Bulls Must Now Come Off the Sidelines

Investor’s first read – Daily edge before the open
S&P 500: 1,903
Nasdaq Comp:4,516
Russell 2000: 1,008
Wednesday: February 3, 2016 8:49 a.m.
Again a whipsaw, up sharply Friday, a stall Monday, and down sharply yesterday.
This is normal for a market that has had a steep, near vertical plunge, as the market seeks a level that discounts known negatives, uncertainties, and fears of something worse to come.
January was a no-show for institutions from the get-go, and there was little new to justify a break of that magnitude. It does not bode well for the year as a whole, a presidential election year, with all the negativity that accompanies a battle for the top spot in our government.
There will be buying opportunities for gutsy traders, and selectively for long-term investors.
Two things bother me most.
One, there is something very ugly lurking out there, not yet known, that’s why the BIG money wasn’t buying in early January and isn’t stepping up to the table and gobbling up all these discounted prices now.
Two, while the January crunch has roiled portfolios to the “ouch” point, the S&P 500 is only down 11%. The carnage is not bad enough to comprise capitulation, so we get that danger zone in between where investors are damned if they do, and damned if they don’t.
The Street calls it a “bear” if it’s down 20%, and this acts like a BEAR !
A bear would call for DJIA 14,680 (S&P 500: 1,707).
A bear market is:
Unless triggered by some horrific event, a bear market isn’t obvious at first. It begins with slippage as if it is just another correction in an up trending bull market. But rallies fail to attract enough buyers to reach new highs. Some begin to sell, others remain on the sidelines. Interest fades and bids weaken in face of one disappointment after another – new negatives surface – stocks start to slide – the Street’s optimism wanes, then sours. Fear mounts, then accelerates, as investors start to raise cash. No longer is it heresy to mention the word “bear.” Doomsters re-surface with talk of DOW 6,000. Fear turns to panic. No one, not anyone, wants to buy a stock. Selling intensifies. “If only I sold at a higher level,” investors lament, “I could be buying here.” The selling drives prices lower until one day when no matter how much selling there is, the market doesn’t go lower (capitulation).
There is an even chance this year will be a bear market. It all depends on the news that hits the market along the way. Unexpected adversity or just disappointments would do it.
This is definitely a green stick fracture, and it wouldn’t take much more for it to reach a full break.
January met my expectations, and I see the rest of the year as rough, but with several juicy trading opportunities.
We are in that saw-toothed, whipsaw pattern so typical of a market that has dropped enough to lure buyers in, but not in such numbers as to run the market back up in a big way. A nice trading rally for the quick and nimble at best, another down-leg at worst.
There is a good chance today or tomorrow the market will spike down then rally. There is good support in the DJIA 15,870 area (S&P 500: 1,870). A decisive break below those levels would be very bearish.
There is resistance in the DJIA 16,590 (S&P 500: 1,950) area. A break above those levels would be bullish.
Based on what is “known,” the bulls should be buying aggressively. So far, they haven’t, which begs the question – “Why ?”
Even so, we should get a solid bounce in early trading today.

SUPPORT “today”: DJIA: 16,011 ; S&P 500:1,889; Nasdaq Comp.:4,478)
RESISTANCE “today”: DJIA: 16,247; S&P 500:1,913 : Nasdaq Comp.:4,543.
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.
On Jan. 7, I listed “panic prices of selected oil stocks,” seeking to pinpoint the level where these stocks would bottom out.
Four of the six oil stocks/ETFs plunged below these prices briefly, then rebounded.
I warned that, “If production cuts are mentioned, the bottom ‘is in.’ ”
No one officially said production cuts would be agreed to, but it was implied, ergo the oil stocks bottomed out on Jan. 20. Buyers below those panic prices should lock in a quick gain. We may be ready to test the lows.
As of Jan. 29:
Panic prices selected oil stocks and results:
ETF (OIH) projected bottom: 21 – low was 20.46 – up 18.6%;
ETF (XOP) projected bottom: 24 – low was 22.06 – up 5.3%; 24;
ETF (VDE) projected bottom: 69 – low was 68.63 – up 16.5%;
ETF (XLE) projected bottom 50 – low was 49.93 – up 7.2%.
Exxon Mobile (XOM) Chevron (CVX) did not drop to projected bottom.
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 January 29, 2016, a reasonable risk is 16,261 a more extreme risk is 16,010. Near-term upside potential is 16,772
 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, 2016 earnings
Note: Source of economic data
For a weekly economic calendar and good recap of indicators, go to mam.econoday.com.
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.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.