INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,881
Monday, May 13, 2019 8:37 a.m.
The Street was unfazed Friday by the inability of the U.S. and China to reach an accord on tariffs, but today it is more concerned today that this may be the new normal.
Shortly, we will know what China’s response will be, and the Street can chew on that.
This indifference to negatives is classic late-stage bull market behavior by an industry that simply won’t accept the possibility the party is ready for last call.
Historically, stock markets top out ahead of the beginning of recessions. The lead time has varies between two months (2007) and 12 months (2000), which is of little help here.
It’s going to be a tough read this time around, since the Street isn’t ready for a bear market, the Fed is determined to head off a recession in an election year, and so much of the decision process is computerized by algos, which can’t possibly be programmed to account for the current political improbabilities that will influence our economy going forward.
What I see developing now is uncertainty about everything. How can corporate managements plan for a future that is so uncertain ?
Will a “pricey” stock market have to find a level that discounts this uncertainty ? What if new negatives surface once that level is reached ?
If the Street’s algos are not programmed to address this uncertainty, will analysts have to re-program them to do so and will that all happen at the same time, resulting in an extreme plunge in prices.
I think the biggest risk here is the Street has lost respect for the savagery of a bear market, a relentless assault by new negatives that pound stocks unmercifully.
Minor Support: DJIA:25,587;S&P 500:2,834;Nasdaq Comp.:7,586
Minor Resistance: DJIA:25,7887; S&P 500:2,865; Nasdaq Comp.:7,877
Friday (May 19)
Unable to strike an agreement on trade with China, Trump has upped the ante by slapping tariffs of 25% on $250 billion of Chinese goods entering the United States. Previously the tariff was 10%.
This could be posturing leading to a surprise announcement over the weekend. The bottom line is, corporate planners have no idea what to expect.
This uncertainty confounds planning and disrupts complex supply chains around the world. It is bad business and bad politics.
With 45 minutes before the market opens, the futures indicate only a mild negative reaction. That could change into a full blown free-fall, if the Street suspects a deal is not imminent.
Even if a deal is announced the market at these levels pretty much discounts a “deal,” so a rally would be limited.
Thursday (May 9)
The market is extremely vulnerable to a flash crash of 6%-9%.
It needs a break on trade talks, or another rescue attempt by the Fed.
The mood on the Street is that the sky is all clear for more upside, the Fed has its back and Q1 earnings are better than projected.
Nonsense ! When things can’t get better, they don’t. I think the BIG money is selling into the blue-sky-forever scenario, and the market is on a precipice.
The Administration’s hype of the Mueller report was premature, now it will be one constitutional crisis after another and that spells uncertainty.
We have been here before, on the edge with the risk of a flash crash, only to have the Street step in to take advantage of slightly lower prices. It’s what I refer to as cruise control investing, driven by algorithms that are programmed to buy at the market and especially on dips until reprogrammed to respond differently.
Algos sport a resilience to developing news that enables them to ignore risk, but lack a human’s ability to think on their feet, to follow one’s instincts and go against the crowd.
Nasdaq stocks are due for a shellacking – big-time.
Wednesday (May 8)
The Street is nervous about a U.S./China trade deal, but not nervous enough to bail out big-time. So far, the market has rebounded from all the sharp sell offs of 10% to 20% over the past ten years, so the Street simply uses sell offs to “buy.”
This is what I have referred to as a cruise control mentality, and looking back, it has worked.
At some point, bad news will hit the market when it is ready to rebound from a sharp sell off, resulting in another leg or two down, a bear market with the DJIA and S&P 500 down 35% – 45%, the Nasdaq more.
Odds are increasing for an ugly free-fall in Nasdaq Comp., up 529% since the bull started March 9, 2009. By comparison, the DJIA is up 303% and the S&P 500 up 233% for the period.
The Nasdaq Comp. declined 78% in the 2000-2002 bear market, though speculation this time does not compare with that we saw in the dot-com bubble burst.
At this late stage in the bull market, investors should have a sizable cash reserve just in case the next major correction will lead to a bear market. That’s hard to do in frothy bull markets. There is always the feeling that an investor can stay for just one more score.
Tuesday (May 7)
A flash crash is just that. It comes out of nowhere, without warning as stock prices gap down so sharply investors have little time to react.
I can only warn that this is one of those times a flash crash could happen.
The Street is only a little worried about a continuing trade war, in fact there is little that worries the Street, and that could be a problem. This is the kind of “see no evil, hear no evil,……” mentality that leads to a flash crash, i.e., everyone stops buying at the same time causing a vacuum which allows a free fall in prices. This leads to increased selling and the market is down 12% before anyone can say “ouch.”
This is the new normal, and it is mostly a result of the computerization of the decision process on the Street, aka algorithms.
The market has taken some nasty hits over the years, but it always bounces back. So why worry about a correction and have a cash reserve ?
One answer may be to have cash to invest at the lower prices a correction offers, Another answer may be to protect your portfolio from taking a huge hit.
Yet another answer may be an extended bear market may keep portfolio values down for an extended period of time, if cash is needed, stocks would have to be sold at depressed prices.
Referring to President Trump’s statement yesterday that tariffs on Chinese goods will be increased to 25% from 10%, Axios reported that tariffs are paid by U.S. importers not by Chinese companies or its government.
An importing company paying tariffs can do the following:
1)Pay the full cost
2)Cut costs to offset cost of tariff
3)Ask the China supplier for discount to offset tariff cost.
4)Source supplies from outside China.
5)Pass cost off tariff on to customer
Monday (May 6)
In response to China reportedly backing off provisions of certain provisions in a trade deal the U.S. thought it had nailed down, President Trump is threatening raise tariffs on $200 billion to 25% from 10% Friday.
Axios reported today that China is in a more advantageous position this time around, since it has been able to stabilize its economy as a result of its stimulus program, and a sudden increase in tariffs would hurt U.S. companies more than Chinese companies.
This could simply be bluster designed to strengthen the U.S. negotiating position before a deal is struck, or news that will trigger enormous uncertainty and a stock market correction.
At this point, the DJIA is expected to open 500 points lower.
Last week I warned that “A Flash Crash Can Come, At Any Time,” and this is the kind of trigger that can do it. As I have warned repeatedly, the Market is overvalued and vulnerable.
Tuesday (April 30)
Yesterday was a ho-hummer, as the Street awaits Fed Chief Powell’s press conference Wednesday at 2:30 a.m..
The economy is holding its own, helped by the Fed which has abandoned its policy of raising rates to one of hold and wait for more information.
Last week’s GDP report showing a 3.2% jump was skewed by a rise in inventories and exports, a bump that is unlikely to repeat.
This will be a big week for economic reports, highlighted by Consumer Confidence and Pending Home Sales on today, the ADP Employment report, PMI Manufacturing, ISM Manufacturing, and Construction Spending on Wednesday, Jobless Claims and Factory Orders Thursday, and the Employment Situation, PMI Services and ISM Non-Manufacturing reports on Friday.
A flash crash can occur at any time, all it takes is for the BIG money to walk away. They don’t even have to sell in size. They probably have already.
No one is bearish – that’s scary.
The Street would like to first run the table taking this market up another 5%- 8%. It’s called greed. A 342% bull market isn’t enough for them, besides an ensuing bear market may last 18 months.
The Fed has few tools to counter a recession. Interest rates are still too low to be cut further and stimulate the economy. We already got an outsized tax cut. Borrowing at the personal, business, corporate and government level is too high.
It doesn’t look like it, but this is a very dangerous market, very similar to the market I warned about prior to Q4’s 20% plunge.
Monday (April 29)
MarketWatch’s Rex Nutting was quick to warn readers today that the 3.2% GDP number reported last week was misleading, that growth in the private-sector was the weakest in six years, more like at a plus 1.3% annual rate. Consumer Spending rose only 1.2% in Q1 after a +2.5% rate in Q4, Durable Goods dropped5.3%, the worst since 2009, he notes. Business investment slowed to 2.7% from 5.4%, investments in factories, offices, stores and oil wells fell for the third straight quarter, investments in computers, airplanes and machinery barely grew, rising 0.2%, Nutting explains.
This will be a big week for economic reports, highlighted by Consumer Confidence and Pending Home Sales on Tuesday, the ADP Employment report, PMI Manufacturing, ISM Manufacturing, and Construction Spending on Wednesday, Jobless Claims and Factory Orders Thursday, and the Employment Situation, PMI Services and ISM Non-Manufacturing reports on Friday.
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 116 months, the second longest on record and 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 hit a low of 3.7 percent in November, jumped to 3.9 percent in December and to 4.0 percent in January. Now, averages include months below and above 3.8. What’s more, we won’t know when the current recession if we have one begins because that conclusion is reached by the Nat’l Bureau of Economic Research (NBER) long after the fact.
>Bear markets lead the beginning of recessions by 3 to 12 months. The current bull market at 119 months is four 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.
>The current economic expansion has lasted 123 months. That’s 65 months (2.1x) longer than the average expansion (58.4 months) going back to 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 3.8 Months.
> 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.
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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.