Burden of Proof Still on Bulls

Investor’s first read – Daily edge before the open
DJIA: 17,760
S&P 500:2,066
Nasdaq Comp.:4,775
Russell 2000: 1,116
Tuesday, May 17, 2016 8:44 a.m.
The bulls stepped in to head off a break down through support levels yesterday, though the buying was more in response to a surge in oil prices and relief abroad that a poll showed it was likely the U.K. would not exit the European Union.
Worth repeating – One big buyer appears to have backed off. According to Birinyi Associates, corporate buy backs have dropped sharply. After repurchasing trillions of dollars of their own stock over the last five years, repurchases have slipped 38 percent in the last four months, the biggest decline since 2009 (when they should have been buying !).
Wouldn’t the economy have been better served if some of that money was spent on R&D, employee training and plant and equipment upgrade ?
Okay, fewer shares outstanding helps the bottom line, but so does future planning. What’s more, the markets opinion of a share’s price varies enormously over time, depending on optimism/pessimism, economies, Fed policy, international events. There is no guarantee slightly higher earnings per share will result in a higher price for a stock. IMHO, not as much as well spent money on the future.
This concerns me. There is a big price to pay for too much focus on short-term curb appeal. Much of a stock’s price is based on forward thinking, what will this stock be fundamentally worth a year from now, three years from now ?
Five days ago, we had a burst of buying, which looked pretty good, but the market ran into a wall the following day with three days of selling.
The bulls stepped in yesterday, but it will take more than one day to reverse a weakening pattern. The bulls must drive the DJIA above 17,934 (S&P 500: 2,084) to gain the edge.
SUPPORT “today”: DJIA:17,621; S&P 500:2,056; Nasdaq Comp.:4,744.
RESISTANCE “today”: DJIA:17,834; S&P 500:2,077; Nasdaq Comp.:4,801.
The Fed: Shortly, the Street will begin to worry about a June bump in interest rates. The FOMC reports its minutes from its meeting tomorrow at 2:00.
Earnings: Q1 earnings were a smidge better than forecast. Initially, it appeared the Street was relieved, but weakness has been creeping in, suggesting something else is calling the shots – Try uncertainty, something the Street never dealt well with. Political: A big part of that uncertainty has to be political.
Seasonal: Eighth year of two-term presidential cycle usually bad starting April/May. Worst six months of year is historically May 1 to November 1.* Phenom referred to as “Sell in May and Go Away.” The two patterns combined spell trouble. Note: Significant rallies have occurred between May and November, testing the validity of this bromide. No indicator is bullet proof.
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 Apr. 28, 2016, a reasonable risk is 17,661 a more extreme risk is 17,374. Near-term upside potential is 18,039.
(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.
The S&P 500 is in its 8th year of a bull market, selling at 17.8 X earnings, only 2.5% off its all-time highs, after a 212% bull rise.
Corrections started in spring in each of the last six years, the biggest being 19.8% in 2011, and smallest 2.3% in 2,014.
They started: 2010 (Apr. 26), 2011(May 2), 2012 (May 1), 2013 (May 22), 2014 ( May 13), 2 015 (May 15). The 2014 correction was insignificant, the 2015 more of a trading peak that trended sideways-to-down before the August flash crash.
So far, Q1 earnings are mixed-to-slightly better than projected. The key will be guidance and projections for Q3 and Q4.
 STATUS OF MARKET: Neutral – but vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 25% – 45%. Consider 75% now if tolerance for risk is low.
 KEY FACTORS: Outlook for Q1, and 2016 earnings questionable. Fed has market under its spell.
Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Stock Trader’s Almanac
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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