Bulls Must Step Up, or……….

Investor’s first read – Daily edge before the open
DJIA:18,202
S&P 500: 2,144
Nasdaq Comp.5,246:
Russell 2000:1,222
Thursday, October 20, 2016 9:12 a.m.
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WHAT COULD HURT THE MARKET
-In debate #3 Donald Trump indicated he would not commit to conceding a loss if Hillary Clinton wins, that everyone will have to wait until the election returns are in before he would give his decision. This is a first, and it could create a lot of angst and uncertainty. There is no historical precedent.
-The uncertainty of who will be elected president has pretty much vanished, and the Street’s concern may now turn to whether the Republicans will lose control of the Senate or even the U.S. House. That was not considered possible six weeks ago.
-Q3 earnings reports in October, which are expected to mark the sixth straight quarterly decline for the S&P 500.
-a downward revision of 2017’s S&P 500 earnings, currently expected by Factset to increase 12.8%. Oil industry earnings have been crushed over the last two years, punishing the S&P 500 earnings as a group. But, based on $55 WTI oil price projections, the oil industry stands to give back what it took away from the overall earnings for the 500. We’ll see.
– Reportedly, three-quarters of UK CEOs surveyed by KPMG are considering relocating HQs due to Brexit. After a four day rout, the British pound rebounded after PM Theresa May agreed to give Parliament a vote on her Brexit plan.
-October madness ! (defies quantification or reason, but happens !
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Q3 EARNINGS
S&P 500 earnings for Q3 are expected to decline 2%, marking the sixth straight quarter of declining earnings.
This shortfall has been expected, and shouldn’t have much impact. What is not expected is if Q4 earnings fail to stabilize, and especially if the Street begins to revise 2017 earnings down from a projected growth rate of 12.8% .This week Factset revised this number down from 13.1%.
The U.S. dollar has been firming since May, which stands to hurt multinational earnings. While the Street has ignored earnings and their overvaluation by the benchmark S&P 500 for years, opting for full focus on the Fed’s policy on interest rates, that can change if the prospect for a sharp earnings rebound in 2017 vanishes.
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POTENTIAL POSITIVES
.There is a historically high level of cash on the sidelines. A Bloomberg Markets survey indicates fund manager cash reserves are 5.8% well above 4.5% the level that is considered “extreme.”
We now have $51+ oil and efforts to put a lid on production. Pendulums do swing back from extremes, and the demise of profitability in the oil industry has clearly breached extremes, adversely impacting S&P 500 earnings. Year-ago numbers will be easier to beat in coming quarters, which would have a positive impact on S&P 500 earnings, helping to narrow the over valuation gap existing now.
Halliburton (HAL) reported a small profit in face of projections for a loss. Its stock closed 4.25% higher. Jefferies published 15 energy stocks with a “buy” or equivalent ratings from 75% of analysts polled by Factset.
(Note: December 8, 2015 – Investor’s first read “Selling Climax Oil stocks at lower levels. January 7, 2016 – “Selling Climax Possible, Panic Prices Selected Oil Stocks targeted lows stocks would hit before the turn.
This was a classic case of exploiting an extreme, a selling climax in an industry group that was crushed. Chevron (CHV) and Exxon (XOM) did not decline to my buy targets, the others did, but only for a day. Classic chart reading – easy to target, but having the guts to step in is why buying low and selling high is so difficult. It is not the human thing to do, unless you have a lot of money to spread around, which is the edge the BIG money has.
TODAY
The “Best Six Months for Owning Stocks (November 1 to May 1)* is just around the corner. As with any seasonal pattern, the beginning and ending month can vary, but generally speaking this six month period is far better than the May1 to November one.
A correction in coming weeks would set up an attractive buying opportunity.
Five days ago, the market averages spiked down and reversed as a result of Fed Chief Yellen’s comment about tightening credit only after the inflation rate reached 3% rather than the 2% level which is the current threshold for action.
I expected a robust rebound, but the four days that followed reflected confusion, as the four days of trading failed to close at the highs for the day.
The bulls will have to pick it up, unless something else is restraining them from more aggressive buying – economy ? Q3 earnings ? The Fed ?
After Yellen’s comment regarding 3% inflation, there is a question about just what is Fed policy, does the Fed have one, or are they winging it as they go along ?
If they are, the Street is going to have to key on other issues and Q4 and CY 2017 earnings would be the first in line. The Street is counting on a sharp rebound in earnings in 2017. If it happens, it will erase most of the current overvaluation of stocks. If the earnings rebound doesn’t develop, the market will head lower, and there is little the Fed can do about it, though they will try.
The Bulls needs to demonstrate leadership and take the DJIA above 18,270 (S&P 500: 2,150), then in a week or so, on above DJIA 18,400 (S&P 500: 2,170).
The stage is being set for a sustainable rally. The Street got what it wants from Yellen. If corporate guidance and projected earnings shows a big rebound in the energy and capital goods sectors, we will get that rally, and it could be big.
We are not seeing evidence right now the bulls are big believers. Without a big thrust of buying, the market looks lower.
A flash-crash ?
It’s still possible. Odds do not favor one, but we should get a better read in the next 3 – 4 days.
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SUPPORT today: DJIA:18,097: S&P 500:2,127; Nasdaq Comp.:5,203
RESISTANCE “today”: DJIA:18,297; S&P 500:2,154; Nasdaq Comp.:5,259
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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 September 16, 2016, a reasonable risk is 18,129 a more extreme risk is 17,908 Near-term upside potential is 18,435.
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ELECTION YEAR PATTERN BEARISH AFTER MARCH
(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.
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 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 Q3, and 2016 earnings questionable with strong U.S. dollar. Forecasts for 2017 still for a gain in S&P 500 earnings of 13.4%. It has been there for months in spite of deteriorating earnings this year. Any downward revision could impact the market significantly.
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Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Stock Trader’s Almanac
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George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
Brooks007read@aol.com
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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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