Bulls Must “Bring It !”

Investor’s first read – Daily edge before the open
DJIA: 18,597
S&P 500: 2,187
Nasdaq Comp.5,240:
Russell 2000: 1,236
Friday, August 19, 2016 9:18 a.m.
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.
S&P futures signal a mixed-to-down open, most likely due to comments yesterday by Fed San Francisco president John Williams that the Street can expect a rate increase “sooner rather than later.”
FOMC minutes from the July meeting released Wednesday indicated a split in sentiments among Fed members.
Could this trigger a correction, combined with the uncertainty of the November election ?
There are still buyers on dips in prices. If these buyers suspect a Fed hawks (rate increase advocates) will prevail, buyers will vanish and sellers hit the exit with nice profits.
Fed Chief Janet Yellen will speak at the economic forum at Jackson Hole next Friday.
Should we get a change in the pattern of buying on dips in prices, a decline will be abrupt and steep.
While the last two days of trading have been one-day reversals to the upside they lack intensity, almost by default the market closed at the highs for the day.
The bulls must “reach” for stocks here, otherwise yield to the bears.
SUPPORT “today”: DJIA:18,539; S&P 500:2,181; Nasdaq Comp.:5,214
RESISTANCE “today”: DJIA:18,613; S&P 500:2,189; Nasdaq Comp.:5,256.
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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