Countdown: Election, Fed Policy, Q3 Earnings

Investor’s first read – Daily edge before the open
S&P 500: 2,163
Nasdaq Comp.:5,328
Russell 2000: 1,250
Tuesday, October 11, 2016 9:08 a.m.
-The uncertainty created by a dead heat in the race for the presidency.
-Q3 earnings reports in October, which are expected to mark the sixth straight quarterly decline for the S&P 500.
-a downward revision of 2017’s S&P 500 earnings, currently expected to increase 13.1%. The strength of the U.S. dollar stands to adversely impact 2016 and 2017 earnings of multi-nationals, which will make that target more difficult. Oil industry earnings have been crushed over the last two years, punishing the S&P 500 earnings as a group. But, based on $55 WTI oil price projections, the oil industry stands to give back what it took away from the overall earnings for the 500. We’ll see.
-if the Street suddenly realizes Fed doesn’t have an exit strategy, never did.
-a recession in Europe. Numbers starting to stink. Markit flash Eurozone PMI at 20-mo. Low Sept; Germany PMI service sector slowest 16 mo..
Reportedly, three-quarters of UK CEOs surveyed by KPMG are considering relocating HQs due to Brexit. The British pound has been getting pounded, and experienced a flash-crash Oct. 6.
-October madness ! (defies quantification or reason, but happens !)
The Q3 earnings season officially got underway today with Alcoa (AA) reporting $0.32 a share vs estimates for $0.35 a share.. S&P 500 earnings for Q3 are expected to decline 2%, marking the sixth straight quarter of declining earnings.
This shortfall has been expected, and shouldn’t have much impact. What is not expected is if Q4 earnings fail to stabilize, and especially if the Street begins to revise 2017 earnings down from a projected growth rate of 13.1%.
The U.S. dollar has been firming since May, which stands to hurt multinational earnings. While the Street has ignored earnings and their overvaluation by the benchmark S&P 500 for years, opting for full focus on the Fed’s policy on interest rates, that can change if the prospect for an earnings rebound in 2017 vanishes.
Uncertainty over the outcome of the election has not gained the traction I expected it to, and may not with only a month remaining.
There is a possibility of a major move in the market in coming weeks. Yesterday’s strength gives the bulls a slight edge, but this is October.
We are approaching the best six months for owning stocks (Nov. 1 to May 1).*
Today starts on the downside, an opportunity to read just how anxious the bulls are to buy. Yesterday, started off like the market was ready for an upside breakout, but tailed off at the close.
Is the Street beginning to worry about Q3 earnings and earnings over the next 12 months ? Or is it becoming more worried about a November bump in interest rates ?
These are questions that must be given consideration. The market will tell us in coming weeks, but the potential for a sharp move is real.
SUPPORT “today”: DJIA:18,243;S&P 500:2,158;Nasdaq Comp.:5,307
RESISTANCE “today”: DJIA:18,397; S&P 500:2,173; Nasdaq Comp.:5,343
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 September 16, 2016, a reasonable risk is 18,011 a more extreme risk is 17,908 Near-term upside potential is 18,435.
(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 Q3, and 2016 earnings questionable with strong U.S. dollar. Forecasts for 2017 still for a gain in S&P 500 earnings of 13.4%. It has been there for months in spite of deteriorating earnings this year. Any downward revision could impact the market significantly.
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.

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