Stock Market Needs a Good Dose of the “TRUTH”

INVESTOR’S first read.com – Daily edge before the open
DJIA: 27,025
S&P 500: 2,997
Nasdaq Comp.:
Russell 2000:
Friday,  October 18, 2019
 7:47 a.m. 
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gbifr79@gmail.com
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TODAY:
If investors are confused, frustrated and uneasy, they are simply normal human beings.
       The Fed keeps saying the market is in a good place, yet it is scurrying to cut interest rates and pump money into the economy.
This is not what the Fed does when the stock market is overvalued probing all-time highs.
What this market needs is the TRUTH.  It would trade lower, but won’t be teetering on the verge of a wrenching flash crash that takes the major averages down 12% -18% in the matter of days.
While flash crashes (the new normal) have  happened frequently since mid-2011, the market has always snapped back quickly.
With a lot of major negatives looming, recession, a dysfunctional government in Washington constantly under fire with one self-imposed crisis after another, an immediate rebound  is unlikely to  happen this time.
That means another leg down, ergo a bear market.
How deep ?
Depends on what new negatives hit it when it is trying to rebound.
That is what determines the depth of bear markets whether it is  a 55% bear (2007-2009), 51% bear (2000-2002), 50% bear (1973-1974), or smaller ones in the low to mid 20s.  It is all about new negatives that pound prices down to unreasonable levels.

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TECHNICAL
So far corporate earnings don’t look as bad as forecast but let’s wait to see more reports. Often, the bad ones are held off until later.
New highs would not be a stretch from here (DJIA: 27,398, S&P 500:3,027). While a punch to new highs would attract a big stir in the financial press, and  excited buyers, the increased volume may attract institutional sellers ho use the increased volume to unload big positions.
DO NOT OVERLOOK THE FACT WE ARE IN A HIGHLY NEWS-SENSITIVE MARKET.  THIS  NINE-DAY RECOVERY HAS DISCOUNTED ANOTHER FED RATE CUT, FED BOND BUYING TO INJECT MONEY INTO THE SYSTEM, AND HOPEFULLY PROGRESS ON U.S./CHINA TRADE TALKS.     …………………………………………………………
Minor Support: DJIA:26,976; S&P 500:2,993; Nasdaq Comp.:8,141
Minor Resistance: DJIA:27,061; S&P 500:2,002; Nasdaq Comp.:8,159
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Thursday Oct. 17  “Has the Street Considered  the Possibility of a Trump Resignation”
This is a high-risk market, a lot can go wrong, all that can go right is already priced into the market (progress on trade talks, Fed cut in rates plus a quasi-QE).
In find it hard to believe the Street is ignoring the implications of impeachment proceedings and the possibility that additional wrongdoings will surface at a time the Democratic Party candidates for election next year are  perceived as unfriendly to stock prices, though the stock market has historically done better under Democrats.  It is perception, not reality, that counts in the short run.
Odds are increasing that President Trump will not run in 2020, and may not survive his presidency.  That is something the Street hasn’t even considered.
Not many in this business were analyzing and writing as far back as Watergate, but it got ugly with each disclosure of impropriety by the Nixon administration.  The S&P declined 50% before the carnage ended.
IMHO, the Street feels immune to a bear market, a unjustified sense of security that bad things can no longer happen that  can be attributed to more than 10-years of Fed-driven bull market.
IMHO, we have been in a recession for many months. Whether it can be minimized by Fed action, is the big question. I don’t think so. Individual, corporate and government debt is too elevated to give a green light to borrow and spend more now..
Presently, the Street seems to believe the stock market can ignore a recession and national political crisis and move on to higher prices.
YES ! the Street can push the market higher, but the BIG money will bail out at some point and we will get a flash crash of 12%-18% in days as all the lemmings will follow.
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Wednesday Oct 16,  Market Has Discounted the Good News – None of the Bad
This is the  3rd time up here for the  DJIA and S&P 500  since July with two interim corrections of 7% and 5%.
This push could reach new highs.  Currently, the S&P 500 is 2,995 with a new all-time high at 3,027.  The DJIA is 27,024 with the all-time high at 27,398. Neither have far to run to  hit new highs.  That would get press headlines, but would not be  a good reason to jump in since the market is historically overvalued, and we are is such a news sensitive market.
Failure to reach meaningful  progress in the U.S./China trade talks, or a break off would send stocks back down.
The Street gives credit to expectations of better than expected  Q-3 earnings, but the best reports tend to come out early in the reporting period with the worst held until later.
Since late December, this market recovery from a 20% drubbing has been all about Fed policy, pure and simple. I don’t think lower interest rates following low interest rates to begin with will prevent a recession – delay maybe, prevent – no.
Bottom line:  For anyone holding cash, this kind of market action is somewhere between torturous and wrenching. The overwhelming urge is to go all in. No one wants to be left behind.   That’s why the Buy Low-Sell High bromide for successful investing is so frustrating.
Human nature works against that overly simplified logic. Greed rules at market peaks, as does fear at bottoms.  It is just so tough to go against those strong emotions at key junctures.
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Tuesday, Oct 15 “Market to March to Another Drumbeat – Q3 Earnings”

The Fed is doing everything it can to head off a recession, including buying bonds, though its purchases since mid-September intending to pump money into the financial system where a shortage caused interest rates on these securities to jump sharply well beyond  the Fed’s fed funds rate. This need for Fed action has not happened for 10 years.
As a result the inverted yield curve is no longer inverted, i.e., long-term rates are now higher than short-term rates.  This is an aberration and does not alter the signal the inversion was giving that a recession was imminent.
The Fed can be expected to cut rates again on October 20, its third cut in less than a year, but the cut  is pretty much built into the market.
The Street thinks it can ride out current and looming  negatives. That’s a big order. There is little the Fed can do but reduce the adversity of a recession which  appears to be digging in its cleats on a global scale.
Impeachment proceedings are picking up a full head of steam and can only depress consumer confidence.
Q3 earnings will hit the Street in coming weeks, but are not expected to make good reading. However, if earnings however soft come in better than currently projected, the Street will see it as a positive.
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Here’s where I have a problem.  The current and prospective negatives are not to be taken lightly, yet the S&P 500 is historically very overvalued.
The Street is betting this recession won’t be accompanied by a bear market. That has never happened. We have had bear markets without  a recession, but never recession without a bear market.
We are back where we were a number of times this year where the Fed has used cuts in interest rates to head off a recession, but recession indicators keep worsening, though at a slow pace.
       As I have written so often. Investors must ascertain their tolerance for risk and adjust cash reserves accordingly.
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Monday Oct 14  “Market News Sensitive – Street Still Wearing Blinders”

The market is increasingly news sensitive, and this is just the beginning. We have the mid-east powder keg, recession which looks more and more like a reality, Q3 earnings which stand to be a bummer, impeachment proceedings which will get ugly and violent, and an increasingly out-of-control government.
If the market were down 30% from here, I would say look for buying opportunities.  But it isn’t. It is still historically  overvalued, by some yardsticks, a lot.
No one wants a bear market, but sensible investing is not about preference, it is about realistically assessing the current and possible prospects and taking action.  Unmistakable storm clouds are looming.
I always thought it was wise to be wrong with your money in your pocket, not stocks. That gives an investor a chance to invest when the odds are more favorable without having to recoup a lot of losses before being profitable.
YES, we are in a news whipsaw.  It is unplayable.
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Friday, Oct 11  “Use Trade Hopes Strength to Raise Cash”
Yesterday, I urged a 90% cash position saying, “Trade talks this week could trigger a sharp rally – fine. That is a chance to lighten up at higher prices. But they could disappoint and trigger a plunge.”
Obviously, few investors would be that cautious, and of course there are investments that will do well while others will get hit.
My stated reason was that, “All Hell can  break loose politically
as the nation sinks into recession. The stock market would  lead it off. That could be today, a week from now or as far out as January.
Why take a chance, there so much more downside than upside ?”
There are times to simply walk away from the market, though they are more easily seen in hindsight.
Odds are good that President Trump will be impeached by the House, though not convicted by a Republican Senate.
During such a process, confidence in the future takes a hit. Add to that the a presidential election at  the same time  these proceedings are underway and  uncertainty takes center stage.
Then there is the fact signs of an early stage recession are causing the Fed to scramble for damage control and prop the market up with reference to another rate cut  or another QE every time it starts to sell off, thus preventing a healthy correction.
Corporate earnings growth has slowed to a crawl at a time the market is overvalued by historical precedent.
Add them up and you get a good reason to have a healthy cash reserve.

What really stuns me is what is happening with world trade. The U.S.’ go-it-alone position on trade is opening the door for countries to develop trade relationships excluding the U.S..
A good example is the 11-country Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP).  The 11 countries in the pact comprise 13.4% of the world’s GDP (US$13.5 trillion) making it the third largest  free-trade group in the world.
It includes most of the TPP, which the U.S. abandoned, but excludes 22 provisions the U.S. favored that other countries opposed.
As a result, the U.S. is on the outside looking in !
Not good for the long haul.  
Of course everyone will always want to do business with the United States, it is just that we won’t be calling the shots like we once were.
Failure to come out of these trade talks with some smidgen of progress would crush stocks.
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What No One on Wall Street Wants to Hear
>We are in the late innings of an economic expansion, so a recession is a good bet. The current expansion started in June 2009, has lasted 122 months, the longest  in history, twice as long as the average length of 11 cycles since 1945.
> Of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months.  The unemployment rate is 3.5% which was hit in September.  Technically, we won’t know when the start of the current recession is official for months after the fact, since that conclusion is  reached by the Nat’l Bureau of Economic Research (NBER) and they consider  host of economic indicators.
>Bear markets lead the beginning of recessions by 3 to 12 months.  The current bull market at 126 months is 4.2 times the average of the last 15 bulls going back to 1957
 >Nine out of the last 10 recessions have occurred with a Republican in the White House.
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George Brooks
Investor’s first read.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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