Breakout Fake Out “Possible” – Careful !

Investor’s first read – Daily edge before the open
DJIA:16,453
S&P 500: 1,926
Nasdaq Comp.:4,534
Russell 2000: 1,010
Thursday: February 18, 2016 9:07 a.m.
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Just be very careful here. One word out of the oil patch to just infer production cuts are out of the question, that a freeze at current levels is the best that can be hoped for, and everything heads south.
One thing I have learned over the years about agreements, pacts, cease fires, etc. is that doubts surface before anything is even close to finalization. If the market rallies on the news, it can reverse quickly if a hitch develops.
Oil ( and the stock market) would get an additional boost if other oil producers fall in line with the Saudi’s and Russia. It would make sense if they did, no one can afford to see the price of oil go lower.
The rally in the DJIA and S&P 500 that started last week came off the January lows setting up a potential double bottom, that with some additional positive news could take the market higher (DJIA 16,930; S&P 500: 1,991).
If the DJIA and S&P 500 break out above the February highs of 16,485 and 1,947, it would trigger a surge of buying.
If we are in a bear market, that is based on more than oil, that breakout would be a fake out and the market would plunge again.
Be aware this can happen, as well.
This is a dangerous market. I don’t think the Street knows what to make of it. I only know to respect its surliness and unpredictability.
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SUPPORT “today”:DJIA:16,301 ; S&P 500: 1,909; Nasdaq Comp.: 4,487.
RESISTANCE “today”: DJIA:16,576 ; S&P 500:1,940; Nasdaq Comp.:4,567
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THE MAKING OF A BEAR
Unless triggered by some horrific event, a bear market isn’t obvious at first. It begins with slippage as if it is just another correction in an up trending bull market. But rallies fail to attract enough buyers to reach new highs. Some begin to sell, others remain on the sidelines. Interest fades and bids weaken in face of one disappointment after another – new negatives surface – stocks start to slide – the Street’s optimism wanes, then sours. Fear mounts, then accelerates, as investors start to raise cash. No longer is it heresy to mention the word “bear.” Doomsters re-surface with talk of DOW 6,000. Fear turns to panic. No one, not anyone, wants to buy a stock. Selling intensifies. “If only I sold at a higher level,” investors lament, “I could be buying here.” The selling drives prices lower until one day when no matter how much selling there is, the market doesn’t go lower (capitulation).
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To qualify as a BEAR MARKET
The DJIA must drop to 14,680, the S&P 500 to 1,707. The 2007 – 2009 bear was down 57%, 2000 – 2002 down 50%. The average decline of a bear market since 1971 is 31%.
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EARNINGS
Corporate earnings will rise to the surface in 2016 as the “decider”. The flow of Q4 earnings started with Alcoa’s (AA) report yesterday.
S&P 500 earnings for 2015 will drop some 5.5% (ex-energy – flat). The Street is looking for some 7% growth this year. As of Friday’s close, that works out to a P/E of 14.9 vs a 10-year average of 14.2. Projections were for growth of 8% last year and ended with zilch for the year, though the market held up well considering.
Stock prices won’t hold up as well if revisions start to plunge again this year. Expect a bear market if they do.
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MY TECHNICAL ANALYSIS of the 30 DJIA Companies:
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 February 17, 2016, a reasonable risk is 15,854 a more extreme risk is 15,738. Near-term upside potential is 16,576 The abrupt change here is due to last week’s sharp rebound.
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 STATUS OF MARKET: Bearish – but trying to turn. Expect volatility
 OPPORTUNITY: RISK: Risk high, but opportunity for traders at lower levels.
 CASH RESERVE: 25% – 45%. Consider 75% now
 KEY FACTORS: Fear taking hold. Concern for the number and extent of additional bumps in interest rates by the Fed; strength of economic rebound; Outlook for Q1, and 2016 earnings as a whole.
The Street is counting on a big jump in Q3 and Q4.
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Note: Source of economic data
For a weekly economic calendar and good recap of indicators, go to mam.econoday.com.
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George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
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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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