Speculative Fever Heating Up

Speculative Fever Heating Up
Investor’s first read – Daily edge before the open
DJIA: 18,868
S&P 500: 2,164
Nasdaq Com.:5,218
Russell 2000:1,298
Tuesday, November 15, 2016 9:11 a.m.
Unlike President Obama, who inherited the worst recession and bear market since the 1930s ( down 55%), President Trump will inherit a stable economy and bull market that has risen 225%.
While both the economic expansion and bull market are aging by historical standards, there is room to run “if” a Republican Congress, packed with deficit hawks, allow him to spend trillions of dollars on the infrastructure and military at the same time slashing corporate and individual taxes, and gutting social programs to offset the cost.
Congress kept Obama on a short leash, but may open the spigots for Trump. Then again, it may not.
Drastically increased fiscal spending combined with tax cuts would accelerate economic growth, jack up the stock market, as well as interest rates and inflation.
One thing we have not seen in the current bull market is rank speculation. Under the right conditions, large cap mid-cap, small-cap, and micro-cap stocks can surge to absurd levels, as investors scramble to make the big bucks blinded by the fear of “missing out,” buying stocks at historically overvalued prices hoping to sell them at yet higher prices. Investors who missed the bull market would be drawn into stocks, just in time to cap a bull market off, as the smart money sells.
The Street isn’t waiting for an answer, racing to buy infrastructure, bank, biotech, aerospace/defense, oil refinery, industrial, and healthcare stocks driving the DJIA to new highs, as well as the small company Russell 2000.
It will take years for a huge increase in spending, corporate tax cuts, and reduced regulations to become reality at the bottom lines of corporations, and that assumes Congress goes along with Trumps plans.
If the deficit hawks in Congress or Democrat obstruction reject Trump’s
efforts, it will be more of what Obama faced.
In 2009-2010, I expected the infrastructure to be the full focus of government spending during Obama’s first year in office, and published features outlining the need and which stocks stood to benefit. It was a natural. Most states would be beneficiaries, therefore politically attractive to all members of Congress. It didn’t happen. What monies states got for infrastructure were spent on other things.
The following infrastructure companies ultimately stand to benefit, though have now been run up in price and are overpriced. Due to limited space, I am listing them by symbols.
These are not recommendations, just FYI.
The surge in the small company Russell 2000 may be a flash in the pan, or the beginning of a speculative binge. From the lows Wednesday, Nov. 9 to yesterday’s close, the market averages rose: DJIA +3.4%, S&P 500: +1.8%, Nasdaq Comp. +1.4%, and the small company Russell 2000 +10.0%.
That spells speculative fever ! Regardless of when (if) taxes will be cut, regs. lifted, and monies approved for infrastructure spend, investors are scrambling to get on board.
The markets are anticipating a major fiscal stimulus. Investors are dumping bond funds and buying stocks. The iShares iBoxx$ High Yield Corp. Bond Fd (HYG) had an outflow of $2.46 bn last week.
The bull market that rose from the worst recession since the 1930s has been persistent, but without the wild speculative fever that has characterized bull markets of the past even though the market is up 225%.
All investors need to go nuts and buy indiscriminately is for them to sense stock prices are going to run away from them. They hate losses, but more so, hate to miss a big move.
This may happen now. They are suddenly thinking the government under Trump will be a big spender and create this runaway economy/stock market. In this business, where the price of a stock is more about perception, than reality, that can happen.
It shouldn’t happen, because there is no assurance Congress will accommodate Trump, but once that fever sets in it has to run its course.
The key is, no one knows what to expect. Wall Street’s computers and algos will have to be re-worked, and that favors the bulls.
Common sense dictates caution. It is too early to know how all this will play out. That’s not how it works when the Street senses a killing.

SUPPORT “today”: DJIA:18,786 ; S&P 500:2,158 ; Nasdaq Comp.:5,196
RESISTANCE “today”:DJIA:18,951;S&P 500:2,178;Nasdaq Comp.:5,253.
The six months between November 1 and May 1, tend to outperform the six months between May 1 and November 1, labelled the “Best Six Months” by the Stock Trader’s Almanac which began tracking the pattern in 1986.
iShares 20-Year Treasury ETF down 14% in 4 months
Long-term bonds have gotten hammered in the last three months. The iShares 20-yr U.S. treasury bond ETF has lost 14.6% since July. That’s nearly 6 times the yield an investor expected over 12 months. Obviously, bonds can be risky. Let’s not forget the name of the game is to buy low and sell high, which applies to long bonds as well as stocks.
A survey of economists reported by Bloomberg yesterday calls for U.S. inflation to surpass the Fed’s target in every quarter of 2017, which if even half true should depress long-term bonds even more.
The Employment Situation report came in Friday, 161,000 jobs were added in October, the unemployment rate was 4.9%.
On occasion, I technically analyze each of the 30 DJIA stocks for a reasonable risk, a more extreme risk, and an upside potential over the near-term. I add the results of each, then divide by the new DJIA “divisor” (0.14602) to get the DJIA for those levels. This gives me an internal check on the DJIA itself, especially if certain higher priced stocks are distorting the averages.
As of November 11, 2016, a reasonable risk is 18,401 a more extreme risk is 18,354 Near-term upside potential is 19,017
 STATUS OF MARKET: Neutral – trending to bullish
 OPPORTUNITY: RISK: Opportunity !
 CASH RESERVE: 25% – 35%.
 KEY FACTORS: Uncertainty of election to be resolved in two days, earnings slide may be over.
Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Stock Trader’s Almanac
George Brooks
Investor’s first read
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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