident the market will be higher a year from now, at least according to Dion Rabouin’s Axios Markets report today.
While an April New York Fed survey found 31% of those surveyed expect job loss and historically low expectations for income and spending, difficulty in getting credit and debt delinquencies in the coming year, they still had confidence that the stock market would be higher a year from now.
Really ?
     That’s what an 11-year old bull market can do to expectations, i.e., they expect the stock market to rise no matter what.
     Again, let me emphasize  the fallacy behind  John/Jane Q’s expectations, as well as the majority of Wall Street’s projections for the stock market lies in overvaluation of stocks.
It was in February when the Shiller price earnings ratio was 31, or 80% above the mean, prior to the flash crash and it is more so today.
Presently, the S&P 500 earnings defy a reasonable estimate for earnings in coming quarters, but they will be much lower, ergo the P/E higher.
Is there good reason for the stock market to be overvalued now in light of the damage that has already been done and the uncertainty that results ?
Is it a good bet against the risk of another leg down that more realistically discounts real value ?
Bottom Line:  Short-term the market can edge higher, driven by short covering and FOMO (fear of missing out). Risk rises dramatically with each tick up – Careful !
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RECENT POSTS:
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Monday May 11, 2020  (DJIA: 24,331)  “A Sucker Rally – Market at Risk of a 30% – 40% Plunge”      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.
       The big boys on Wall Street think they can look beyond what is happening now to a recovery and another pocket-lining bull market and endless economic recovery.
Maybe that worked in the past, but we have not been faced with this level of pain and uncertainty since the 1930s.
The market was extremely overvalued in February before the bear market started and with earnings plunging, is even more so now.
I see the economic recovery as an “L” not a “V” or “U” as most economists expect. I expect another leg down in the stock market to discount their disappointment.  IF the Street suddenly realizes the recovery won’t begin later this year, and not in 2021, they will panic.
Money managers have a fiduciary responsibility to preserve client capital, so they will  1) stop buying, and 2) SELL.
That calls for DJIA below 10,000, the S&P 500 below 1,500 and Nasdaq Comp. below  4,000.
Bottom Line:
Along the way we will have more Fed/government stimulus. It is a presidential election year, and the powers at the top are terrified. There will be news of COVID-19 treatments and vaccines that will raise hopes of an end to our dilemma.
BUT, consumer confidence has been seriously jolted and buying of anything other than the necessities will rule for a long time. With unemployment poised to top 22 million, a person does not have to lose their job to be afraid of it happening to them.  Expect a consumer strike. They are now discovering they can get along on less.
CONFIDENCE in the future drives economic expansions and bull markets.
It will take time, maybe years.  Meanwhile, the market will have to adjust to that and it isn’t going to be pretty.
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Friday  May 8, 2020  (DJIA: 23,875) “
Sell the Bad News –  Wall Street Wrong  – Consumer Strike Imminent….Not Going Back to Way It Was
How could the stock market go up when economic news just keeps getting worse ?
As a rule, the big money buys when the news couldn’t get worse, that’s when they find the best bargains.
After a surge of short covering in March, the big houses on Wall Street stepped in to buy and with a few exceptions, are still buying.
JPMorgan Chase, Goldman Sachs and Morgan Stanley are bullish, with the opinion that markets will continue to look through bad news about the depth of the economic downturn with a reversal of the  recent damage by the end of the year.
        Citigroup is more cautious, crediting the market’s strength to an unprecedented governmental policy response but skeptical that the markets can be propped up indefinitely.
To my surprise, Minneapolis Fed president Neel Kashkari told Axios Markets “It is becoming clear that we’re in for  a long, gradual recovery…he wishes we had a quick bounce back.
Scott Clemons, Brown Brothers Harriman, agrees saying, “The market has too quickly celebrated success on the healthcare front, without  fully appreciating how hard it is to turn the economy back on.
I totally disagree with the big boys on this one,
suggesting more than once that they walk around the block with eyes and ears open to see what is happening.
This one is different and can’t be treated with the usual, “how to time a market bottom 101” playbook.
Both the stock market and economy took a huge hit starting in February when COVID-19 pricked a highly overvalued stock market bubble. At the time, both the stock market and economy were 11 years old, the economic expansion more than twice the norm, the bull market four times the norm.
          We were due for a recession/bear market, even without COVID-19.
What has happened and is continuing to happen will vastly impact consumer spending patterns and businesses that support them.
In short, a normal recession has now become the worst since the Great Recession of 2007-2009 which drove the S&P 500 down 57%, and possibly the worst since the devastating Great Depression.
It all depends on the tumble of dominos – how far and how long they fall.
The Fed, the Administration and the powers on the Street have a lot of clout, and this is a presidential election year, so the hype will continue.
Bottom Line    Too much has changed to go back to the inflated stock prices. Too much has changed to go back to economics as usual. I see another leg down. Depending on whether the institutions panic, we are looking at new lows and a DJIA below 12,000 possibly 10,000.
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Thursday  May 7, 2020 (DJIA: 23,664) A “Coming-Out Party….Then a Plunge
       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.
Outcoming Party
       We  have to have an “outcoming” rally first with news coverage of lines of people waiting to access restaurants, public events, kids taking a ballfield to play their game, record sign-ups for cruises, parties inside and outside, interviews of maskless people braving the risk to return to the way things were.
Fiddlesticks ! After the bump, COVID-19 will still be there. Without a quick fix that stops it in its tracks, fear and uncertainty will prevail.
Even with a “fix,” lasting damage has been done and will continue.
Beware of “Hype”
Expect the Fed, the Administration and powerhouses on Wall Street to pull every stunt in one’s devious playbook to  prop the stock market up through election day.
Wall Street, spoiled from a fed-nurtured , 11-year old bull market won’t let go, pushing stocks as the only place to put one’s money.
I agree it is, but at much, much lower prices.
Still Overvalued
NO, this is NOT an opportunity of a lifetime. The stock market was absurdly overvalued before the bear market started in February, and is much more overvalued now.
       The Fed and government can throw all the money they can “create” at our economic nightmare, but consumers are so shellshocked they’ll go into survival mode and slash spending especially on big ticket items.
This is why the liberation of states from stay-at-home mode will only trigger a temporary bump as government rescue efforts run their course, and the nation sinks deeper into recession.
Institutional Panic ?
       I see a second leg down that will take the  DJIA below 12,000, and 10,000 if the Street panics. That counts to the S&P 500 to at least 1,500, and the bulletproof Nasdaq Comp. below 4,000.
Here’s why a panic can happen.
Managers of money have a fiduciary responsibility to preserve client’s assets.
If they suddenly see the possibility of the recession we are in now turning into a severe recession or a depression, they will sell. All will get the sell signal at the same time and that means – straight down, flash crash #2.
Worst Since 1930s
 This bear market stands to be the worst since the 1930’s Great Depression.  Adding to the severity is the fact all this happened after the longest bull market/economic expansion on record.
Jobless claims for the last week reached 3.17 million.  While that is down from 3.85 million the prior week, it is ominous for the future. To date, the grand  seven week total exceeds 33 million jobs lost.
Not only does this impact the job losers, it sends a chill into those who already have a job.
Bottom Line
     The market is up at the open as the Street anxiously awaits the re-opening of business.    As my headline suggests, a coming out party will precede the second leg down in this bear market, however the party may first have to reach a fever pitch before “last call.”
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Wednesday May 6, 2020  (DJIA: 23,803) “The Big Gamble Begins”

The Stock Trader’s Almanac was the first to target May 1 as the beginning of the worst six months of the year with November 1 to April 30 being the “best” six months for investing.
      However, investors must realize, major moves in the opposite direction can occur within these six month periods, The Feb/Mar. 35% plunge being a recent example.
For good reason, I don’t think the stock market comes close to discounting the adversity that lies ahead, i.e., it is more overvalued now than in February when it went into a bear market, especially given the fact earnings will be getting clocked in coming quarters.
The current bear market rally is tempting investors to jump in. Who wants to miss a new bull market ? (FOMO: fear of missing out).
That’s classic behavior in a bear market rally. However, it wouldn’t take much of a plunge to renew the FOLE mentality (fear of losing everything).
      Bad news accompanies bear market bottoms, which tend to precede the end of recessions by 3 – 5 months. turn up 3-5 months.
But news in coming months will get worse, so it boils down to how bad does it get before the stock market has discounted the worst ?
U.S. factory orders plunged 10.3% in March as the COVID-19 shut down began. Durable goods fell 14.7%, nondurables dropped 5.8%. MarketWatch’s Jeffrey Bartash believes U.S. and global economies could take years to  recover.           The ISM (service) Index plunged 41.8% in April, the first decline in 112 months.
I hold to my bear market bottom in October with the possibility of DJIA below 12,000 – 10,000, the S&P 500 below 1,500 and Nasdaq Comp. bellow 4,000.
For that to happen, the institutions would have to panic.
      It depends on how far the economic dominos tumble. The Fed and U.S. government has thrown an unprecedented amount of money at the problem in an effort to prevent a devastating depression. Initially that will buy some time.  If the economic wound heals quickly, a depression can be avoided, but an ugly recession will still do a lot damage.
The chaos and damage of a depression would be unthinkable.
In either case, the stock market is extremely overvalued.
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Tuesday May 5, 2020 (DJIA: 23,749) “The Street Rolls the Dice, Buffett Raises More Cash”      While yesterday’s rally at the open stalled, the market finished strong and will follow through today.
         We have 18 more trading days in May so the adage, “Sell in May, and go away” may still prove as good guidance .
Warren Buffett didn’t wait for May to dump his entire position in airline stocks, going on to admit he didn’t find any stocks interesting at this time.
A year from now, most students of the market, money managers, analysts and investors will look back  and wonder why it wasn’t more obvious what was happening now.
We are well into a recession and may well sink into another Great Depression, yet the bear market rally, now up 32% from its March low, is still notching up.
Only 16% off its February 19  all-time high, and facing the worst economic debacle since the 1930s, the S&P 500 is absurdly overvalued, and will get more overvalued in coming quarters as earnings plunge.
But, the Street is looking past the immediate crisis to what it thinks is a robust recovery.
If Buffett thinks it is wise to raise cash, why shouldn’t more people.

 

Monday May 4, 2020  (DJIA: 23,723) “Stock Technicals Weakening – Test of Lows ?”    Q-1 earnings are hitting the Street and are not a good read. Q2 will be worse for the obvious reason.
Guidance on future earnings is of little value, since no one has a handle on where things will go in coming quarters.
A number of states are lifting COVID-19 restrictions, though the virus is still spreading at around 30,000 new cases per day.
If  the spread recedes, the economy has a chance to stabilize, if not, the country will have to return to  social distancing again leading to the worst recession since 1929-1932.  I am not sure that won’t happen anyhow,, since so much damage has been done already.
Wall Street doesn’t get it. While a good chunk of the 35% bear market rally between March 23 and April 29 was short covering, there was a lot of bargain hunting by traders and institutions thinking the correction was over and it was party time again.
       The S&P 500 is down 17% from its February 19 bull market high where its price earnings ratio (P/E) was more overvalued than at any time ever except at the dot-com Internet bubble high in January 2000.
With a severe recession underway, possibly a depression, a 17% correction doesn’t begin to discount the potential damage looming for the economy and corporate earnings.
Why ?  I think the Street has become desensitized to hard times. It has been more than 11 years since the Great Recession. Memories of its angst have faded.
What’s more, I would hazard a guess, that many of the decision makers today were either not in this business then or just starting.
         A grand bull market tends to erase the pain of hard times and embellish the rewards of  a relentlessly rising market, one nurtured by the Fed whenever it stumbled.
Bottom Line:
        While the market will open on the downside, watch an attempt to rally – if it is robust, a downturn in May, a key pivotal month, will have to come later.  If the rally is lifeless, we are heading lower.
I alerted readers of a rally on March 23 with the S&P 500 at 2,245 and picked April 15 (S&P 500: 2,846) as an end to the rally after a 27% rise. It continued to rise another 8 percentage points before its peak three days ago at 2,954.
My headline Friday, “End of Bear Market Rally ?” has a better chance of being right.  On Friday, we saw a  break in the tech stocks that stands to follow through this week. If so, it should trigger a plunge in the overall market as a beginning of a test of the March 23 lows at DJIA: 18,213, S&P 500: 2,191, Nasdaq Comp.: 6,631.
Initially, I see that test as appearing to be successful at some point above those lows, but believe  we will see a substantial  drop below the lows if institutions panic and sell aggressively, even a DJIA below 10,000.
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Friday  May 1, 2020 (DJIA: 24,345) “Is the Bear Market Rally Over ?”

Headlines in Axios’ AM- Mike’s top 10  this morning tell the story of today’s dilemma.
“U.S. Jobless claims soar past 30 million”
was accompanied by, “Wall Street has best month in 30 years.”
Whoa !
Does that mean the bear market is over, that Wall Street sees an economic recovery later in the year and is loading up on stocks in advance,  driving the S&P 500 up 33% in 28 days ?
Aren’t investors supposed to experience excruciating  pain before bear markets end ?
IMHO, they will in coming months.  This has been a bear market rally, driven by short covering, buy-biased algos and Wall Street hype in a presidential election year.
We have massive government stimulus for several reasons. For one, this is an election year, but more importantly, the economy is now in the deep stuff.
Consumers
account for 70% of the nation’s GDP and it is where the recession will have a major impact.
A new economic era looms, but it isn’t about aggressive spending on big ticket items, travel,  housing.
Coming off 11 years of economic expansion, consumers are in debt and as a result of the recession, getting deeper in debt and that will alter spending plans going forward..
As a result, corporate earnings will be taking a big hit
near-term and going forward.  Stock buybacks, a major driver of stock prices, will all but stop.
 Here’s  the reason for another leg down in stock prices. It’s the valuation of stocks.  At the market peak in February, the S&P 500 price/earnings ratio (P/E) was higher than at any time in the past except the dot-com Internet bubble in 1999-2000.
A bear market had to happen.
Now, with earnings plunging and the S&P 500 only 11% below its peak, the stock market is even more overvalued.
So, when does the next leg down start ?  News flow (Fed, Administration and Street hype, news of a treatment/vaccine for COVID-19), will have an impact. Without that, May is a good possibility with a plunge into fall.
How far down ?   Again, it’s an election year and powerful forces media and otherwise will attempt to prop the market beyond election day.
At its ugliest, I’d say DJIA 9,750, the S&P 500 below 11,500 and Nasdaq Comp. below 4,000.
Absurd ! How could that be ?
The news is bad enough, worse yet falling dominos  can make it a lot worse.  It really only takes a couple big hitters on the Street to break ranks and sell to trigger mass selling by institutional investors.
Aren’t they in it for the long haul, i.e. buy  and sell only to switch to another stock ?
None can afford to sit on monstrous losses and ride out an extended bear market. The managers will lose their jobs – get sued. They are humans, they get greedy (seen that) and can get scared.
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Thursday  April, 30, 2020  (DJIA: 24,633) “Shilling’s “INSIGHT” asks, “Is This 1929 All Over Again ?”

Bear market bottoms are mostly accompanied by a lot of angst, and rightly so, investors just took a big hit.    The hit between February and March was big (35%+), but the bear market rally’s 34% rebound was so swift investors didn’t have a chance to jump out of any windows.
So now, just 13.3% down from the February 19 bull market top, investors feel safe enough to hold tight if not buy more stock.
CFOs disagree according to an Axios report with 80% expecting losses this year
, one-quarter of them expecting losses in excess of 25%. More important, 70% are considering deferring or cancelling investments plans.
One-third of U.S. debt is “distressed,
which means corporate bonds are trading  at significant  discounts because a company is likely to file for bankruptcy or default, Axios reports.
As stated here many times since this year’s March 23,  S&P 500 low  of 2,191, I believe this is a bear market rally that will yield to another  plunge. Depending on what new adverse news hits it as it is tumbling, the DJIA could drop below 10,000.
For one, what is happening will have long-lasting impact on individuals and businesses no matter how much money the Fed and Congress throws at the problem.
        Even with the announcement of  new treatments and a potential vaccine, the new mindset of the consumer will be changed for years.   Saddled  with debt, unemployment and fear of the future, the consumer will be more reluctant to take on big ticket items, especially if it means more borrowing.  This will have an adverse impact of numerous industries, just one example of dominos tumbling.
The U.S., Q1  GDP was down 4.8%, for the week ending April 25, more than 3.8 million more filed for unemployment, bringing the total to 30 million. Unemployment is now tracked to reach 22%, the worst since the Great Depression.
At current levels, the stock market does not discount the present adversity or what lies ahead, only lower prices will.
The late-stage, bull market bubble was pricked by COVID-19 in February, but the stock market was historically extremely overvalued at the time, and that is why it dropped 35%+ in 21 days.
         Now, having recouped all but 11% of its loss, and faced with plunging earnings, it is even more overvalued now.
This is one thing the books written five years from now will point out and readers will wonder, how could the Street be so blind ?
A. Gary Shilling’s Monthly publication, INSIGHT,” headline’s its May issue with
 “Is This 1929 All Over Again ?”
His 32-page analysis strikes some stunning parallels with that era, far too much for me to do justice to here.   We are facing something worse than the Great Recession and bear market of 2007-2009 which hammered  the S&P 500 down a whopping  58%.
Shilling is one of the nation’s most renowned economists, having predicted the Great Recession, bear market, financial crisis, and housing collapse of 2007-2009  well in advance.  INSIGHT”S, editor, Fred T. Rossi, makes a compelling case for this parallel to 1929 backing it up with  a host of stats, charts, graphs. I will attempt to condense his findings as we go forward.
All students of stock market history know the picture must get extremely bleak before bear markets end and turn up in anticipation of a recovery.
Bottom Line:
THE PROBLEM HERE IS, THE ECONOMIC PICTURE GETS MORE DIRE, BUT THE STOCK MARKET RISES FROM OVERVALUED LEVELS TO EVEN MORE OVERVALUED LEVELS.  THE DAMAGE DONE TO OUR ECONOMY, TO GLOBAL ECONOMIES,  IS TOO GREAT TO BE REVERSED SO QUICKLY, SUPPORTTING THE CASE FOR ANOTHER LEG DOWN, AND I SEE THE POSSIBILITY OF A DJIA BELOW 10,000.
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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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