All is Well, Unless……..

Investor’s first read – Daily edge before the open
DJIA: 19,918
S&P 500: 2,260
Nasdaq Com.: 5,447
Russell 2000:1,262
Friday, December 23, 2016 9:06 a.m.
WHAT CAN WRONG: The market has soared in face of expectations of tax cuts, deregulation and a big spend on the military and infrastructure starting sometime next year. The market tends to discount potential in advance, but is not always right.
Yesterday, I questioned whether Congress dared oppose any of President Trump’s proposals for fear that individuals will be singled and attacked by tweets or administration officials, a pattern that seems to be the new normal.
If Congress caves, most of the goals referred to above will pass, at least in part.
If the Republican deficit hawks resist, uncertainty about tax cuts, dereg. and the big spend are in question. According to the Associated Press, Senate Majority Leader Mitch McConnell (R-KY) is cool on a $1 trillion stimulus spend on the military and the country’s infrastructure.*
Then too, Trump’s chief of staff to be, Reince Priebus, indicated in a radio interview that the initial focus would be on repealing Obamacare and tax reform with the big spend coming later.
There is also the issue of how all this would impact the $19 trillion national debt. The cut of corporate and personal taxes impacts the inflow of funds to the U.S. government, requiring spending cuts to offset the shortfall. A big spend must be offset somehow, probably in part by private partnerships and tax concessions.
BOTTOM LINE: There is risk of the market getting ahead of the curve here if the new administration hits snags in implementing tax cuts and the approval of its big spending plans.
For now, the fever festers, investors anxious to extend a bull market long-in-the-tooth and up 239%. They sense a bonanza, quick and easy money, and wild speculation in what is perceived as a “new era.”
The market has traded flat for eight days, a normal consolidation considering its big 9.3% run, which actually started before the election.
While it declined two days in a row, it was minimal. Another drop is likely at the open today, and may be more pronounced. There is nothing in the news to convince the Street that tax cuts and a big spend is not on the table next year, so declines will meet buyers. If all that wonderful stuff begins to hit a wall, the market is going south.
SUPPORT “today”: DJIA:19,860;S&P 500:2,254; Nasdaq Comp.:5,424
RESISTANCE “today”:DJIA:19,965;S&P 500:2,268; Nasdaq Comp.:5,466
Corporate earnings.
Factset now sees Q3 earnings for the S&P 500 up 3.0%. On Sept. 30, its projection was for a decline of 2.2%. Q4 is projected at a gain of 5.2%, the year projected to come in at plus 0.1%. Earnings for 2017 are expected to increase 11.4%. Currently, the P/E based on 12 months out is 17.1x, which compares with a 10-year average P/E of 14.3x.
The six months between November 1 and May 1, tend to outperform the six months between May 1 and November 1, labelled the “Best Six Months” by the Stock Trader’s Almanac which began tracking the pattern in 1986.
iShares 20-Year Treasury ETF down 14% in 4 months
Long-term bonds have gotten hammered in the last three months. The iShares 20-yr U.S. treasury bond ETF has lost 18.1% since July. That’s nearly 8 times the yield an investor expected over 12 months. Obviously, bonds can be risky. Let’s not forget the name of the game is to buy low and sell high, which applies to long bonds as well as stocks.
A survey of economists reported by Bloomberg yesterday calls for U.S. inflation to surpass the Fed’s target in every quarter of 2017, which if even half true should depress long-term bonds even more.
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 December 14, a reasonable risk is 19,713 a more extreme risk is 19,657 Near-term upside potential is 20,123
 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:
*The Fiscal Times – 12/22/16 – Eric Pianin
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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