INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,050
Thursday, June 25, 2020 8:39 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
On June 8, the NBER officially set the beginning of the recession thus ending the longest economic expansion of 128 months.
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. ……………………………………………………………………………………………………………………………………………..
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 S&P 500 is down only 10.1% from its all-time February high, a high that was gained before the impact of COVID roiled global economies.
A 10% discount in the S&P 500 from February’s all-time highs does not discount the damage done to our economy by COVID-19 and measures to adjust to it.
If the economy is not is great trouble, the Fed and Congress would not be panicking to head off a Depression.
Here’s the problem:
Based on time-tested measures of valuation, the S&P 500 was 40% overvalued when the 11-year old bull market bubble was pricked by COVID in February.
The resulting recession will hammer corporate earnings making the overvaluation much greater somewhere in the area of 50%.
Expect the three amigos, the Fed, the Administration and Wall Street to rush forth with hype to prevent the stock market from finding a level that discounts the fact COVID-19 is spiking and the economy struggling to regain any meaningful positive momentum.
They will try to prop the market up with promises and misleading projections, but reality may chase the big buyers away setting the stage for “Flash Crash #2.
Money managers have a fiduciary responsibility to grow AND preserve capital. If they see huge and extended risk ahead, they will stop buying and start selling.
That would result is a free fall and test the March 23 lows (DJIA: 18,136; S&P 500: 2,191: 6,031), which could be broken if enough panic sets in.
Again, a 10% decline from overvalued all-time highs DOES NOT DISCOUNT THE RISK THAT LOOMS.
Wednesday June 24, 2020 (DJIA: 26,156) “Risks Rising Relentlessly”
Again, I say the following because the Fed is the primary driver of the March 23 rebound at least until November 3.
James Athey, money manager at Aberdeen Standard Investments said yesterday, “Rightly or Wrongly, there’s a pretty widespread feeling that riskier assets won’t go down because the Federal Reserve won’t let them.”
That’s why Bubble #2 is forming.
If the Fed is seeing serious economic problems lurking out there, why would it encourage asset prices to jump unrealistically ? After a 21 day 36% drop in the S&P 500, what is it about the danger of creating bubbles doesn’t the Fed understand ?
COVID is not going away, in fact it is spiking. It is unlikely states will go back into lockdown, but individuals may simply not go out as much as they would if COVID was no longer a worry.
Just a SAMPLING of what I am reading:
According to Axios AM (absolutely a daily must read), 43% of 7,317 small business owners that received money through Paycheck Protection Program (PPP) say they could be out of cash in a month or less.
What’s worse, 69% of small businesses that did not receive PPP expect to run out of cash next month, and 76% of minority-owned businesses that did not get PPP will be out of money in July, half are already out now.
Travel spending will be down 45% by year end. Obviously, businesses supporting that industry will be hurt, as well.
Health and fitness businesses will lose $350 million a week through year end.
All told, GDP is expected to shrink 5.2% this year alone, three times as much as in the 2009 recession.
This economic recovery is over-hyped. The 43% rebound in the S&P 500 is unjustified – a bubble that will eventually get pricked by reality, or burst because it cannot inflate any longer.
What I am seeing, people without masks in face of a resurgence in COVID-19, and a Fed blind to the dangers of inflating a stock market bubble is appalling !
Arrogance in the first case, ignorance in the second. What are these people thinking ? Or…can’t they ?
Tuesday June 23, 2020 “Fed is Doing It Again – Bubble #2 –
JEEZ ! Nooo… Not Again – Ugh ! %&%#@”
When will Bubble #2 burst ?
August ? November ?
It’s anyone’s guess – too many balls up in the air.
Reports on the economy will show improvement for a month or two simply because they are compared with “beatable” numbers, but then what ?
A line from yesterday’s post is worth a reprint:
Off and on, the Fed has been in panic mode since the economy and stock market started to melt down in Q4 of 2018 when the economy was on the threshold of recession and stock market had plunged 20% in 90 days.
Worth noting, COVID-19 did not strike until early this year, so my wild guess is, the Fed didn’t want a recession/bear market leading into or during a presidential election year.
The Fed has unchecked, unlimited and untethered power, and apparently feels it has been charged with the responsibility to use it, even it drives stock prices to dangerous levels.
That said, I don’t think a bunch of out-of-touch, prima donna bankers should have so much power. Why are they not warning investors of asset risk all the while they are panicking about an economy that is teetering on the edge of a cliff ?
I think we are in very dangerous waters here -sharks everywhere – COVID-19, Iffy China trade deal, global meltdown, election chaos, and the risk that institutions with algos all keying on the same metrics will suddenly get a SELL !
That would be Flash Crash #2.
When ? It will happen out of nowhere. The bubble will be inflated by hype from the Street, the Administration and the Fed until pricked by an event, or maybe it just gets too big and bursts on its own like it did in February.
Be prepared !
Monday June 22, 2020 (DJIA: 25,851) “Why is the Fed in Full Panic Mode ?”
Wow ! The Fed has always had unchecked power, but that is over the top.
But, the Fed couldn’t stop the 36% plunge in the S&P 500 earlier this year, or the 58% one in 2007-2009, or the 51% carnage in 2000-2002.
Here’s the problem with the Fed micromanaging the stock market. It works for a while, at which a correction/bear market brings stocks back down to realistic levels.
The S&P 500 is already within 8.7% of the February all-time highs when it was historically overvalued. It is so much more so today.
In a panic, the Fed has slashed its benchmark Fed funds interest rate to zero in less than a year. More importantly it has inundated the markets with freshly printed money.
A June 19, MarketWatch article, “Money printing by the Federal Reserve has propelled stocks for more than a decade, but that effect may soon wear off,” highlights a disturbing issue.
When does the Fed max-out its ability to print money ?
In March 2009, the Fed’s balance sheet was $2.08 trillion. It rose to $4.4 trillion in 2018 and now stands at $7 trillion en route to $10 trillion.
More importantly, WHY the panic ?
Is the Fed political ? Are they trying to insure Trump’s re-election and control of the Senate remain under business-friendly Republicans ?
Or…..Does the Fed see a devastating economic, financial, and fiscal meltdown if it doesn’t undertake unprecedented measures to intervene ?
For whatever the reason, the Fed is not just propping the market up, but driving it higher. It is once again inflating a huge bubble, which at some point will burst.
Unfortunately, a lot of investors will get hurt when it does, especially newcomers like the Robinhood and its “merry men” investors.
One of they most classic signs of a market top is new investors making easy money in a late-stage bull market. This can go on for a while. We will read of individuals quitting jobs to trade the market, of small fortunes made, of novices writing “how to” books.
This frenzy will drive more and more investors into stocks, some borrowing (margin) to buy even more shares.
Undervalued stocks are becoming hard to find. New investments in historically overvalued stocks will have to be sold at a more overvalued price to someone else (greater fool theory).
The end result will be the same as it always has – a crash. It is now a matter of when.
Friday, June 19, 2020 (DJIA: 26,080) “Flash Crash #2 Dead Wrong…..So Far”
The Fed has never demonstrated its power in determining the direction of stock prices as much as it has in recent months.
It did so between December 2018 and February 2020 when it single handedly created bubble #1, a 44.2% rise in the S&P 500 before the February 35.6% flash crash.
Since that crash, it has orchestrated Bubble #2, which has driven the S&P 500 up 42.1%.
No one can dispute its need to head off an economic depression, but as in 2019, the Fed did not warn of an excessive expansion of asset values as it should have if concerned about investors incurring extreme risk.
Can this lead to Flash Crash #2 ?
I was right about Flash Crash #1, but so far am dead wrong about #2.
That is no reason to go all-in.
Unless the Street has tossed out the rule book of valuations that has survived decades of time-testing, a major correction looms as we head into the fall.
How deep ?
That depends on news flow. Do cases of COVID-19 accelerate ? Are major advances to its treatment/vaccination made in the interim ? Does the current economic bounce fail to follow through ? Will the Fed run out of ammo and hype ? Finally, will money managers panic ?
The latter would make the difference between a 30% plunge and a 55% plunge.
As I see it, the initial gap down with flash crashes is a result of institutions and traders withholding buy orders creating a vacuum of sorts where normal selling can’t find buyers without sizable discounts in price.
As the decline intensifies, so does the selling resulting in a climactic sell off.
Like I have noted repeatedly, I believe stocks should be allowed to find a level that accurately reflects known and perceived risks. No institution should be so powerful that it can interfere with that process.
The DJIA is within 5.4%, the S&P 500 within 3.6% and the Nasdaq Comp 1% of its grossly overvalued all-time February highs, but the economic outlook dire.
This begs the question, if this is not true, why then is the Fed writing blank checks and Congress in panic mode ?
Suddenly speculative fever is heating up as investors panic for fear of missing out (FOMO), and institutions panic for fear of underperforming their competition.
A classic bubble !
When will it burst ? Beats me, I was months early for #1. The bubble may not pop (or get pricked) until August/September.
At some point reality will prevail.
Thursday June 18, 2020 (DJIA: 26,119) “Sideways Trading Range Into August – Then Plunge in Fall” The DJIA and S&P 500 have recovered more than two-thirds of the Feb./Mar. flash crash plunge, the Nasdaq Comp. is a smidge.
This assumes a full recovery form the shock delivered by COVID-19 and the global response to contain it.
As warned here, we are seeing big jumps in economic indicators, as current reports register big gains over depressed numbers in prior months. An example is the 17.7% jump in May retail sales over April. Versus a year ago, the change was a minus 6.1%. There will be more like this, but they will not indicate a full recovery.
While the Administration no longer recognizes COVID-19 as a threat, consumers just may with spikes in hospitalizations in Texas, Florida, Arizona and Arkansas.
Coming out parties abound, but all it takes to muffle an economic recovery is a reluctance of consumers (70% of GDP) to go out.
Bear in mind, a good part of the March 23 to current rebound was short covering, traders who sold short expecting a second leg down only to be forced to buy-in when the market refused to decline, as the Fed continued to assure the Street it had their back.
I was right about a bounce with my March 24 blog saying I expected a big rally starting today (DJIA: 18,591, S&P 500: 2,237, Nasdaq Comp.: 6,860).
At the time I indicated I expected the market to renew its bear market plunge after a rally of about 17%. WRONG. It kept rising.
The Fed must see an enormous risk to the economy if it doesn’t intervene in every way possible. Why else would it relentlessly announce measures to head off a financial crisis the latest being its plan to buy corporate bonds.
We will get a better read after November 3.
I still hold to my belief we will see another leg down heading into August -October and an election where the President and Republican Senate may get ousted.
The Street was ecstatic when Trump was elected, I expect it to become fearful if he is beaten, since it stands to result in an increase in corporate taxes on favored treatment of corporations and high earners.
It appears (hope I’m wrong), the stock market has been managed (manipulated) over the last 18 months with the objective of re-electing Donald Trump and maintaining Republican control of the Senate. Why else has there been so much Fed intervention before COVID-19 and after ?.
I think the Fed managed the stock market during Obama’s administration, but to a far less extent. Too much power in the hands of a group that is narrowly focused and diversified. Markets should trade freely. It’s the only way to get a true picture of what conditions are.
I believe flash crashes (new normal) are caused by institutional investors and traders stepping away from the market when they see trouble of overvaluation, not by heavy selling. The dearth of buy support enables stocks to drop vertically.
The selling comes after a big decline.
It will happen again – Beware ! The next time could be as bad as in February/March.
Wednesday June 17, 2020 (DJIA: 26,289) “The Fed – Too Much Unchecked Power ?”
CNBC’s Jim Cramer warns investors don’t fight the Fed and don’t fight the “tape.”
Don’t fight the Fed is one of the first maxims I encountered years ago, though I find myself fighting it today. Just because they have unchecked power, does not mean they are always right.
My problem is not with preventing a collapse of the economy (depression), but with NOT warning about asset bubbles the bursting of which can crush portfolios for years. The Fed wants to have it both ways – an economic recovery and booming stock market. Hopefully, this is not about the November elections.
The Fed created Bubble #1 (Dec. 2019 – Feb. 2020) and I am afraid it is creating Bubble #2 now.
By “the tape,” Cramer is referring to the direction of the market as reflected in charts and if anyone still pays attention – the ticker tape. Both favor the bulls ! The tape isn’t what it used to be before being totally dominated by institutional investors. Today, 80% of listed stocks are held by the to 20% of its investors with money managers making most of the decisions.
The tape may be bullish, but if institutions suddenly stop buying, the vacuum of support results in a sudden freefall, a flash crash for which there is no warning.
Years ago, when institutions had less of an impact, corrections were more gradual affording savvy investors a chance to ease out of the market.
This is why I have urged a cash reserve for years. Realistically, the size of the reserve depends on one’s tolerance for risk.
It will be too late to protect one’s portfolio when “they” pull the plug.
The Fed does not want the stock market to decline. The latest example of this was its announcement coincident with an 8% drop in the S&P 500 that it would be buying corporate bonds instead of bond ETFs. It’s announcement triggered a rally.
On another subject. As I warned weeks ago, economic data released now will compare very favorable with prior month data, since that data was severely depressed.
An example is retail sales which jumped 17.7% in May from April. Compared with a year ago, sales are down 6.1%. I always like to look at “raw” data. Percentage changes vary based on starting dates. This is a great way to manipulate results to suit one’s preference.
Tuesday June 16, 2020 “Fed Keeps Inflating Bubble #2”
The buzz on the Street now is there is too much SPECULATIVE activity by the “little investor.” Generally small investors are wrong at turns because they are more prone to emotionally rush in at tops and bail out at bottoms.
With little else to do when cooped up in their homes, individual investors have taken to trading stocks on commission-free platforms like Robinhood.
Reportedly, these COVID campers are doing well, which in itself is a warning sign. It shouldn’t be easy for the inexperienced investor to make money, since they do not have access to in-depth research or privileged information.
But, as I have observed at numerous market tops, the less you know the more money you can make, until the plug is pulled after which the less experienced keep buying until the market gets close to a bear market bottom when they then sell out fearful the market is going lower..
Citigroup’s Tobias Levkovitz sees investors starting to “chase performance,” referring to the “fear of underperforming (FOMU)” as a bigger driver of buying than fear of missing out (FOMO).
FOMU stands to apply more to institutions which are in competition with others for money management funds.
CNBC’s Jim Cramer described the current market environment as rampant speculation.
Many of the smaller investors are marching to the drumbeat of Dave Portnoy, a sports betting guru turned stock picker at least until someone cries “play ball.”
Portnoy has 1.5 million twitter followers, so he has enough impact to help fulfill the dreams of riches for his minions, or lead them to the slaughterhouse.
My wish is for the former, but fear the latter.
Well the committee for the re-election of Donald Trump is back to work.
Headed up by Fed Chief Powell, the Fed once again has demonstrated stock market timing second to none with yet another stimulus. This time it’s its plan to buy corporate bonds in the secondary market when prior to this it was just in the primary market. It was enough to goose a stock market that was in full rope-a-dope just a day ago.
Soooo, what if Powell just looks like a Trump toady. What if he is relentlessly pressing for one form of stimulus after another because his catbird perch enables him to see a devastating DEPRESSION if drastic measures are not employed ?
That is a better reason for taking some cash off the table than loading up on stock, especially with the market more overvalued than at any time in history.
If that’s not all, Powell will be giving Congress his semiannual update on the economy today and tomorrow !!!
Powell owns the 2019-2020 stock market bubble which was pricked in February leading to a 35.6 % plunge in the S&P 500 in 21 days.
He also owns the recovery from that plunge, Bubble #2, which started on March 23 and stands to be pricked before the fall.
Powell wants to have it both ways. He wants to save the economy from a depression but wants to prop the stock market up, probably until November.
It is not going to work. If the economic outlook is as grim as the Fed’s actions and those of Congress, the stock market should sell at lower prices my guess being 30% – 45% lower.
The damage here is in NOT spelling out how dire the condition of the economy is and letting the stock market find a level that discounts known and perceived negatives.
Eventually, the market will ignore the Fed, the Administration and Street hype and find that level, and a lot of investors will be crushed.
Monday, June 15, 2020 (DJIA: 25,605) “Portnoy’s Army of First-Time Investors – a SELL Signal ?” One of the classic sell signals over the years is when the public (individuals) begin buying stocks aggressively, the logic being that it takes a lot of bull market to convince them it is safe to buy.
According to a Goldman Sachs report there has been a surge of buying of stocks and options by the “Covid at-home day traders,” a stunning level of speculation, according to Sundial Capital Research.
Robinhood, a commission-free investment app added three million accounts this year, half being first-time investors according to a weekend article by Bloomberg, “Barstool Sports’ Dave Portnoy Is Leading an Army of Day Traders.”
Day trading is a highly risky venture involving the buy and sell within the same day, usually scalping a small profit (or loss).
With no games to bet on, Portnoy has taken to trading and “calling attention” to certain stocks.
Hand it to him, he is a wizard at attracting attention with some 1.5 million Twitter followers.
With a mantra of “ stocks only go up, only losers take profits, ” Portnoy thinks it’s time for the “suits” to make way for the new kids on the block.
Portnoy goes so far as to diss Warren Buffett, saying he is ‘a great guy, but when it comes to stocks he’s washed up—I’m (Portnoy) the captain now,” he boasts.
This reminds me of the movie “The Hustler”, where Eddie Felson (Paul Newman) took on Minnesota Fats (Jacky Gleason) in an all night pool game.
Eddie taunted Fats with disrespect while cockily consuming a fifth of J.T.S. Brown bourbon. Fats waits patiently until early morning, taking a few minutes to freshen up in the rest room before emerging clear headed and ready to take Fast Eddie down.
If its not a cult following of a promoter, it’s reckless greed that takes late comers down.
Over 58 years in the business, I have seen them come …..AND GO !
It is classic late-stage bull market stuff, promoters with little experience, lots of money and a great knack for attracting attention orchestrate a following.
With Portnoy’s big following, any stock he highlights is bound to attract buyers with the predictable result – a jump in the price of the stock.
I have seen people abandon successful businesses to trade the market for a living as speculation heats up near the end of bull markets. This is when the less you know, the more money you can make. It is a classic sell signal.
To his credit, Portnoy believes younger people (millennials and GenZs) need to be invested in stocks that will pave the way to financial independence down the road.
Actually, this age group got a bad start with first the Great Recession (2007-2009) denying them jobs out of college, then what we are dealing with now just adds to their woes.
I believe we are on the threshold of another devastating plunge in stock prices and an extension of the recession that started in February.
Young people interested in building a portfolio would be better off waiting for a big plunge in the market (30%+) to consider buying, not at a level when stocks are selling at all-time valuation highs.
Bottom Line: COVID-19 is not going away, with some states showing big spikes in cases.
It is unlikely, states will return to stay-at-home, but the increased risk may keep people there anyhow impacting an economic recovery.
People have money, but the question is, will they spend it and on what ?
The economic expansion was 11 years old in February before turning into a recession, but it was not even strong then.
With corporate earnings plunging with no guarantee of a meaningful recovery any time soon, the overvaluation of stocks is even more extreme than before the February/March crunch.
Some 80% of the nation’s listed stocks are owned by 20% of the nation’s investors, with institutions managing the bulk of that money.
They will hang tough, but if another major sell off is imminent, these managers will stop buying, for one, and do some selling , for another.
That is what will mark the difference between a 20% plunge and a 40%-50% plunge. Doesn’t look good.
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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.