Churning Prior to a Big Move

Investor’s first read – Daily edge before the open
DJIA: 18,456
S&P 500: 2,170
Nasdaq Comp.:5,154
Russell 2000: 1,217
Friday, July 29, 2016 9:08 a.m.
The Federal Open Market Committee (FOMC) decided to stick with 0.25% – 0.50% for its benchmark rate, though was more upbeat than a month ago, citing a strong labor market and reduced risk of economic disruption abroad as a result of Britain’s intent to leave the European Union (EU).
This raised speculation of a rate increase at its September 21 meeting.
But Q2 GDP was reported today. The economy grew only 1.2% (annual rate) half of what economists had been estimating.
Anyone expecting a September rate hike can go back to the drawing board.
Yesterday’s reports were mixed. The S&P Case-Shiller Home prices Index for May was flat, but New Home Sales for June sizzled. The Richmond Fed Mfg. Index for July jumped smartly, but PMI Services for July slipped. Consumer Confidence held solid, but the State Street Investor Confidence tumbled. Wednesday: Durable Goods Orders for June were down sharply, Pending Home Sales for June were flat. Today: Imports exceeded imports in June for the International Trade Index, Jobless Claims were up a modest 14,000 for the July 23d week Kansas City Fed Index: July’s decrease reversed June’s advance. Today: 2nd Qtr GDP grew at a 1.2% annual rate., Chicago PMI (9:45), Consumer Sentiment (10:00).
The S&P 500 is pricey at 19.4 times for trailing earnings and 17.1 times on forward earnings. This compares with a 10-year average of 14.4 times and a 2006-2007 (pre-bear) multiple of 16-17.
Right now the market is comfortable with hopes that the gap between normal and pricey can be closed next year when earnings for the S&P are expected to rebound 13%. After five straight quarters of lower earnings, the market cannot hold these levels if the Street begins to doubt 2017 will improve significantly.
The market will be under pressure at the open following the Q2 GDP report, which suggests a stall in a slow growing economy, not from consumer spending, but from the corporate side.
Q2 earnings are mixed with positive and negative surprises containing stock prices within a narrow trading channel.
The S&P 500 is up 9.2% from its June 27 low, the Nasdaq Comp. up 12.7%, even in face of another down quarterly earnings report.
With long-bond interest rates at 1.51%, who can blame investors for seeking a return in yield stocks or in growth stocks via capital appreciation.
Investors seem a little too unconcerned with the risks that accompany a late-stage bull market faced with uncertainties non the least of which is a presidential election preceded by very negative and divisive campaigning.
The market has demonstrated its new normal now is, if it is going to go down, it will do so in a hurry, as it did in August 2015 and January this year.
SUPPORT “today” DJIA:18,380 ; S&P 500:2,162; Nasdaq Comp.:5,141.
RESISTANCE “today” DJIA:18,503; S&P 500:2,175; Nasdaq Comp.:5,159.
This market has defied anything I have ever seen EXCEPT that is, near market tops.
News headlines of new all-time highs attracts interest especially from investors who have not participated in this bull market. Likewise, it is forcing investment professionals (brokers, money managers, hedge funds and newsletter writers) to become more fully invested.
It is characteristic of late bull market behavior to prompt talk of a “New Era.”
I have heard the New Era talk before. It comes on stream when the market hits new highs after a long bull run at a time just about everyone concludes the market simply has to go higher and they better jump on board.
I see fundamental and technical signs that warn of a top, but then I started seeing those three weeks ago. It is a matter of how high is high, and a momentum that is self fulfilling.
Bull markets can reach unthinkable extremes when investors stampede into stocks fearing being left behind.
Then too, fear of total ruin at bear market bottoms can trigger panicky selling as investors scramble to salvage what’s left of a portfolio after a 30% -45% plunge.
Major tops and bottoms are marked by extremes. Savvy investors know this. Even so, it is a challenge for any human to resist the urge to chase running stock prices at unreasonable heights, or get chased out after a harrowing plunge in stock prices.

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 23, 2016, a reasonable risk is 18,476 a more extreme risk is 18,421c. Near-term upside potential is 18,828.
(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.
 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:
* (Excellent pre-market read)
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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