Another Critical Test for Bulls

Investor’s first read – Daily edge before the open
DJIA: 17,750
S&P 500:2,063
Nasdaq Comp.:4,763
Russell 2000: 1,121
Wednesday, May 4, 2016 7:24 a.m.
NOTE: There will not be a post here Thursday or Friday. Wednesday will be released early without benefit of breaking news just before the open.
We have entered a seasonally unfriendly six months period with the S&P 500 up 14% in 10 weeks.
Yesterday, April’s PMI mfg. report was mixed and ISM mfg. Construction Spending for March rose slightly, but February revised up sharply.
Economy: mixed-to-soft. The bear market lead time for recessions is 6 – 12 months, so weakness in the stock market will be a warning that a recession is possible, however not guaranteed. The ADP Employment report comes at 8:15 a.m. today and Employment Situation report Friday at 8:30).
The Fed: is micromanaging the price level of market too much, allowing a buildup of uncorrected negatives, increasing risk of sharp plunge triggered by unexpected news.
Earnings: The Street is betting on a sharp earnings rebound in Q4 and especially 2017 (+14%). P/Es are above historic norm, so there is no room for disappointment.
Political: Uncertainty mounting.
Seasonal: Eighth year of two term presidential cycle usually bad starting April/May. Worst six months of year is historically May 1 to November 1.* Phenom referred to as “Sell in May and Go Away.” The two patterns combined spell trouble.
My support levels for yesterday’s market held, but they will be tested again today. The bulls need a sharp selling climax followed by a sharp rebound to reverse what looks like the beginning of a slide in prices.
There have been buyers on weakness since February. While that will continue, sellers may get the upper hand.
There is merit to the bromide, “Sell in May and go away,” a projected six month period ending on November 1, when the “Best Six Months” for owning stocks kicks in.
It is important to remember that these six month periods are interrupted by counter moves, some significant.
If sellers win this battle, expect the Fed to trot out its minions to try to prop up the market and delay the inevitable. Hmmmm ! a little too caustic ? NO ! A healthy, less dangerous, market is one where free flow of sentiments about the many key factors that should define market value is permitted, not one that is artificially propped up by promises that “all is well – trust us.” Eventually the weight of all the economic, fundamental, monetary, international, political, technical and seasonal factors suppressed by the Fed overwhelms the market and you get a free fall.
I think there is real danger here, enough to warrant a sizable cash position. If the market can stabilize, then buying can be resumed. If it plunges, that cash can be employed at lower prices and investors don’t have to wait months to get back to current levels.
The first May down leg can find some support at
DJIA: 17,297
S&P 500: 2,011
Nasdaq Comp. 4,707
Beyond that, look for:
DJIA: 16,397
S&P 500: 1,909
Nasdaq Comp.:4,451.
Technical rallies will intervene. A bear market would develop if new negatives hit the market when it is down enough to attract serious buying, most likely at the level noted above under “Beyond that, look for.”
As noted Monday, we have “greenstick” fractures in both the economy and stock market, but those are not yet “full” fractures.
This is a huge test for the bulls and the Fed, which has methodically propped up the market allowing negatives to go uncorrected along the way. This is a phony market, I have said so for some time.
I am told by a very savvy source, the pros he monitors cannot make money in this market, and the dilemma of mutual funds and hedge funds is proof of that.

SUPPORT “today”: DJIA:17,687; S&P 500:2,057; Nasdaq Comp.:4,747. This is a key level.
RESISTANCE “today”: DJIA: 17,826; S&P 500:2,073 ; Nasdaq Comp.: 4,782;
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 Apr. 28, 2016, a reasonable risk is 17,661 a more extreme risk is 17,374. Near-term upside potential is 18,039.
(I will repeat this regularly to keep readers aware of the potential for an April correction)
The market is tracking a pattern for presidential election years where an administration is in its second term.* The news is bad.
Historically, these markets have declined in Jan./Feb., rallied in March then topped out in early April, plunged in May with brief rallies in June and August and a plunge into October prior to the election.
The S&P 500 is in its 8th year of a bull market, selling at 17.8 X earnings, only 2.5% off its all-time highs, after a 212% bull rise.
Corrections started in spring in each of the last six years, the biggest being 19.8% in 2011, and smallest 2.3% in 2,014.
They started: 2010 (Apr. 26), 2011(May 2), 2012 (May 1), 2013 (May 22), 2014 ( May 13), 2 015 (May 15). The 2014 correction was insignificant, the 2015 more of a trading peak that trended sideways-to-down before the August flash crash.
So far, Q1 earnings are mixed-to-slightly better than projected. The key will be guidance and projections for Q3 and Q4.
 STATUS OF MARKET: Neutral – but vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 25% – 45%. Consider 75% now if tolerance for risk is low.
 KEY FACTORS: Outlook for Q1, and 2016 earnings questionable. Fed has market under its spell.
Note: Source of weekly economic calendar and good recap of indicators:
*Stock Trader’s Almanac
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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