Bulls Looking to 2017 Earnings Rebound

Investor’s first read – Daily edge before the open
DJIA: 18,573
S&P 500: 2,182
Nasdaq Comp.:5,228
Russell 2000: 1,227
Thursday, August 18, 2016 9:08 a.m.
Differences of opinion within an organization are healthy as long as they merge into a reasonable conclusion. But the policy of an organization with as much global impact as the Federal Reserve must remain consistent from one policy announcement to the next. As it stands, individual Fed members express different points of view between meetings giving the impression there is no real policy that decisions in the financial community can be based on.
Yesterday, the market was greeted by the Fed’s Dudley and Lockhart who said a September rate increase was possible, Lockhart implying more than one bump was possible. That was followed at mid-day by the Fed’s Bullard who really didn’t see more than one bump. The market dropped at the open, but recouped its loss after Bullard’s comments.
Today, Kaplan spoke at 8 o’clock and Williams will speak at 4 o’clock. At risk here is a total lack of credibility, so bad that the Street does not respond to any policy announcement.
Minutes of the July 26 FOMC meeting were released yesterday with a slight bias to no rate increase near-term.
S&P 500’s Q2 earnings are in the process of chalking up their fifth straight decline, while at the same time posting one new all-time high after another.
Q3 is expected to be its sixth decline, with Q4 posting a gain of around 5%, but that’ s compared with a bummer quarter a year ago.
Normally, markets decline in expectation of a drop in earnings growth, but five in a row ?
Currently, 2017 earnings are expected to post a gain of 13%. Even if that happens, the S&P 500 would be pricey at 17.1 times earnings vs. a 10-year average of 15.9.
This is the second longest bull market in history (90 months) and the economic expansion accompanying it is the third longest (86 months) on record.
The S&P 500 Index is misleading, dominated by big-name stocks. Over the last 12 months, more than half of the 500 stocks have had declines of 20%, the benchmark that comprises a bear market. The mathematical weighting enabled the largest market cap stocks to offset the decline in those stocks.
European markets, the British pound and Euro were buoyed by weakness in the U.S. Dollar which hit a 3-month low.
S&P 500 futures are mixed prior to the open.
The market regained all of its early losses yesterday, most likely as a result of conflicting statements by Fed officials. This pattern is referred to as a one-day reversal. When to the upside, it is normally bullish.
If the market is looking for an excuse to go down, it is struggling to find one.
As noted in numerous posts here, when the plug is pulled in this market, it will drop sharply with very little warning, as a lot of computer programs say the same thing – SELL.
The bulls continue to buy on dips, hopeful for a sharp rebound in 2017 earnings.
SUPPORT “today”: DJIA:18,483 ; S&P 500:2,171; Nasdaq Comp.:5,201
RESISTANCE “today”: DJIA:18,649; S&P 500:2,192; Nasdaq Comp.:5,258.
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 August 12, 2016, a reasonable risk is 18,501 a more extreme risk is 18,404. Near-term upside potential is 18,808.
This market has defied anything I have ever seen EXCEPT that is, near market tops.
News headlines of new all-time highs attracts interest especially from investors who have not participated in this bull market. Likewise, it is forcing investment professionals (brokers, money managers, hedge funds and newsletter writers) to become more fully invested.
It is characteristic of late bull market behavior to prompt talk of a “New Era.”
I have heard the New Era talk before. It comes on stream when the market hits new highs after a long bull run at a time just about everyone concludes the market simply has to go higher and they better jump on board.
I see fundamental and technical signs that warn of a top, but then I started seeing those three weeks ago. It is a matter of how high is high, and a momentum that is self fulfilling.
Bull markets can reach unthinkable extremes when investors stampede into stocks fearing being left behind.
Then too, fear of total ruin at bear market bottoms can trigger panicky selling as investors scramble to salvage what’s left of a portfolio after a 30% -45% plunge.
Major tops and bottoms are marked by extremes. Savvy investors know this. Even so, it is a challenge for any human to resist the urge to chase running stock prices at unreasonable heights, or get chased out after a harrowing plunge in stock prices.
(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 Q2, and 2016 earnings questionable. Fed has market under its spell.
Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Bloomberg.com (Excellent pre-market read)
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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