Crunch Time – Ultimate Test for the Bulls

Investor’s first read – Daily edge before the open
DJIA: 17,425
S&P 500: 2,043
Nasdaq Comp:5,067
Russell 2000: 1,135
Monday: Jan. 4, 2016 9:06 a.m.
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A 7% plunge in China’s Shanghai Composite Index (SHCOMP) triggered circuit breakers forcing the market to be closed overnight. Asian currencies were thrown into turmoil, safe havens sought in bonds and global markets hammered, none the least is the U.S. stock market.
All this reminds the Street that China’s economy does matter.
But other issues bedevil U.S. markets, which have been pricey in face of uncertainty here and abroad.
This bull market, two months short of being 7 years old, has seen a host of uncertainties, and survived. This year will be yet another test.
Unlike last year’s market which was range bound featuring numerous rallies and declined, this year should feature only several plunges and rallies. A bear market depends on whether the market gets hit by new negatives when the market is ready to rebound from one of those sharp declines.
JANUARY’S FORECASTER
The market’s trend in January has an excellent track record for signaling the “general tone” of the market for the year. It’s called the January Barometer (JB) developed by Yale Hirsch (Stock Trader’s Almanac) in 1972. Essentially, the trend of the S&P 500 in January is followed by a like change for the year, though a lot of contrary things can happen between January 31 and December 31 – so beware. This is not a “buy-hold signal if the market is up in January, or a “sell everything” indicator if January is a downer.
The logic behind the JB is that institutions tend to tip their hand as soon as the new year kicks off, buying if strongly bullish, selling if bearish.
The huge drop in China’s stock market prior to the first trading day in U.S. stocks muddies the picture.
TODAY:
The sharp plunge at the open presents institutions with an opportunity to pick up stocks at a discount from last Thursday’s close.
If they were bullish or even neutral going into 2016, they will buy the open, and run stocks back up holding most of the gains from this morning’s lows.
Otherwise, expect a rally failure, a bounce that doesn’t hold with a weak close.
I have been expecting a sell off in January, but wanted to see if the institutions tipped their hand about sentiments for 2016. China muddied that read with its huge plunge in its stock market.
Traders may be able to clip a quick profit buying the open if the S&P 500 is off 30 points before trading begins. Chasing a rally after it has recouped more than Two-thirds of today’s loss at the time (S&P off 12, DJIA off 170) can be risky.
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SUPPORT “today”: DJIA: 16,937; S&P 500:1,986; Nasdaq Comp:4,867.
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NOTE: Support and resistance levels are where I expect the intraday prices of the DJIA, S&P 500 and Nasdaq Comp. to reverse or close. Buyers should be cautious when a resistance level is reached but consider buying when support levels are reached. Sellers should consider taking action when resistance levels are reached and defer selling when support levels are reached. These levels are picked daily and based on my application of technical analysis.
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ECONOMY:
This will be a big week for economic reports, but how much the Street cares now that the Fed has made its decision on interest rates is in doubt. Today, it’s the PMI Manufacturing report (9:45 a.m.); ISM manufacturing report and Construction Spend (10:00). Wednesday we get the ADP Employment report, PMI Services, Factory Orders and the ISM Non-Manufacturing report, Jobless Claims Thursday and the Employment Situation report Friday at 8:30. (SEE: mam.econoday.com for details).
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OIL
I have been writing that 2016 is the year to buy oils. Developments in the Mid-East like the rift between Saudi Arabia, Bahrain, Sudan and the UAE and Iran may stabilize oil prices heading off a climactic washout of oil company stock prices.
The Saudi’s are playing a dangerous game. Too many big hitters getting hurt. Pressure from within out the outside will force them to trigger a price rebound, just like they triggered a plunge.
Whether oil stocks will get hit further depends on Mid-East conflict and whether institutions with a long-term horizon believe they are a bargain and step in.
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ELECTION YEAR MARKETS
Pre-presidential election years have a record of being the best of the four-year election cycle with presidential election years running a close second. But the eighth year of a two-term presidency is the exception with the S&P 500 losing an average of 10.9% going back to 1901.*
This supports my expectation of a correction in January setting the precedent of a volatile year for stocks in 2016.
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MY TECHNICAL ANALYSIS of the 30 DJIA Companies:
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 DJIA “divisor” (0.149677) 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 December 29, 2015, a reasonable risk is 117,209 a more extreme risk is 16,920. Near-term upside potential is 18,056.
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 STATUS OF MARKET: Bullish but “at risk” of a major correction in January.
 OPPORTUNITY: RISK: January plunge possible.
 CASH RESERVE: 25% – 45% depends on tolerance for risk.
 KEY FACTORS: Concern for the number and extent of additional bumps in interest rates by the Fed; strength of economic rebound; Outlook for Q3/Q4 earnings; Stimulus Europe/China a catalyst !!
 CONCLUSION: Fed bump in interest rates now official. While Fed has assured the Street additional bumps will be modest, doubts by some will have an impact.
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Note: Source of economic data
For a weekly economic calendar and good recap of indicators, go to mam.econoday.com.
*Stock Trader’s Almanac
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George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
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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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