Bulls Absolutely Must Step IN Now….or else

Investor’s first read – Daily edge before the open
DJIA: 17,529
S&P 500:2,047
Nasdaq Comp.:4,715
Russell 2000: 1,097
Wednesday, May 18, 2016 9:01 a.m.
The market took a hit yesterday after two Fed officials, Atlanta Fed’s Dennis Lockhart and San Fran Fed’s John Williams implied the market was “underestimating” Fed plans to bump rates. Both are non-voting members and should not speculate on what the Fed plans to do. Traders price the odds of a June rate hike at 19%, a July hike is at 36% – Silly !
Another driver of concern for a near-term rate hike was a jump in April’s CPI. It rose 0.4% in face of an 8.1% jump in gas prices. Core CPI (excl. food and energy) increased 0.2%, in line with expectations. The year/year increase was 1.0%, well below the Fed’s 2% target.
Oil was up yesterday, but the market was down. At some point here, the market will march to a different drummer.
The Street is in a quandary, it really doesn’t know what to do, as evidenced by the back-to-back sharp moves up then down.
The bears look to a “pricey” valuation of equities and a market that has risen 200% in seven years. The bulls are betting on an earnings rebound in 2017 and the fact there is nowhere else to put one’s money for a chance of a return.
There is enough of a chance of one of those vertical free-falls, that investors should have a sizable cash reserve.
If it doesn’t happen, there will be plenty of opportunities to get back in.
If the market is going to break down here, there is a chance of a spike up before it does, giving the bulls one more chance to turn this thing around.
SUPPORT “today”: DJIA:17,392; S&P 500:2,033; Nasdaq Comp.:4,681.
RESISTANCE “today”: DJIA:17,585; S&P 500:2,061; Nasdaq Comp.:4,729.
The Fed: The Street is beginning to worry about a June bump in interest rates. The FOMC reports its minutes from its meeting tomorrow at 2:00. It matters little what the minutes contain, the Street’s expectation of when a rate increase will take place will fluctuate, especially in face of conflicting commentary by Fed officials out on the speakers’ circuit.
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 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: mam.econoday.com.
*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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