A Test For the Bulls

Investor’s first read – Daily edge before the open
DJIA: 20,810
S&P 500:2,363
Nasdaq Comp.: 5,835
Russell 2000:1,394
Friday, February 24, 2017 9:08 a.m.
Looks like a lower open today after the markets hit a wall yesterday with the Nasdaq Comp. and smaller company Russell 2000 hit the worst.
A correction of sideways trading pattern would make sense after a 13.4% post-election surge in the S&P 500.
The driver for the surge has been well publicized – tax cuts, deregulation, and increased spending on the infrastructure.
Nothing has changed except the timing of each and that seems to change often. Currently, top priority will be given to the repeal of the ACA, followed by tax reform, then immigration. Infrastructure spending may be held for 2018, a mid-term election year.
As long as the Street expects progress on these issues within a year, they will be buyers.
What to do with ACA may be a sticking point without an easy solution and an issue that could hurt Republicans in the mid-terms if not resolved satisfactorily.
Treasury Secretary Steven Mnuchin hinted yesterday that tax reform could come before the August recess – that is unlikely.
Regardless of party affiliation, investors must accept the possibility of an open-ended Russia/Trump scandal, an administration and a Republican Congress running for cover and ultimately, Trump’s replacement by Vice President Mike Pence. (see Political/Stock market below).
The market will open lower today. Whether this is the beginning of a five to ten day correction or a two-day affair depends on how eager investors are to jump on lower prices.
A one-day reversal where stocks regain most of their day’s loss indicates the pullback will be brief. A close at the lows for the day indicates lower prices next week.
SUPPORT “today”: DJIA:20,696 ;S&P 500:2,255;Nasdaq Comp.:5,803
RESISTANCE “today”:DJIA:20,835;S&P 500:2,366;Nasdaq Comp.:5,850
– the prospect of big corporate tax cuts, deregulation, a big spend on the military and the infrastructure and the restructuring of long-standing trade agreements.
-the possibility they will take longer than expected, worst case be disappointing.
-the uncertainties of the repeal of Obamacare
-talk of privatization of Medicare and Social Security
-possible undermining of NATO and the European Union
-a trade war of sorts.
-lifting of sanctions on Russia for its incursion in the Crimea and actions in Syria, adding to questions already breached.
-continued internal polarization of America and the possible extension of such to other countries.
-intense economic stimulation by the Trump/Republican Congress stands to trigger a rebound of inflationary pressures forcing the Fed to bump interest rates sooner than expected.
-an increasing erosion of investor confidence in President Trump.
-the real possibility of Trump putting the country on a war footing to ensure patriotic support for the mid-term elections, or a pre-emptive attack on North Korea or Iran.
-the possibility, though remote at this time, that the Trump/Russia connection may blow up.
There are some similarities between what is happening now and what happened 44 years ago with the Watergate scandal during President Nixon’s administration.
The Watergate break-in occurred in mid-June 1972 with a cover up beginning immediately along with daily disclosures of impropriety at the highest levels until President Nixon was forced to resign. But even though serious disclosures were surfacing for five months, Nixon was still re-elected by a landslide.
A bear market began on January 11, 1973 with the S&P 500 plunging 50% over a 21 month span.
A 16 month recession started in November 1973, triggered by fallout from Vietnam, the disruption of Bretton Woods monetary system, stagflation, the oil crisis and Watergate.
If a scandal exists and is not successfully covered up, its impact may not be felt for many months.
Could something similar happen again ?
YES, it’s possible, especially since the stock market is at all-time highs and overvalued as the Street expects a huge Trump stimulus.
Be forewarned.

“To be honest, I inherited a mess,” Trump said at his press conference yesterday, adding, It’s a mess… at home and abroad.”
Really ! If he thinks a growing economy, stabile financial and fiscal conditions here and abroad, limited warfare in the mid-east, he should have been President in 2009 when Barack Obama took over in face of a global meltdown, the worst stock market and economic collapse since the 1930s, war on two fronts, bankruptcies at the highest level on Wall Street, the potential extinction of the U.S. auto industry.
Is this man delusional ? Is he of sound mind ? Who could whine about what he has inherited in his first year as president ?
This is scary. President Trump heads up the most powerful position in the world, and he is acting like a psychotic.
Even Trump-friendly Fox news anchor, Shepard Smith, is stunned saying, “It’s crazy what we’re watching every day, it’s absolutely crazy. He keeps repeating ridiculous throw away lines that are not true at all….”
Wall Street isn’t concerned, if Trump gets kicked out or bails out in disgrace, they got V.P. Pence, who I think they really prefer anyhow.
Corporate earnings (updated Feb. 11, 2014)
Factset now sees Q4 earnings for the S&P 500 up close to 5.0% vs. a Dec. 31 projection of plus 3.0%.
Earnings for all of 2016 is now projected to be plus 0.5%.
Q1 earnings are projected to increase 9.9% on revenue growth of 7.5%. Q2 is projected at plus 9.1% and 2017 as a whole are projected at a plus10.3% down from earlier estimates of 11.4. Currently, the P/E based on earnings 12 months out is 17.4 x, which compares with a 10-year average P/E of 14.4.
MY TECHNICAL ANALYSIS of the 30 DJIA Companies: (UPDATED 2/13/17)
On occasion, I technically analyze each of the 30 DJIA stocks for a reasonable risk, a more extreme risk, and an upside potential over the near-term. I add the results of each, then divide by the new DJIA “divisor” (0.14602) to get the DJIA for those levels. This gives me an internal check on the DJIA itself, especially if certain higher priced stocks are distorting the averages.
As of January 27, 2017, a reasonable risk is 20,361 a more extreme risk is 20,286 Near-term upside potential is 20,967 .
 OPPORTUNITY: RISK: Selective opportunity ! Risk is reality at some point
 CASH RESERVE: 25% – 35%.
 KEY FACTORS: Speculative fever driven by expectations of tax cuts, lifting of regs., and lots of money dumped on economy.
Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
George Brooks
Investor’s first read
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.

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