BIG Week Reports on Economy

Investor’s first read – Daily edge before the open
DJIA: 17,873
S&P 500: 2,099
Nasdaq Comp.:4,933
Russell 2000: 1,150
Tuesday, May 31, 2016 9:01 a.m.
This is a huge week for economic reports, with the potential to give the Street a clue on whether the Fed will raise rates at its FOMC meeting June 15.
Personal Income and the S&P Case-Shiller HPI come before the open today followed by Consumer Confidence, the State Street Investor Confidence and Dallas Fed Mfg. reports at 10:00.
Wednesday its ADP Employment at 8:15 a.m., PMI Mfg. (9:45), ISM Mfg. and Construction Spending at 10:00. Jobless Claims come at 8:30. The all-important Employment Situation comes Friday at 8:30, followed by PMI Services (9:45), Factory Orders and ISM Non-Mfg. at 10:00.
Fed Chief Janet Yellen spoke Friday noting the economy is picking up after a sluggish Q1, that the Fed will gradually and cautiously increase interest rates over time and probably in coming months. Some of her colleagues agree.
The Street is pondering uncertainties, namely:
– the recent strength of the U.S. dollar and it’s impact on internationally derived earnings in Q4 when the Street is hoping for an earnings rebound.
– OPEC’s meeting on Thursday
– FOMC’s meeting June 15
-Brexit outcome June 23
-can the consumer continue to drive the economy ?
-will corporate America spend less on buying its own shares and spend more on capital goods.
-how long will the economic expansion last. The current one started in June 2009 and is 84 months old. The average post WWII was 54 months
-the election. Regardless of outcome – expect polarization beyond belief.
RECAP: Last Wednesday I headlined, “Last Rally Before a Plunge” based on a striking similarity between today’s technical patterns and those existing prior to severe plunges in August 2015 and January this year. Friday, I said nothing has changed in spite of a move up in the market, but added the “market can move higher before voiding the comparison with August and January.”
I still see this as the “rally” before a plunge, the obvious question being when does it top out ?
There is an outside chance that this rally will punch briefly to new 2016 highs (DJIA: 18,167, S&P 500: 2,111).
Why ?
Market turns often occur after a brief break above or below a previous high or low. The BIG money uses the press hoopla about the break above or below those points to sell or buy because of sharp press-induced volume.
Two good things can happen here – one bad. The market can move sideways within a trading range, or it can continue in another leg up in this 7-year bull market.
The bad thing that can happen is a five month plunge that will take investors well into 2017 to recover from, assuming 2017 is not a recession year, then it will take longer.
Investors have to let their tolerance for risk be their guide and not let fear or greed get in the way.
The question investors must ask themselves is, is it worth rolling the dice with an aging bull market that is selling near its highs (DJIA up 177%, S&P 500 up 215%, Nasdaq up 290%) ?
In December I called for a top in January and we had the worst January on record. I said 2016 would be a rough year with a few buying opportunities of which we have had two. In March I called for a peak in April and so far the 20th holds. So far, I hold to my forecast.
SUPPORT “today”: DJIA:17,805; S&P 500:2,088; Nasdaq Comp.:4,889.
RESISTANCE “today”: DJIA:18.034; S&P 500:2,116; Nasdaq Comp.:4,971.
Earnings: Q1 earnings were a smidge better than forecast. Initially, it appeared the Street was relieved, but weakness has been creeping in, suggesting something else is calling the shots – Try uncertainty, something the Street never dealt well with. Political: A big part of that uncertainty has to be political.
Oil: Crude oil hit a seven-month high after Goldman Sachs analysts forecast $50 oil later in the year.
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. Note: Significant rallies have occurred between May and November, testing the validity of this bromide. No indicator is bullet proof.
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 May 26, 2016, a reasonable risk is 17,656 a more extreme risk is 17,526. Near-term upside potential is 17,963.
(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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