Bulls Need Big News – Pronto

Investor’s first read – Daily edge before the open
DJIA:15,973
S&P 500: 1,861
Nasdaq Comp4,337.:
Russell 2000:971
Monday: February 15, 2016 8:53 a.m.
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This rally is normal. Last Thursday I said to look for a series of sell offs, which if well-timed can give traders a chance to scalp a quick profit. I added Friday or Monday (??) seems to be one of them if the market gets crunched big today. It got crunched big, but the rally started that day, gained traction Friday and will jump out big at the open today.
We’ll give Fed Chief Janet Yellen half credit for the reversal, and of course the rebound in oil prices. The latter got further impetus from talks over the weekend between Saudi Arabia and Russia to freeze (not cut) production.
Finally, markets here are getting a boost from a rally in European Stocks Monday while the market was closed here for Presidents’ Day. Stocks abroad were rebounding from levels not seen since 3013 and reflected a renewed confidence central banks there would employ whatever stimulus was required to generate economic recovery.
THIS IS A VERY IMPORTANT JUNCTURE. We have the appearance of a double bottom in the DJIA and S&P 500 after rebounding from the January 20 lows. The Nasdaq Comp. and Russell 2000 rebounded after breaking the January lows.
Today will open strong. For this rebound to have legs it desperately needs good news, first on 2016 earnings guidance, second on the economy. There are some signs both are struggling.
If earnings are to grow impressively, it will take a surge in Q3 and Q4 to do it. The manufacturing inventory to sales ratio is rising sharply. If sales don’t pick up, there will be a lot of inventory hangover to work through this year, not good for manufacturing, which some think is in a recession.
TODAY:
I agree with a bounce here, but am wary how long it will last. A rally failure would hurt an already weak bull case, could even trigger another leg down.
Historically, stock markets turn down ahead of the onset of a recession, the lead time varying between two and 12 months.
The plunge in the market this year is telling us something is out of whack, to be alert for the unknown, or worsening of the known.
The bulls will be challenged to wade through a lot of selling in route to a climb back to last year’s highs (DJIA: 18,351; S&P 500: 2,134; Nasdaq Comp.: 5,231).
I think they will give it a good try, but get gunned down before or slightly above the Feb. highs (DJIA: 16,510; S&P 500:1,947; Nasdaq Comp.: 4,636).This is a DANGEROUS market.
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RESISTANCE “today”: DJIA:16,213 ; S&P 500:1,889 ; Nasdaq Comp.:4,398
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THE MAKING OF A BEAR
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).
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 12, 2016, a reasonable risk is 15,854 a more extreme risk is 15,738. Near-term upside potential is 16,388. The abrupt change here is due to last week’s sharp rebound.
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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, 2016 earnings
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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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