Bulls Challenged By Pullback

Investor’s first read – Daily edge before the open
DJIA:16,431
S&P 500: 1,921
Nasdaq Comp.: 4,503.:
Russell 2000: 1,012
Wednesday: February 24, 2016 8:54 a.m.
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Recently, the market has been in lockstep with the price of oil, but a new drummer will eventually emerge to set the tone. It could be the Fed (again), or it could be 2016 earnings revisions. The Street is expecting Q3 and Q4 to bail out another flat year. Any change for the worse there and this market is overpriced.
OIL:
My post Feb 18, in response to Saudi’s production “freeze” warned of surprises. I noted, “One thing I have learned over the years about agreements, pacts, cease fires, etc. is that doubts surface before anything even close to finalization.”
So, it should not surprise anyone that Saudi’s oil minister, Ali al Naimi said yesterday that he didn’t see production cuts anytime soon. Oil had been rising on the freeze news, but is now declining along with the stock market. That can change in a heartbeat if other OPEC or non-OPEC nations announce they are ready to fall in line with anything the Saudis want.
Along those same lines, don’t expect anything in the stock market from a peace announcement in Syria. Too many loose ends.
TODAY
The breakout above the February highs Monday failed to follow through on Tuesday, and suddenly the burden of proof is on the bulls to prevent another leg down.
If the bulls can hold the line here or in the area of DJIA 15,891; S&P 500: 1,861; Nasdaq Comp.:4,331, a bear market can be avoided.
Even so, a meaningful surge is going to be difficult in light of a host of uncertainties.
The Street really doesn’t know what to do, and neither do its algo-computers. It is keyed on oil prices for whatever reason is not clear, perhaps the plunge suggests deflation is possible.
This too will change, and my guess is corporate earnings will call the shots.
January’s plunge, the worst since at least 1950, was a warning shot that must be respected. That doesn’t mean several strong rallies are impossible, they are probable. But this is a high risk market, all it needs is something to trigger a panic.
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SUPPORT “today”: DJIA:16,217; S&P 500:1,896; Nasdaq Comp.:4,457. These levels should hold, but with this volatility, anything canhappen.
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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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