There are No “New Eras” for Stocks

INVESTOR’S first read.com – Daily edge before the open
DJIA:26,2897
S&P 500: 2,918
Nasdaq Comp.:7,959
Russell 2000:1,518
Friday August  12, 2019
  9:12 a.m.
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gbifr79@gmail.com
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TODAY:
If this market were trading 25% lower in face of hurtful tariffs, struggling global economies on the threshold of recession,  stagnant corporate earnings, excessive individual, corporate and government debt that limits future growth,  international tensions and  a government under fire, I would feel more comfortable about buying, simply because these negative would be largely discounted.
By historical yardsticks, this market is overvalued, possibly by more that 25%.  The Shiller price/earnings ratio is 29.5 versus a mean of 16.6, that’s higher than before the 2007 – 2009 bear market, and as high as the market before the ’29 crash. While the market is not as overvalued as the 44.2  P/E in December 1999 when the dot-com bubble burst causing a 50% plunge in the S&P 500 (78% plunge in Nasdaq), there is enough good reason to have a healthy cash reserve.
A NEW ERA FOR STOCKS ?   That’s what the Street generally thinks at market tops.  With algorithms doing so much of the Street’s thinking, this market  can hang tough….until something unexpected outside of the algo programming metrics and you have a stampede for the exits….and no buyers.
The only thing new about this era is the degree to which the market has been casinoized.  Bull and bear markets happen. We are overdue for the latter. All it takes is for a couple of major institutions to ditch their algos, break ranks and sell – the others will follow. That justifies taking steps to  protect one’s portfolio with a cash reserve of 30% +. Depending on one’s tolerance for risk, that could be greater.
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BOEING (BA)
A purely technical scenario:  Boeing (BA: 337) Resistance starts at 339 but could get up to low 340s before running into selling. It hit 339 Friday but fell back. BA tends to trace out an irregular pattern, looking good just before looking bad. …………………………………………….
TECHNICAL
The Trump administration and Fed will release whatever info it can muster up to stabilize this market and it may work temporarily.
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Minor Support: DJIA:26,153; S&P 500:2,913;Nasdaq Comp.:7,927
Minor Resistance: DJIA:26,347; S&P500:2,924;Nasdaq Comp.:7,976
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Friday  August 9   “Easy Does It !”
       Was the recent four-day, 6.7% loss in the market the beginning of a major correction (12% – 18% downer), or a bear market, down 35% – 45%, or just another blip in a 10-year old bull market ?
       On the positive: The bulls have weathered a lot of  bad news (trade news, threat of recession talk,  Iran, impeachment) and are still hanging tough.
Negative: The bulls may be at the breaking point where just one more negative could trigger a breaking in ranks on the Street where a few big funds sell, prompting others to do likewise, and whoosh !
The DJIA Has recouped two-thirds of its August loss, the S&P 500 and Nasdaq Comp. a bit more.
There is overhead supply above yesterday’s close fueled mostly by in ramp up in the  trade war between the US and China.
While today will start off on the downside, the real test will come later in the morning.  If the bulls step in aggressively, they can run the market back up to the old highs.
Failure to do so would lead to a test of the August lows of DJIA 25,440, S&P 500: 2,822, Nasdaq Comp.:7,662.

Thursday   August 8, 2019
“Absolutely NO ROOM For a Rally Failure Today”
       Let me pose this question one more time.
Why is the Fed is such a hurry to cut interest rates ?
       Is it because it wants to make it easier for corporations to borrow money to buy back their own stock running the price up to enhance the value of Executive holdings and options ?
Is it because the Fed wants to punish investors in fixed income investments ?
         NO ! It’s because the Fed is scared stiff the economy will be in a recession in 2020, a presidential election year.
         According to AXIOS Markets (Dion Raboun  Aug. 7) and CME Group’s Fed Watch, the Street is pricing in a 50% likelihood that the Fed will cut rates three times by year-end.  Raboun added, the “only reason for the Fed to cut rates by one percentage points or more in a year would be that the U.S. economy is in peril.
The Street’s algos are programmed to buy at the market, but especially on dips in prices.
        If the money managers, brokers and analysts see a recession, they will have to change the algos, and since there has never been a recession without a bear market, their action will trigger a free-fall in stocks far worse than what we have seen in recent days.
        It will happen, if not this time down, then in the near- to intermediate term future.
The Fed is artificially and irresponsibly propping this market up with a lot of inaccurate rhetoric and now with rate cuts.
They should let the market adjust to known and perceived negatives and find a level that discounts them.  That would be a way to head off the flash crash which is a straight down phenom that does serious damage.
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Wednesday  August 7  “White House/Fed Hype May Not Be Enough”
     Yesterday I warned that after this week’s crunch in the market,  the administration and Fed would release whatever info they could muster up to stabilize the market.  Sure enough, St. Louis Fed president James Bullard  played the rate card, saying, “Further rate action may be desirable.” which helped bump a sagging market up to an upbeat close.
Trump’s economic adviser, Larry Kudlow, told CNBC yesterday that the United States  will remain committed to resuming negotiations with China in early September after stating Monday that the economy is in a strong position with money pouring in  from abroad seeking safety and higher interest rates.
If that is the case Larry, why is the Fed in a hurry to cut interest rates ?
There is a trade off here, the Street can celebrate rate cuts, but has to cope with a recession and there has never been a recession that has not been accompanied by a bear market.
So far, government hype has worked. When it fails to move markets,  it is time to head for cover.
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BOEING (BA)
A purely technical scenario:  Boeing (BA: 332) 
briefly broke below 330 again yesterday but failed to follow through on the downside.  Based on price action, it looks like it will rally to 339 before dropping to 307 where another rally should take place before dropping below 300 to the mid-200s. Just a technical opinion – a warning for some, opportunity for others.

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Tuesday  Aug. 6, 2019 “The Party Is Over – Use Rally to Raise Crash Reserve”
 This is the rally I referred to in Yesterday’s blog, “Technical  Rally Possible at Any Time – Highly Risky.” That is exactly what this is.
     Expect the Trump administration to release anything possible designed to stabilize  this free-fall. My guess it will be plans to renew tariff talks with China or comments by China about the yuan
The White House-friendly Fed will trumpet talk of one or two more rate cuts by year-end both attempts to stop the carnage.
BEWARE: WHEN HYPE AT HIGH LEVELS FAILS TO GOOSE THE MARKET, IT IS TIME TO RUN FOR THE HILLS.
      This is looking more  and more like the beginning of a bear market, keeping in mind fed rate cuts preceded every recession going back to 1955.
It looks like the BIG  money is starting to jump  ship, breaking ranks with the quant/algo types who desperately need to reprogram their computers before getting crushed by reality.
A lot of investors have gotten hurt by the Fed, which irresponsibly sucked investors into the market with its hype  first, talk of rate cuts and an economy that is “in a good place,” then with last week’s rate cut.
This is all  amateurish folly. While able to move markets with just a few words, the Fed simply is unable to understand market action and gross overvaluation of stocks.
They should acknowledge the seriousness of  the weakness in our economy and global economies and let the market find a comfort level, but NEVER gloss it over and encourage investors to jump into a market that is overvalued.  Shame !
The Fed did a great job in the 2007 – 2009 Great Recession/Bear Market, but failed to prepare for the  recession that looms today by overstaying QE.
The horse has left the barn (the bear his/her den). If this is not the big downer, it is previews of coming attractions.
        This is why I have continually urged a sizable crash reserve. The new normal now is the flash crash, a vertical plunge in stock prices that strikes without enough warning to do some  selling.
         So what does an investor do now ?  A trader can act swiftly moving in on weakness to buy technically oversold stocks, then just as swiftly take profits on a rebound.
If this is the beginning of a 35% -45% crunch  investors, indifferent to risk, are in for  super angst.
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Monday, August 5, “Technical Rally Possible at Any Time – Highly Risky”
I have been on record for warning that we are in the early stages of a recession and data over the weekend  in InvesTech Research’s interim bulletin indicates just that with graphs highlighting the ISM Manufacturing Index (Purchase Managers ), the ISM  New Orders Manufacturing Index and Chicago Business Barometer all on the threshold of crossing into no growth territory.
While Consumer Confidence (present and future) indices are at all-time highs, this extreme exuberance  normal at business expansion peaks.
However, JP Morgan is bullish, urging clients to us the current weakness to add stocks to their portfolios.
Granted, the sharp sell-off at the open stands to attract traders, the risks are high – just too many visible  and sub-surface negatives for a sustained rally in a market that is historically over valued.
If enough institutions agree, we will get a rally from these levels, but they are in the money management business and can’t afford to be bearish..
At much higher levels last Wednesday morningand before the Fed announcement of a rate cut, I headline “Traders – Sell the Rate Cut,” feeling the action was already priced in the market and the market was over due for a correction.
With the help of Trump’s Thursday warning to China of another 10% tariff on Chinese exports on September 1, the market tumbled and looks like it will follow through today before an attempt to rally today.
Nimble traders can exploit these wide swings in the market, but investors need a crash reserve.
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Friday, August 2, 2019 “More Tariffs    Bluster….or Blunder ?”
We are now in a correction phase of the Fed-induced rally from mid-June to mid-July.  Whether that becomes more of a correction depends on just how spooked the Street gets from President Trump’s threat to not just raise tariffs on $300 billion of Chinese goods 10% on September 1, but may even up it to 25% or more.
That sounds like bluster, but the uncertainty that can be created over the remaining 29 days of August is capable of  hammering a  market that has been run up unnecessarily on hopes of a rate cut.
Obviously with individual, household, business and corporate and government debt at inflated levels higher rates would have been a disaster.
But who can afford to borrow at this point.
Well, possibly Corporations buying back their own stock, but stocks are still pricey, so how much sense does that make ?
We have been riding the crest of a rising wave of unrealistic expectations, also known as a bubble.
I have urged readers to establish a crash reserve in line with their tolerance for risk for over a year.
The pattern has been for the market to snap back after corrections, which some may interpret as a reason to ignore risk.  Right ……..but at one’s potential demise.
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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 120 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 3.6% which was hit in May.  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 123 months is 4 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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