Bulls Still Hanging Tough, but…….

Investor’s first read – Daily edge before the open
DJIA: 17,840
S&P 500: 2,088
Nasdaq Comp.4,822:
Russell 2000: 1,139
Wednesday, July 6, 2016 9:02 a.m.
The Street has second thoughts about its blasé attitude about Brexit last week, and rumors of Frexit, Swexit, Itexit, Denexit, etc. haven’t even surfaced yet, though after watching what is happening in Britain may discourage another country from exiting the EU.
The big news is long-term interest rates. Ten-year governments are hitting all-time lows around the globe with the Us 10-year at 1.33%, U.K. 0.72%, Germany 0.19%, France 0.11%, Japan 0.27%, Hong Kong 0,86%.
CHASING YIELD – wherever it can find it
This policy and Brexit’s flight to safety has depressed the 10-year U.S. Treasury yield yields 1.33%.
Buying bonds under these conditions carries a huge risk, knowing how fickle the Fed has been. One reference to rate hikes by one of its Governors out on the speakers’ circuit, or a rumor the Brits won’t exit after all and whoosh, down goes the price of long-term bonds.
Record low interest rates has left money managers little choice but to buy blue chip stocks yielding yields north of 2%, and part of the buying in recent months has been just that.
But that alone won’t prop the market if the Street factors in Q2 earnings which will be much lower than projected three months ago, or the uncertainties arising of the November elections.
What’s more, a stronger U.S. dollar stands to adversely impact Q3 and Q4, S&P 500 earnings, which the Street was counting on to justify these prices.
Earnings projections for Q2 call for a drop of 5.3% vs. an estimate of a drop of 2.8% three months ago. While oil and related industries account for much of this decline, nine sectors have lower growth rates now than at Mar.31. This would bring the P/E for the S&P 500 to 16.4 compared to a 5-year average on 14.6 (data FactSet.com). A Q2 decline would be the first time Y/Y earnings have declined five consecutive quarters since Q3 2008 – Q3 2009, the Great Recession.
Earnings will be released in coming weeks. Along with that, the Street will have to deal with revisions of future earnings and corporate guidance. Expect those to be lower than projected.
Yesterday’s and today’s decline can be taken as a correction to the sharp rebound last week that erased the Brexit losses. This correction should hold generally above DJIA 17,600 (S&P 500: 2,060) this week.
The attempt to rally after this correction will be very telling. There are just too many negatives out there that the market has not factored in to not have a sizable cash reserve. Obviously, the Street’s computers aren’t programmed to acknowledge them, or the market would trade lower.
At some point that will happen.
SUPPORT “today”: DJIA:17,698, S&P 500:2,078; Nasdaq Comp.:4,781
RESISTANCE “today” DJIA:17,934; S&P 500:2,097; Nasdaq Comp.:4,855.
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 July 1, 2016, a reasonable risk is 17,798 a more extreme risk is 16,833. Near-term upside potential is 18,120.
(I will repeat this regularly to keep readers aware of the potential for an April correction)
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.
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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