Bulls Back, But “Must” Follow Through

Investor’s first read – Daily edge before the open
DJIA:16,484
S&P 500: 1,929
Nasdaq Comp4,545.:
Russell 2000: 1,022
Thursday: February 25, 2016 8:12 a.m.
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After a failure t break out above February’s rally high Tuesday, I noted the burden of proof was on the bulls.
They responded yesterday reversing a big sell off in early trading and even closed the major market averages on the plus side. That’s what’s called a one-day reversal.
The rationale is that the market has dramatically changed direction after a big move in the other direction, which has in the past signaled a continuation of the trend.
However, in a volatile market, that pattern is not as consistent, what with the impact of monster traders and a host of leveraged strategies.
What must be noted here is that the pattern of trading over that last month is a near duplicate of the rebound last October from the big sell off in August. If today’s market mirrors the October 2015 rebound, this market stands to recoup all it lost in January.
Do I believe that ? I can’t afford to exclude that possibility. The market is currently driven by the price of oil, but that will change to something else. My guess the new focus will be corporate earnings though they can’t be tracked daily like oil prices.
The Street is expecting Q1 and Q2 to be downers, but sees Q3 and Q4 rebounding. Precise estimates vary too much to trust at this time. Obviously, upward revisions would launch a surge in the market. And, of course, a slide in prices, a bear market if 2016 is flat.
January’s plunge was more than the occasional “cleansing” of nervous investors and uncommitted buyers. We had that last October.
This was a response to serious concerns about a host of issues (deflation, oil, economies here and abroad, earnings), but quite possibly the uncertainty of who will be elected in November.
Now it makes sense, that the eighth year of a two-term president has historically been a rough year. It is one of the key reasons last December I warned of a top in January and a rough year. BUT, I also noted there would be some buying opportunities.
What’s important is investors have cash on hand to take advantage of those junctions, and the guts to buy.
TODAY:
The bulls were there in force yesterday at lower prices, and are in position to blow the market out above the Fed. Highs (DJIA:16,485; S&P 500: 1,947). That would give the DJIA a shot at 16,664 and S&P500: 1,991.
Under no circumstances can the market give up what it recovered in yesterday’s rebound, which hit lows of DJIA: 16,403 and S&P 500: 1,891
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RESISTANCE : “today”: DJIA: 16,601; S&P 500: 1,944; Nasdaq Comp.:4,573.
SUPPORT “today”: DJIA:16,316; S&P 500:1,912; Nasdaq Comp.:4,496.
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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 22, 2016, a reasonable risk is 16,243 a more extreme risk is 16,007. Near-term upside potential is 16,720
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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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