NOTE: PRESENTLY, I DO NOT PLAN TO POST WEDNESDAY AND THURSDAY
November 15, 2019 (DJIA – 28,004) I Called for a bear market to start in January, that the initial plunge would be 12%-18% – “straight down.” It started mid-February, dropped 16.3%, rallied then plunged another 32.8%.
January 20, 2020 (DJIA:29,348) My blog, “INSANITY,” projected a bear market decline of 30% – 45%. The DJIA plunged 38.4% in 21 days.
With the DJIA at 18,591, I wrote that , while I see lower prices later in the year, I expect a big rally with the upside potential of DJIA 22,037 (S&P 500 : 2,617).
With the DJIA at 23,942 (S&P 500) on April 15, I called for an end to rally, up 29% but well short of how far the rally extended. On May 18, I began to warn of Bubble #2
It is imperative that investors assess the level of risk they can tolerate and be sure their level of cash addresses it now, so they are ready for the next leg down whether it comes tomorrow or months from now.
Fueled by bumps in economic indicators from depressed levels and looking out beyond current problems, money managers continue to buy, fearful of getting beat by competition.
The buying will continue until late summer when the Street realizes COVID-19 has shuttered a significant part of the economy, AND a possible Democrat sweep of the presidential and Senate races will adversely impact the stock market.
I see a plunge starting in August and ending after the November 3 elections.
The three amigos, the Fed, Administration and Street will hype the economy and stock market, panicking if it doesn’t work.
COVID-19 spikes are forcing states to re-think “coming out” plans, which will be economically devastating in light of their increasing fiscal problems. More importantly, if they do or don’t, the consumer is becoming more and more wary about the risk, triggering a domino effect.
It’s all in the “dominos” falling creating an open-ended problem economists can’t measure.
There will be trading opportunities for those buying overpriced stocks and selling them to investors willing to pay a higher price. This has long been called the “greater fool theory,” i.e. a fool pays too much for a stock but finds a greater fool to buy it from him. No one wants to miss out.
Classic bull trap.
This market “is” rigged by the three amigos, but that should end within 6-7 weeks when institutions ignore the hype lock in profits.
Whenever, a market ignores fact and reality over and over, it is being manipulated or simply driven by fantasy, and greed.
Most likely the DJIA will jump above June’s 27,580 and S&P 500” 3,222 before topping out. This trap would suck a lot of innocent, excited investors in as the smart (BIG) money sells and moves to the sidelines. That will create a vacuum for stocks to fall freely, triggering a flash crash as the “public investor and Robinhood investor begin to panic and drive prices lower past the elections into early December.
Tuesday June 30, 2020 (DJIA 25,595) “Rally Sets Stage for Big Sell Off in the Fall”
Yesterday will be touted as a successful test of support and a one-day reversal. It was and should be good for a rally into resistance starting at DJIA:26497, S&P 500: 3,148, Nasdaq Comp.: 10,187)
Obviously the Street is betting a recovery in the economy will develop soon enough that a cash reserve is not necessary.
While the tech-heavy Nasdaq Comp. punched to all-time highs last week, the DJIA remains down 13.4%, the S&P 500 down 10.0%, hardly a bull market.
FYI: Half of the 580 point rise in the DJIA was accounted for by four of the 30 DJIA stocks _ Apple (AAPL: +8.15); Goldman Sachs (GS: +4.28); Boeing (BA: +24.48); Home Depot (HD: 5.11).
While the DJIA was up 2.32%, The S&P 500 up 1.47% and the Nasdaq Comp. up 1.32%.
All this in face of spiking COVID-19, the villain of the 21-day 35% plunge in the S&P 500earlier in the year.
As a bear, I am not impressed. I think significant risk lies ahead that is ignored by the Street.
Institutions are locked into a buy mode with little interest in selling except for switches in positions. With risks obviously high, that is a dangerous position for money managers to take, so selling to raise cash to protect client portfolios is not out of the question.
I think the stage is set for a big plunge in the fall prior to the November 3 election. TOO MUCH ARROGANCE, TOO MUCH HYPE, TOO LITTLE RESPECT FOR A STORMY SURF !
Monday June 29, 2020 (DJIA: 25,595) “A Fiduciary Responsibility to Preserve Capital” What on earth are these decision makers on Wall Street thinking ? Have they no respect for what is happening out there ? Do they think the stock market will be spared the devastation of tumbling dominos. The Fed can only print so much of our money to delay financial carnage until November 3.
There is a sea change underway, a change in national priorities and it is not good news for overpriced stocks.
The Shiller price earnings ratios (P/Es) for the S&P 500 have ranged between 44 and 8 over 50 years. Currently, the ratio is 28, or 69% above its 10 year mean of 16.7.
That’s today, what about the ratio after earnings have been hammered by the current recession and risk of continuing damage done by COVID-19 ? Based on what we are seeing, why would anyone want to pay that kind of premium for stocks, even considering there is nowhere else to invest.
The Fed, Administration and Street is desperately trying to prevent another free-fall in stock prices, at least until after the November election.
That could be the “trap” of all “traps,” as investors rush in encouraged by misleading hype that the crisis is over, a “V” recovery is imminent.
Maybe COVID-19 will vanish or me countered by a vaccine some day, but a lot of damage has already been done.
Besides, the economy was on the threshold of recession in Q4 2018. The Fed Was able to delay that with hype and cuts in its fed funds rate all of which created a stock market bubble that was burst in February when the recession set in after 11 years of expansion.
The economy was weak then and is weaker now. The stock market was overvalued then and more so now.
How about the Fed ? With its balance sheet at $7 trillion, up from $4.4 trillion two years ago, and headed for $10 trillion, will it be in a position to counter the next crisis ?
I think the stock market is vulnerable to a plunge of 30% -50%. For the worst case to happen, money managers would have to stop buying, but in addition “sell.”
Why would they do this ?
They have fiduciary responsibility to preserve their clients’ portfolios’ value.
Friday June 26, 2020 (DJIA:25,745) “Rigged ?”
Stock market rigged ?
It would seem so. The behavior of this market defies the rules of gravity and rational that has applied to stock markets over many years.
The stock market has no business trading at these levels
Based on time-tested measures of valuation, the S&P 500 was 40% overvalued when the 11-year old bull market bubble was pricked by COVID in February.
The resulting recession will hammer corporate earnings making the overvaluation much greater somewhere in the area of 50%.
After a 21-day 35% free-fall in February/March, the stock market rebounded to within 10% of its all-time high.
That’s insane. That suggests to me, the Street has no respect for a stormy surf, one with rip tides that can suddenly suck you out into the deep waters.
This is what happens when a bull market/economic recovery extends well beyond the norm. Memories are short, decision makers have little experience tday to base “respect” on. The Street is spoiled by years of Fed-nurturing.
For most of 2019, I warned of dangers of the Fed-orchestrated Bubble #1, which COVID burst in February.
I am warning of Bubble #2, which is driven by the three amigos, the Fed, the Administration, and the Street.
Can they prop the market up until November 3 ?
I am not the only old timer to warn of a bubble.
In an Wednesday interview with MarketWatch’s Mark DeCambre, Jeremy Grantham, co-founder of money manager, Grantham, Mayo, Van Otterloo & Co. says this bubble is the “Real McCoy, “crazy stuff,” adding “the chutzpah involved in having a bubble at a time of massive economic and financial uncertainty is substantial.”
One reason for Grantham’s bearishness is “rampant trading by out-of-work investors, which reflects a market that may be “the most bubblicious he’s seen in his storied career.”
A new era ? No more bear markets ? Buy the dip, no sweat ?
Play if you want, but keep a cash reserve in keeping with your tolerance for risk.
Oh, sit close to the exits. I agree with Grantham. This is the bubbles of all bubbles. The last burst was a warning shot. The next triggers selling by money managers who realize they have a fiduciary responsibility to preserve capital as well as to increase portfolio value.
Thursday June 25, 2020 (DJIA: 25,445) “S&P 500 down 10% From All-Time Highs Does NOT Discount Damage Done To Economy – Try 40% !”
The S&P 500 is down only 10.1% from its all-time February high, a high that was gained before the impact of COVID roiled global economies.
A 10% discount in the S&P 500 from February’s all-time highs does not discount the damage done to our economy by COVID-19 and measures to adjust to it.
If the economy is not is great trouble, the Fed and Congress would not be panicking to head off a Depression.
Here’s the problem:
Expect the three amigos, the Fed, the Administration and Wall Street to rush forth with hype to prevent the stock market from finding a level that discounts the fact COVID-19 is spiking and the economy struggling to regain any meaningful positive momentum.
They will try to prop the market up with promises and misleading projections, but reality may chase the big buyers away setting the stage for “Flash Crash #2.
Money managers have a fiduciary responsibility to grow AND preserve capital. If they see huge and extended risk ahead, they will stop buying and start selling.
That would result is a free fall and test the March 23 lows (DJIA: 18,136; S&P 500: 2,191: 6,031), which could be broken if enough panic sets in.
Again, a 10% decline from overvalued all-time highs DOES NOT DISCOUNT THE RISK THAT LOOMS.
Wednesday June 24, 2020 (DJIA: 26,156) “Risks Rising Relentlessly”
Again, I say the following because the Fed is the primary driver of the March 23 rebound at least until November 3.
James Athey, money manager at Aberdeen Standard Investments said yesterday, “Rightly or Wrongly, there’s a pretty widespread feeling that riskier assets won’t go down because the Federal Reserve won’t let them.”
That’s why Bubble #2 is forming.
If the Fed is seeing serious economic problems lurking out there, why would it encourage asset prices to jump unrealistically ? After a 21 day 36% drop in the S&P 500, what is it about the danger of creating bubbles doesn’t the Fed understand ?
COVID is not going away, in fact it is spiking. It is unlikely states will go back into lockdown, but individuals may simply not go out as much as they would if COVID was no longer a worry.
Just a SAMPLING of what I am reading:
According to Axios AM (absolutely a daily must read), 43% of 7,317 small business owners that received money through Paycheck Protection Program (PPP) say they could be out of cash in a month or less.
What’s worse, 69% of small businesses that did not receive PPP expect to run out of cash next month, and 76% of minority-owned businesses that did not get PPP will be out of money in July, half are already out now.
Travel spending will be down 45% by year end. Obviously, businesses supporting that industry will be hurt, as well.
Health and fitness businesses will lose $350 million a week through year end.
All told, GDP is expected to shrink 5.2% this year alone, three times as much as in the 2009 recession.
This economic recovery is over-hyped. The 43% rebound in the S&P 500 is unjustified – a bubble that will eventually get pricked by reality, or burst because it cannot inflate any longer.
What I am seeing, people without masks in face of a resurgence in COVID-19, and a Fed blind to the dangers of inflating a stock market bubble is appalling !
Arrogance in the first case, ignorance in the second. What are these people thinking ? Or…can’t they ?
Tuesday June 23, 2020 (DJIA: 26,024) “Fed is Doing It Again – Bubble #2 –
JEEZ ! Nooo… Not Again – Ugh ! %&%#@”
When will Bubble #2 burst ?
August ? November ?
It’s anyone’s guess – too many balls up in the air.
Reports on the economy will show improvement for a month or two simply because they are compared with “beatable” numbers, but then what ?
A line from yesterday’s post is worth a reprint:
Off and on, the Fed has been in panic mode since the economy and stock market started to melt down in Q4 of 2018 when the economy was on the threshold of recession and stock market had plunged 20% in 90 days.
Worth noting, COVID-19 did not strike until early this year, so my wild guess is, the Fed didn’t want a recession/bear market leading into or during a presidential election year.
The Fed has unchecked, unlimited and untethered power, and apparently feels it has been charged with the responsibility to use it, even it drives stock prices to dangerous levels.
That said, I don’t think a bunch of out-of-touch, prima donna bankers should have so much power. Why are they not warning investors of asset risk all the while they are panicking about an economy that is teetering on the edge of a cliff ?
I think we are in very dangerous waters here -sharks everywhere – COVID-19, Iffy China trade deal, global meltdown, election chaos, and the risk that institutions with algos all keying on the same metrics will suddenly get a SELL !
That would be Flash Crash #2.
When ? It will happen out of nowhere. The bubble will be inflated by hype from the Street, the Administration and the Fed until pricked by an event, or maybe it just gets too big and bursts on its own like it did in February.
Be prepared !
Monday June 22, 2020 (DJIA: 25,851) “Why is the Fed in Full Panic Mode ?”
Wow ! The Fed has always had unchecked power, but that is over the top.
But, the Fed couldn’t stop the 36% plunge in the S&P 500 earlier this year, or the 58% one in 2007-2009, or the 51% carnage in 2000-2002.
Here’s the problem with the Fed micromanaging the stock market. It works for a while, at which a correction/bear market brings stocks back down to realistic levels.
The S&P 500 is already within 8.7% of the February all-time highs when it was historically overvalued. It is so much more so today.
In a panic, the Fed has slashed its benchmark Fed funds interest rate to zero in less than a year. More importantly it has inundated the markets with freshly printed money.
A June 19, MarketWatch article, “Money printing by the Federal Reserve has propelled stocks for more than a decade, but that effect may soon wear off,” highlights a disturbing issue.
When does the Fed max-out its ability to print money ?
In March 2009, the Fed’s balance sheet was $2.08 trillion. It rose to $4.4 trillion in 2018 and now stands at $7 trillion en route to $10 trillion.
More importantly, WHY the panic ?
Is the Fed political ? Are they trying to insure Trump’s re-election and control of the Senate remain under business-friendly Republicans ?
Or…..Does the Fed see a devastating economic, financial, and fiscal meltdown if it doesn’t undertake unprecedented measures to intervene ?
For whatever the reason, the Fed is not just propping the market up, but driving it higher. It is once again inflating a huge bubble, which at some point will burst.
Unfortunately, a lot of investors will get hurt when it does, especially newcomers like the Robinhood and its “merry men” investors.
One of they most classic signs of a market top is new investors making easy money in a late-stage bull market. This can go on for a while. We will read of individuals quitting jobs to trade the market, of small fortunes made, of novices writing “how to” books.
This frenzy will drive more and more investors into stocks, some borrowing (margin) to buy even more shares.
Undervalued stocks are becoming hard to find. New investments in historically overvalued stocks will have to be sold at a more overvalued price to someone else (greater fool theory).
The end result will be the same as it always has – a crash. It is now a matter of when.
Friday, June 19, 2020 (DJIA: 26,080) “Flash Crash #2 Dead Wrong…..So Far”
The Fed has never demonstrated its power in determining the direction of stock prices as much as it has in recent months.
It did so between December 2018 and February 2020 when it single handedly created bubble #1, a 44.2% rise in the S&P 500 before the February 35.6% flash crash.
Since that crash, it has orchestrated Bubble #2, which has driven the S&P 500 up 42.1%.
No one can dispute its need to head off an economic depression, but as in 2019, the Fed did not warn of an excessive expansion of asset values as it should have if concerned about investors incurring extreme risk.
Can this lead to Flash Crash #2 ?
I was right about Flash Crash #1, but so far am dead wrong about #2.
That is no reason to go all-in.
Unless the Street has tossed out the rule book of valuations that has survived decades of time-testing, a major correction looms as we head into the fall.
How deep ?
That depends on news flow. Do cases of COVID-19 accelerate ? Are major advances to its treatment/vaccination made in the interim ? Does the current economic bounce fail to follow through ? Will the Fed run out of ammo and hype ? Finally, will money managers panic ?
The latter would make the difference between a 30% plunge and a 55% plunge.
As I see it, the initial gap down with flash crashes is a result of institutions and traders withholding buy orders creating a vacuum of sorts where normal selling can’t find buyers without sizable discounts in price.
As the decline intensifies, so does the selling resulting in a climactic sell off.
Like I have noted repeatedly, I believe stocks should be allowed to find a level that accurately reflects known and perceived risks. No institution should be so powerful that it can interfere with that process.
The DJIA is within 5.4%, the S&P 500 within 3.6% and the Nasdaq Comp 1% of its grossly overvalued all-time February highs, but the economic outlook dire.
This begs the question, if this is not true, why then is the Fed writing blank checks and Congress in panic mode ?
Suddenly speculative fever is heating up as investors panic for fear of missing out (FOMO), and institutions panic for fear of underperforming their competition.
A classic bubble !
When will it burst ? Beats me, I was months early for #1. The bubble may not pop (or get pricked) until August/September.
At some point reality will prevail.
Thursday June 18, 2020 (DJIA: 26,119) “Sideways Trading Range Into August – Then Plunge in Fall” The DJIA and S&P 500 have recovered more than two-thirds of the Feb./Mar. flash crash plunge, the Nasdaq Comp. is a smidge.
This assumes a full recovery form the shock delivered by COVID-19 and the global response to contain it.
As warned here, we are seeing big jumps in economic indicators, as current reports register big gains over depressed numbers in prior months. An example is the 17.7% jump in May retail sales over April. Versus a year ago, the change was a minus 6.1%. There will be more like this, but they will not indicate a full recovery.
While the Administration no longer recognizes COVID-19 as a threat, consumers just may with spikes in hospitalizations in Texas, Florida, Arizona and Arkansas.
Coming out parties abound, but all it takes to muffle an economic recovery is a reluctance of consumers (70% of GDP) to go out.
Bear in mind, a good part of the March 23 to current rebound was short covering, traders who sold short expecting a second leg down only to be forced to buy-in when the market refused to decline, as the Fed continued to assure the Street it had their back.
I was right about a bounce with my March 24 blog saying I expected a big rally starting today (DJIA: 18,591, S&P 500: 2,237, Nasdaq Comp.: 6,860).
At the time I indicated I expected the market to renew its bear market plunge after a rally of about 17%. WRONG. It kept rising.
The Fed must see an enormous risk to the economy if it doesn’t intervene in every way possible. Why else would it relentlessly announce measures to head off a financial crisis the latest being its plan to buy corporate bonds.
We will get a better read after November 3.
I still hold to my belief we will see another leg down heading into August -October and an election where the President and Republican Senate may get ousted.
The Street was ecstatic when Trump was elected, I expect it to become fearful if he is beaten, since it stands to result in an increase in corporate taxes on favored treatment of corporations and high earners.
It appears (hope I’m wrong), the stock market has been managed (manipulated) over the last 18 months with the objective of re-electing Donald Trump and maintaining Republican control of the Senate. Why else has there been so much Fed intervention before COVID-19 and after ?.
I think the Fed managed the stock market during Obama’s administration, but to a far less extent. Too much power in the hands of a group that is narrowly focused and diversified. Markets should trade freely. It’s the only way to get a true picture of what conditions are.
I believe flash crashes (new normal) are caused by institutional investors and traders stepping away from the market when they see trouble of overvaluation, not by heavy selling. The dearth of buy support enables stocks to drop vertically.
The selling comes after a big decline.
It will happen again – Beware ! The next time could be as bad as in February/March.
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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.