INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,074
Wednesday November 6, 2019 9:01 a.m.
After Reuters reported progress in U.S./China trade talks and a likely delay in U.S. tariffs on European autos, the stock market cannot afford any disappointments.
In fact, at these levels, the stock market is vulnerable, and unless news gets much better from here, the stock market is fully priced.
In November 2016, the Street celebrated the election of Donald Trump with a strong rally in the stock market.
But the Street has not given consideration to his removal from office via resignation, impeachment/conviction, or defeat in 2020.
With impeachment proceedings well underway, it is likely it will begin to think about alternatives.
A 10-year old bull market wipes out memories of the most recent bear market (2007 – 2009) where the S&P 500 dropped 57%. At the time the world looked like it was ending, and without gallant efforts by the Bush and Obama administrations and the Fed, we would still be recovering from a global meltdown.
I think tops are tougher to call than bottoms. No one wants bull markets to end, everyone wants bear markets to. Unless a bear market is triggered by dramatic news, tops take longer to develop as the market begins to sense worsening economic news. However, investors are usually in a state of denial trying to eke out one more big score, and with prodding by the pros in the Street, they keep buying.
Bottoms tend to develop faster, as mounting fear convinces investors prices will continue to fall, and they better sell out completely, resulting in one or more selling climaxes until there are no sellers left.
So, where am I going with all this ?
The end will come when it is least expected, and the outcome will be ugly. Be sure to have a cash reserve and sit close to the exits with the restyou’re your holdings.
Off and on, I have referred to this as a bubble that will burst when least expected. When that happens, the market will plunge so sharply, investors will have no time to protect their portfolio from nasty losses.
The key here is, how much of the positives ( rate cut, better than expected Q3 earnings, trade talk progress) have been discounted at these lofty levels.
Minor Support:DJIA:27,387; S&P 500:3,066; Nasdaq Comp.:8,417
Minor Resistance: DJIA:27,521; S&P 500:3,077; Nasdaq Comp.:8,441
Tuesday Nov. 5, 2019 “Bubble Expands Further”
The next 12 months will be wild as impeachment proceedings move forward, trade talks stir anxiety, and the U.S. economic numbers flow in indicating recession or a pause before a recession.
So far, the Street has a single focus – BUY regardless of any outcome. Most of these decisions are computer based, with human tweaks now and then. That is the primary reason that the Street ignores looming negatives.
Expect “DOW 30,000” to be hyped, as well an economy that is finally recession-free.
What I am reading suggests otherwise, but investors don’t want to hear that in bull markets, and that is why they get hurt in bear markets.
Some investors will think they can sell near the top but not until they make some more money before then. Some are sure they can ride out a recession/bear market over 6 to 15 months then start making money all over again for the next two to four years.
The problem with that logic is after a 30% plunge in prices the news environment becomes so negative that investors begin to fear that lower prices are inevitable and the safe thing to do is “sell” with losses big enough it takes years to recoup the damage done by the bear market.
The Fed has decided it will micro-manage the economy and stock market. I don’t think Fed Chief Jerome Powell is smart enough to do that. To his credit though, I don’t think anyone is smart enough to micro manage anything so huge and unpredictable.
You see, there are always several balls up in the air in that business any one of which can come down when least expected and change to situation.
One of those balls already came down – impeachment. The other is the Feds attempt to goose the economy and stock market when the latter is already significantly over valued based on prior valuations.
Another ball that can come down is global depression. I don’t expect that, no one does, and that is why it can happen. This would feature economic stagnation at zero growth levels and a stock market that after a 50% decline has no more bounce than a soggy playground soft ball.
Yet another ball that can come down is one that no one on earth suspects !!
Be very careful here. With a new market high hyped whether it is a fraction of a point or many points, the urge to go all-in surges. It’s called a “BUBBLE.”
Monday Nov 4 “I Am Wrong….so far Bubble Still Bubbling – Careful
OMG ! The bubble of all bubbles. Why is the Fed doing this ? Three rate cuts in less than a year.
It’s like the alternative is unthinkable……NO ! what the Fed is doing is unthinkable !
With their rhetoric, the Fed is sucking investors into the market as the major averages are hitting all-time highs. This is what the Fed normally does in recessions when stocks are plummeting.
The Shiller price/earnings ratio is higher than the 1987 Black Tuesday crunch (down 36%), than 2007 Great Bear market ( down 50%), but still below the 2000 dot-com bubble burst ( down 57%).
The DJIA is set to follow the S&P 500 and Nasdaq Composite with a breakout of the trading range that has constrained it for two years. The NYSE Composite still has a way to go.
Axios points out that the S&P 500 is up 4% since optimism was announced October 11 about phase one of the U.S./China trade talks. Odds favor more announcements of progress on trade coming out of the White House as impeachment proceedings move forward.
I have been wrong here with my warnings about the direction of stock prices. I expected a bull market top which historically occurs months ahead of a recession. According the A. Gary Shilling’s November “INSIGHT,” we are in a recession, and he backs his conclusion with facts and reason, referring to the consumer as the “last straw.”
There is no sanity in the expansion of bubbles, they have to run their course.
The danger is they are irresistible for investors who are drawn in deeper and deeper until the inevitable burst and plunge. Adding to investors’ demise is they are drawn in even more so by the initial plunge, thinking this is a “gift.”
It is a ride that is moving too fast for anyone to get off. Besides, humans being human make it impossible even if they saw the break coming.
Friday Nov. 1 “Fed’s Bold Gamble…Just That ….. a Gamble”
The market will just have to digest what is going on, including corporate earnings, conflicting economic reports, stock market seasonal tendencies (Best Six Months), Fed policy panic, and impeachment procedures.
The latter is the wild card, the only known is that it will be divisive in a political environment that is already divisive.
So far, the Street couldn’t care less – NOT smart ! Confidence, or a dearth of it, rules in the end as far as stock prices are concerned.
But decisions on Wall Street are so “algoized” it’s hard to tell when a change in analyst/money manager marching orders will occur, but any change from the automatic buy at any price mentality to defer purchase or “sell” will have an immediate, profound impact on the market.
Obviously, the Fed has ramped up its quest to micro-manage the economy and stock market – BIG mistake !
Hands off, at least as far as the stock market is concerned. Let it find a level that discounts known and prospective conditions and events.
Fed policy is now what it would normally be, after a recession and bear market are already well on their way, so what will the Fed do if this effort to head off a recession/bear market fails ? Uncharted waters.
Thursday Oct. 31 “Fed PANIC ! Begs the Question – Why ?”
Fed Chief Jerome Powell had this to say at his post-FOMC press conference yesterday. “There’s plenty of risk left, but I have to say the risks seem to have subsided.”
Really ? Why then, did the Fed decide to cut interest rates for the third time in less than a year ?
Powell has to stop sugar-coating the situation. If the economy is bad enough to cut rates three times in less than a year, the Fed is doing investors a huge disservice by sucking them in at all-time market highs where the S&P 500 is more overpriced than any time in history except the 1999-2000 dot-com bull market highs which preceded a 50.5% drop in the S&P 500 and 78% drop in the Nasdaq Comp.
As I see it, the Fed is panicking in the face of a global recession and a presidential election next year.
Some progress is expected on the U.S./China trade front – both countries are feeling the pain of tariffs and the damage it is doing to corporate decision making.
Trump needs a win during impeachment proceedings, so he will do his best to ensure some progress. Xi Jinping, China’s president, will likewise make concessions unless he decides to play hardball with Trump under pressure from within his own country.
Bottom line: The Fed is doing now what it normally does after a recession is well underway when the stock market is down sharply, not historically overvalued.
If it fails to head off a recession, it will have little firepower to prevent the recession from getting worse and lasting longer.
Wednesday Oct. 30 “Street Worried About Fed Rate Cut Today ?”
The first of three estimates of Q3 GDP came in today at annual rate of 1.9%, better than the Street’s 1.6%, a positive unless the Fed decides not to announce a cut in its fed funds rate today. While the Q3 GDP is better than expected, it is lower than Q2’s growth rate of 2.1% and Q1’s 3.1%. The next key report will be the Employment Situation report at 8:30 Friday.
While this market is overvalued historically, one more push up is possible in response to better than expected Q3 GDP and Q3 earnings that so far are above expectations though projected from intentionally low-balled levels.
The stock market bubble continues to deflate then inflate, chasing investors out only to suck them back in – a highly risky situation.
No one want to miss out on an opportunity to make more money. That has to be weighed against one’s tolerance for risk if the next move is down 35%-45%.
Tuesday Oct. 29 “Big Economic News Coming – GDP – Jobs”
The S&P 500 broke out to new highs yesterday on better than expected Q3 earnings, trade hopes and expectations of a Fed rate cut, but there was not the big follow through that normally accompanies a breakout.
The DJIA and Nasdaq Comp.
That can still happen, since the Street often takes a day or two to decide if overhead supply has lifted. This is the third attempt since July to break out of this general area.
BUT, what if all these goodies have been discounted at these levels, which are in fact very pricey, so much so, you have to go back to the 1999 – 2000 dot-com blow off to find the market so overvalued.
As noted yesterday, this is a big week for economic reports, especially Q3 GDP (Wed 8:30) which is estimated to drop to an annual rate of 1.8 percent from 2.0 percent in Q2 and 3.1 percent in Q1, as well as the Employment Situation report (Fri. 8:30) estimated to show 93,000 new hires in October vs. 135,000 in September.
The week got off to a bad start with the September Chicago Fed National Activity index report dropping sharply to -0.45 from +o.10 and the October Dallas Fed Mfg. Survey index dropping to 4.5 from13.9.
Monday Oct. 28 “Buying Breakout to New Highs – Risky”
Big week for economic reports – Q3 GDP comes at 8:30 Wednesday, the Employment Situation on Friday at 8:30.
Both have a bearing on whether the economy is near or in a recession.
The Fed Open Market Committee (FOMC) meets Tuesday and Wednesday with an announcement of the third rate cut in less than a year. expected on Wednesday, though no press conference is scheduled.
No FOMC meeting is scheduled for November, so the next meeting is not until December 10.
Three things are driving stock prices: a cut in the fed funds interest rate; better than expected Q3 earnings; progress in the U.S./China trade talks.
Conclusion: This market is pricey at these levels, in fact, historically very overpriced, but the Street thinks it can run the table anyway, so expect new highs today and all the press hoopla that goes with it.
Negatives: 1) the Fed does not cut rates this time. 2) trade talks disappoint. 3) GDP signals a recession, as well as other economic indicators announced this week, primarily Consumer Confidence (Tues. 10 a.m.) Employment Situation (Fri. 9:30).
This is a very dangerous market to chase. It is next to impossible to resist doing so, but all things considered, the downside risk far exceeds the upside potential. Many on the Street have no idea how ugly a bear market can get, therefore very few are bearish enough to be selling.
That in itself is bearish, but until several big institutions cut and run, the market will hold the line with short-lived corrections along the way.
Friday Oct. 25 “Big Move Looms as Street Decides on Earnings”
The market needs some volatility and I think we are about to get it.
Q3 earnings are hitting the Street. Some are better than expected, some disappointing, and the Street is about to decide what to do – Buy…or Sell !
The technical picture (price action) is slightly upbeat, which I think can be credited to hopes for progress on trade and a Fed rate cut plus QE. It’s really hard to tell now how the Street is factoring earnings into its equation.
New highs would be easy to hit (DJIA: 27,398; S&P 500:3,028). The S&P hit 3,016 yesterday.
New highs by the S&P would trigger news headlines and rush to buy.
However, with the markets as historically overpriced as it is now, a recession looming, and the uncertainty of a presidential impeachment process underway, a sustainable surge from these levels stands to be short lived.
Thursday, Oct. 24 “Watching and Waiting….for a signal”
Street is watching and waiting for a signal on trade and earnings, not just Q3 but guidance and projections for 2020, which has so far been projected to be better than this year.
If the Fed cannot head off a recession, the Street will be slashing 2020 earnings projections which would adversely impact an overvalued market.
Odds are good we already are in a recession, so the Fed has its work cut out for it. The Fed is cutting rates and employing a variation of QE, so I don’t know what it can do if we get into a severe recession.
These are strange times.
But a Fed rate cut is built into current pricing and much of expected progress on trade.
Failure to cut rates and/or failure to make progress on trade would hammer prices.
I think the market has a shot at new highs, which would be accompanied by a lot of press, Administration and Street hoopla, driving the market up temporarily and maybe into early January before a major correction develops.
Playing that move by buying the breakout would be a challenge for all but the nimble and quick.
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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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.