Correction Starting ?

Investor’s first read – Daily edge before the open
DJIA: 17,897
S&P 500: 2,080
Nasdaq Comp.4,938:
Russell 2000: 1,130
Monday: April 18, 2016 9:07 a.m.
Referring to Sunday’s oil meet in Doha, Friday’s post noted, “It looks like good news is already discounted in the price of oil. Bad news isn’t ! A blow up or continuing uncertainty would hammer stock and commodity markets Monday.”
The big meet of oil ministers from 16 nations in Doha yesterday was a bust. Iran was the sticking point. It did not attend the meeting, stating it needed to reach pre sanction levels first. Saudi Arabia claimed it would not freeze production unless all oil producers froze production.
So here we are, faced with yet another Mid-East crunch, lower oil prices and a stock market that is already on thin ice due to ugly Q1 earnings reports.
A plunge in oil prices may be tempered by a huge reduction in production caused by a labor strike in Kuwait, OPEC’s fourth biggest producer.
Is this the tipping point for the April correction I have expected ?
News is beginning to confirm trouble.
1-U.S. retail sales have been flat for a year and are now turning down.
2-March Vehicle sales turned in the worst performance in 6 and one-half years.
3-The IMF’s semiannual World Economic Outlook trimmed its 2016 growth forecast with downgrades for the U.S., UK, Japan, the Euro area , Brazil and Russia.
4-The failure of oil producers to agree Sunday on its freeze tosses the issue of oil prices into another quagmire.
5- The flow of Q1 earnings will be mostly negative, with little help expected in Q2.
6-The eighth year of a two term presidency tends to be a bummer. This on won’t be different.
7-The S&P 500 sells at 17.8 X trailing earnings. At 26.3 X , Shiller’s P/E is 58% above its historic norm, leaving little wiggle room for the Bulls.
The Fed will do everything possible to avert a sharp drop in stock prices. However, that didn’t prevent chilling August 2015 and January/February plunges.
If the big picture on 2016 earnings (Q’s 1-4) is worse than expected, the market is heading south. Right now, the Street is betting on a rebound in earnings in Q4, though any big percentage jump would be partly due to its comparison with a weak Q4, 2015.
I am not surprised by the inability of the major oil producers to reach a decision in Doha this weekend. The Saudis got their way, as usual.
I am concerned about cracks in the global economic foundations and a pricey stock market. The level of stock prices is really a matter of consensus based on expectations for the future. Selling only 2.5% off its all-time highs, the S&P 500 is in the 7th year of a bull market that has risen 212%. Be very careful.
So far, it looks like the Street is looking beyond Q1 earnings to Q4 when growth will appear to accelerate, mostly owing to a favorable comparison the weak showing in Q4 2015.
Companies will be issuing guidance for Q3 and Q4 from which analysts will issue projections. If revisions are lower across the board, the market will take a hit – higher, another leg up.
FactSet Research’s April 1 forecast revised Q1 earnings down to minus 8.5% (-3.7% ex energy) from a plus 0.8% projected in December. Of 121 company’s Q1 guidance, 94 have issued lower estimates. Currently, estimates for 2016 as a whole vary by source, but the trend appears to be downward revision.
SUPPORT “today”: DJIA:17,763; S&P 500:2,066; Nasdaq Comp.:4,891.
RESISTANCE “today”: DJIA:17,953; S&P 500:2,087; Nasdaq Comp.:4,954.
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 March 31, 2016, a reasonable risk is 17,664 a more extreme risk is 16,560. Near-term upside potential is 18,102
(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.
This supports my December forecast of an ugly January, a rough year as a whole, but with several buying opportunities.
The stock market is constantly adjusting for fundamental, economic, monetary, fiscal, political, psychological and global outlook, moving higher or lower depending on how it is perceived, a process I refer to as seeking a comfort level.
This sifting process is what creates rallies and corrections, bull and bear markets. In seeking a comfort level, the market often hits extremes if only momentarily.
By propping stock prices with verbal hype and changing policy projections, the Fed has denied the market the normal processing of all the other factors that comprise value.
Buyers jump in on Fed hype, and sellers defer action, hanging in as long as the Fed is in there with positive feed.
When an event triggers a sudden break, all that deferred selling hits a market that does not have enough buyers to absorb it, and you get a freefall. Throw in some highly leveraged positions on the wrong side of the market, and you get an horrendous freefall.
With a meltdown looming in 2008/2009 and the S&P 500 down 50% , the Fed had to step in. But, there is no good reason for the Fed to be propping the market now after the S&P 500 has tripled from its bear market lows.
What it is doing is creating a highly vulnerable market, one that can devastate investors if the Fed hype suddenly fails to work.
Freefalls come out of nowhere. Before an investor can respond, markets can be down 3% – 5% en route to a 12% – 20% – 35% plunge.
Like a rogue wave, the next one will strike without warning.
 STATUS OF MARKET: Neutral – but vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 25% – 45%. Consider 75% now
 KEY FACTORS: Outlook for Q1, and 2016 earnings questionable.
Note: Source of weekly economic calendar and good recap of indicators:
**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.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.