Break of Critical Support = Flash Crash

Investor’s first read – Daily edge before the open
S&P 500: 2,139
Nasdaq Comp.:5,239
Russell 2000: 1,227
Thursday, October 13, 2016 7:45 a.m.
-The uncertainty created by a dead heat in the race for the presidency.
-Q3 earnings reports in October, which are expected to mark the sixth straight quarterly decline for the S&P 500.
-a downward revision of 2017’s S&P 500 earnings, currently expected to increase 13.1%. The strength of the U.S. dollar stands to adversely impact 2016 and 2017 earnings of multi-nationals, which will make that target more difficult. Oil industry earnings have been crushed over the last two years, punishing the S&P 500 earnings as a group. But, based on $55 WTI oil price projections, the oil industry stands to give back what it took away from the overall earnings for the 500. We’ll see.
-if the Street suddenly realizes Fed doesn’t have an exit strategy, never did.
-a recession in Europe. Numbers starting to stink. Markit flash Eurozone PMI at 20-mo. Low Sept; Germany PMI service sector slowest 16 mo..
Reportedly, three-quarters of UK CEOs surveyed by KPMG are considering relocating HQs due to Brexit. After a four day rout, the British pound rebounded after PM Theresa May agreed to give Parliament a vote on her Brexit plan.
-October madness ! (defies quantification or reason, but happens !)
The Q3 earnings season officially got underway today with Alcoa (AA) reporting $0.32 a share vs estimates for $0.35 a share.. S&P 500 earnings for Q3 are expected to decline 2%, marking the sixth straight quarter of declining earnings.
This shortfall has been expected, and shouldn’t have much impact. What is not expected is if Q4 earnings fail to stabilize, and especially if the Street begins to revise 2017 earnings down from a projected growth rate of 13.1%.
The U.S. dollar has been firming since May, which stands to hurt multinational earnings. While the Street has ignored earnings and their overvaluation by the benchmark S&P 500 for years, opting for full focus on the Fed’s policy on interest rates, that can change if the prospect for an earnings rebound in 2017 vanishes.
Minutes from the FOMC September 20-21 meeting told us what we already know, that a rate hike is going to come by year-end. The Fed used the words “relatively soon,” which could mean November 2 or December 14, the latter a better bet. Its benchmark federal funds lending rate is currently 0.25 pct. to 0.50 pct. where it has been since last December.
Stock prices stabilized yesterday after a sharp plunge Tuesday. For the present time, the Street is less concerned about Fed policy and more concerned about the possibility of a Democratic sweep of the presidency and Senate with big gains in the House. That prospect has only developed in recent days. Who knows how this one will unfold. Bizarre would be an understatement, and I don’t think the market likes bizarre anymore than it likes uncertainty.
That leaves Q3 earnings discussed above. I don’t think the Street can tolerate another string of declining earnings.
But let’s not overlook two potential catalysts.
We now have $50 oil and efforts to put a lid on production. Pendulums do swing back from extremes, and the demise of profitability in the oil industry has clearly breached extremes, adversely impacting S&P 500 earnings. Year-ago numbers will be easier to beat in coming quarters, which would have a positive impact on S&P 500 earnings, helping to narrow the over valuation gap existing now.
That’s what can happen if the price of oil stabilizes and moves higher, and I have no way of predicting that.
The stock-index futures are down sharply at the open as campaign rhetoric gets uglier by the day. Toss in weak Q3 earnings, an indecisive Fed, and rumblings abroad and you have an unfriendly environment for stocks.
We have been here many times in the past, and the market has recovered briskly, rewarding buyers. In face of mounting uncertainty, odds favor a break to lower levels, which would set up a juicy buying opportunity.
Risk is DJIA: 17,560; S&P 500:2,056; Nasdaq Comp.: 5,073.
SUPPORT “today”: DJIA:17,996 ;S&P 500:2,121;Nasdaq Comp.:5,197
RESISTANCE “today”: DJIA:18,192; S&P 500:2,145 ; Nasdaq Comp.:5,265
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 September 16, 2016, a reasonable risk is 18,011 a more extreme risk is 17,908 Near-term upside potential is 18,435.
(So far this is not holding up)
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.
 STATUS OF MARKET: Neutral – but very, very vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 45%. Consider 75% now if tolerance for risk is low.
 KEY FACTORS: Outlook for Q3, and 2016 earnings questionable with strong U.S. dollar. Forecasts for 2017 still for a gain in S&P 500 earnings of 13.4%. It has been there for months in spite of deteriorating earnings this year. Any downward revision could impact the market significantly.
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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