INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,215
Monday July 27, 2020 7:48 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 18,591on March 24, 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) – it went higher.
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
Brief bio: In investment business 58 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. ………………………………………………………………..
For months I have warned that a correction into the fall would develop, and two weeks ago I said it would start on July 27 – today.
If I am wrong about the 27th, I erred by going with my “gut” about a specific day, NOT that a plunge into the fall won’t happen. It will.
Friday, I called for a spike down in the FAANG stocks, picking the price level where I expected them to rebound from, which they did.
Facebook (FB): 223 – Low: 226 Close: 230
Amazon (AMZN): 2,887 – Low:2,888 Close: 3,008
Apple (AAPL):363 – Low: 356 Close: 370
Netflix (NFLX):466 – Low: 467 Close: 480
Google (GOOG):1,486 – Low: 1,488 Close: 1,511
Tesla (TSLA):1,407 – Low 1,366 Close: 1,417
As noted Friday, the rebound of these stocks must be watched closely. Failure to bounce sharply would be a huge warning signal for the group and market as a whole.
Danger of Disconnect:
The Street’s disconnect with what has happened, is happening and an unpredictable future, has created a highly dangerous situation, unlike anything I have seen in 58 years in this business, 52 years as a writer.
Knowing the historic overvaluation of most stocks, the unpredictably of COVID-19, the political unrest in our country, and potential for a severe recession/depression, I question how money managers can justify buying at these levels without incurring legal blowback if the market crashes.
If just a few BIG hitters walk away, worse yet sell in-size, it is LIGHTS OUT. Everyone will scramble to find a buyer for their stock – Flash Crash #2
Look, I am not a card-carrying bear, but we are tiptoeing through a minefield here with the market close to all-time highs. There is no guarantee that we will get an “all’s well,” when COVID is under control. Dominos will tumble for a long time.
I think the Street’s algos have it wrong. Unfortunately, this is what an 11-year old Fed-nurtured economic expansion and bull market will do for objective analysis.
Stuff happens. Between 1968 and 1981 we had four recessions and six bear markets which included domestic, international and political upheavals – comparable in many ways to today. . The Price/earnings ratio for the bluest of chips hit single digits !
What Can “Temporarily” Delay a Sell Off :
> Effective treatment and vaccine for COVID -19 though many months away.
> Earnings that are reported as better than expected because the projections were low-balled in the first place.
> Expect hype by the Fed, Administration and Street, on the economy and especially on a vaccine in effort to prop the market before November 3.
> Fed or Congressional stimulus. While helping individuals and institutions, the dire need for yet another program highlights the deepness of our problems.
Much is reported about how well the so-called Robinhood investors are doing. While dissed as newbies, novices, inexperienced, “oddlotters”, they are making money by “buying low, and selling high,” not in penny stocks, but tech stocks, airlines, stay-at-homes, breaking news stocks, etc..
Yesterday, Bloomberg quoted Bespoke Investment Group as noting how the newbie traders were buying the dip, not even afraid to jump on companies with serious financial problems.
One warning here for these gutsy traders who you can’t help but like. There will be a dip in the market that looks like a “gift”. Instead, it will be the kiss of death for one’s trading portfolio …… if highly leveraged – worse.
That will be the dip before a flash crash that does not snap back quickly, a bear market, or depending on how one sees this one, the test of the March lows.
So far, it has paid off for these shooters to stretch a single into a double, but the risk of test of the March 23 lows looms.
What to do: If it works, don’t change it, but don’t get greedy and….sit close to the exit. Cash is an investment when risks are high. For one, it protects portfolio values in the event of a flash crash (new normal), two, it can be tapped if the market craters and gives investors a “dip”…. of 30% – 45%.
At these levels, price earnings that rank with the highest ever, the market does not discount current and future adversity, not even close. These conditions breed another flash crash, if not today, in the near future.
Rallies must be watched for indications that they lack conviction.
Rally failures are deadly, as they reflect buyers are using strength to sell.
There will be a lot of hype and misinformation as the election approaches and it can trigger rallies – beware.
Friday July 24, 2020 (DJIA: 26,652) “FAANG Stocks Floundering”
On July 14, I headlined, “Wall Street’s Darlings De-Fanged” after the prior day’s outsized one-day reversal with the close at the day’s low for of all but one. It signaled exhaustion for the FAANG stocks: Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), Microsoft (MSFT), Tesla (TSLA) which was confirmed yesterday when they plunged.
Look for a spike down in each followed by a rally which must be read closely. Buying must be aggressive, or it signals serious weakness. The Street has been quick to jump on any pullback to buy these stocks. Failure now indicates the group is in line for a major consolidation/correction.
Near-term support must hold:
Facebook (FB): 223
Amazon (AMZN): 2,887
Don’t believe our economy is in dire straits ?
Walk around the block, look to the right, look to the left. Efficiency of getting anything done has ground to a halt. Communication sucks. The tempo of business muted. Parents and consumers are afraid to go out. Stimulus money will be hoarded if not spent, who knows what to expect next ? Dominos will be tumbling for a long time as the key interaction between businesses and consumers is disrupted.
Will the announcement of a treatment/vaccine help ? Of course, but serious damage has been done to the economy and confidence in institutions, employers and the government.
So why are stock prices more overvalued now than before COVID-19 struck ?
For one, the Street is looking beyond this crisis and economic woes to a recovery. For another, so many investment decisions are based on algorithms. It appears they aren’t programmed for an extended and severe recession/depression.
Two weeks ago, I picked July 27 as the day that the big correction into the fall would begin. Admittedly, news could delay that. A stimulus package would be a life-saver for some, but would be an admission that the economy is in very serious shape.
But this bubble is due to burst.
“Bear Market Rally Top Looms” (July 9 )
“Bubble Burst Looms ! COVID-19 Repeat” (July 10)
“One More Spike Before Fall Plunge” (July 13)
“Wall Street’s Darlings De-Fanged” (July14)
Vaccine – a Gamer Changer ?” (July 15)
“Market Turns Down July 27” (July 16)
“One More Push Before a Crunch ?” (July 20)
“Rally to Set Up Correction” (July 21)
“At Some Point: Market to Open – No Buyers in Sight” (July 22)
“Last Push Before Bubble Bursts (July 27 ??) (July 23)
Thursday July 23, 2020 (DJIA: 27,005) “Last Push Before Flash Crash (July 27 ??) The New York Weekly Economic Index (WEI) has stalled after a rebounding from depressed May/June levels, according to Axios Markets. The index covers daily and weekly consumer, labor and production data and confirms bearish readings compiled by Goldman Sachs, Jefferies and Oxford Economics..
Add to that, lower readings by the St. Louis Fed’s coincident employment and TSA checkpoint data and anyone paying attention has to be concerned that stock market valuations far greater than those in February before a 35% flash crash.
This doesn’t have to be complicated. This is Bubble #2, the first being a Fed-nurtured bubble between December 2018 and February 2020.
Bubbles expand until something pricks them or they burst on their own.
The S&P 500 was extremely overvalued in February before the COVID flash crash.
With corporate earnings down sharply and no assurance of a significant rebound in the future, the S&P 500 is so much more overvalued today.
Flash crash #2 when the bubble bursts. Expect Q2 earnings to be a better read than expected, but that is because they will be low-balled on the Street to create that effect.
The Fed, Administration and Street don’t want the party to end and will do all they can to prevent a sell off before November 3.
At some point, the market will open and there will be no buyers.
Why ? Because money managers will have difficulty justifying paying up for stocks, especially since they are well aware the future is bleak and uncertain. There is liability here.
Chief investment officer at UBS Ag, Mark Haefele, was quoted today by Bloomberg News saying, “As large asset allocators, when we look across, there are very few alternatives to equities right now.”
But at these levels, Cash is an alternative.
No, cash doesn’t earn a return, but it protects portfolio values against losses and provides a reservoir to tap when the market is more reasonably priced.
Risk of another flash crash is great enough to justify a cash reserve of 35% – 50%. or more, depending on one’s tolerance for risk.
Wednesday July 21, 2020 “At Some Point: Market to Open – No Buyers In Sight”
For most of the Street’s tech Sweethearts, also referred to as the FAANG stocks, July 13’s one-day reversal signaled a near-term top. The following day, I headlined “Wall Street’s Darlings De-Fanged.”
Why on earth would I take on the tech stocks, the “buy ‘em and don’t look back” stocks ? No one else is.
That huge July 13 spike up with a close at the low for the day was a warning signal for Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), Microsoft (MSFT), Tesla (TSLA). So far, that spike was the “top” for all but Google (GOOG), which had its one-day reversal yesterday.
The tech cult runs deep, everyone loves a sure thing….until reality sets in.
As if I wasn’t looking for trouble on that score, I have been calling for a major correction starting July 27, fully aware a lot of things can happen on that day and the days to follow.
Well, if I am crazy enough to do this every day before the open for 11 years (very few do), I must step up to the plate and take my cuts even if risking a “whiff.”
If the market were down 30% or more, I could be more optimistic knowing the market was discounting a host of adversity and uncertainty from a historically overvalued level.
On July 13, I called for, “One More Spike Before a Fall Plunge.” Since then, the market has risen until yesterday.
At some point (July 27), the market will open with no buyers in sight and whoosh, down it goes, a decline that depending on what new negatives hit it when it tries to rally, could pass 35% as memories of the February/March flash crash surface.
This time, the rebound would take a lot longer.
Tuesday July 21, 2020 (DJIA: 26,680) “Rally to Precede Correction”
Axios Markets’ Dion Rabouin claims Wall Street analysts are discussing the increasing possibility of a “blue wave” Democratic sweep of Congress and the presidency, that Goldman Sachs, Societe General, State Street , TD Securities and UBS are preparing lists of Biden buys.
I am not sure about that – a blue wave is not a certainty, says Ryan Detrick, senior strategist for LPL Financial.
Detrick notes that since 1928, the stock market has accurately predicted the winner of the presidential election 87% of the time when the S&P 500 was higher three months before the election, with the incumbent party usually winning, when lower the incumbents lost.
I am well aware investors tend to vote their wallet. I also think the Fed, Administration (obviously) and Street are doing their best to prop the market up until November 3.
If I am right about a major correction going into the November 3 election, the odds of winning favor the Democrats.
We are now getting the surge I referred to yesterday and on July 13 (“One More Spike Before Fall Plunge”). I expect it to carry through Friday with a decline starting Monday, July 27.
A lot of good and bad can happen in this short interim to change that forecast. I expect the $600/month to be extended over the weekend. That’s good for individuals but bad in that it would be an admission that the economy is in the very “deep stuff.”
Monday July 20, 2020 (DJIA: 26,671) “One More Push Before a Crunch”
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.
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.
Friday July 17, 2020 – No post
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.
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 !!
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.
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.
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.
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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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.