Dividend Stocks Driving the Market

Investor’s first read – Daily edge before the open
DJIA: 18,003
S&P 500: 2,091
Nasdaq Comp.4,906:
Russell 2000: 1,146
Monday: April 25, 2016 9:06 a.m.
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.
My March 31 “Technical Analysis of the 30 DJIA Companies” (DJIA: 17,685) called for an upside potential of 18,102. That was hit last Tuesday requiring me to update the computation (see below). The new upside is 18,340. Interesting ! The all-time high for the DJIA is 18,351.
That is possible since the U.S. dollar has been trending down, indicating a more favorable environment for exporters and companies with significant global business.
But something else is afoot here, which has been driving prices up. Starting with the rebound January 20 from the worst January plunge in 75 years, stocks paying attractive dividends became the darlings of the Street.
Throughout 2015, an index of dividend paying stocks tracked the same path as the S&P 500 and tech stocks, but suddenly diverged in January and have outperformed ever since.
The reason – the flip-flop in Fed policy in January from an expected four rate increases in 2016 to two, if that. The Street is assuming higher rates won’t be coming anytime soon and is seeking yield in dividend payers, they aren’t going to get it in fixed income with the 10-year treasury yielding 1.77 percent.
As a result, many yield stocks trade at premiums to historical norm. As long as they notch up, fine. It should be remembered that the price of a stock is automatically decreased by the amount of the dividend when the stock goes ex-dividend (when the company cuts a check, transferring money from its coffers to the shareholder.
Then too, if these stocks are now trading at a premium, what happens if the economy picks up and the Fed begins to bump rates up ? These stocks will correct back to normal valuations a drop in valuation that may erase much of the amount of dividends paid.
The FOMC meets today but no press conference is scheduled for Wednesday, so any action on rates is next to zero.
Dividend paying stocks power the DJIA, so my upside of DJIA 18,340 is possible if the Street keeps buying them. The all-time high for the DJIA is 18,351. Breaking that would give the BIG money a chance to unload stocks as the press headlines generate a lot of volume reporting the market hit a new all-time high.
SUPPORT “today”: DJIA:17,749; S&P 500:2,085; Nasdaq Comp.:4,887.
RESISTANCE “today”: DJIA:18,083; S&P 500:2,101; Nasdaq Comp.:4,929.
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. 22, 2016, a reasonable risk is 17,792 a more extreme risk is 17,634. Near-term upside potential is 18,340.
Seven stocks took sharp hits last week. These are “solid-sleeper” blue chip stocks !
Visa (V)
Travelers (TRV)
Coca Cola (KO)
Microsoft (MSFT)
Procter Gamble (PG)
Verizon (VZ)
All had positive chart patterns before reversals, and should be considered a warning sign that even the big blues are vulnerable.

(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 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.
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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