Don’t Chase a FOMC Minutes Rally

Investor’s first read – Daily edge before the open
DJIA:18,128
S&P 500: 2,136
Nasdaq Comp.:5,246
Russell 2000: 1,227
Wednesday, October 12, 2016 9:08 a.m.
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WHAT COULD HURT THE MARKET
-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. After a four day rout, the British pound rebounded after P.M. May agreed to give Parliament a vote on her Brexit plan.
-October madness ! (defies quantification or reason, but happens !)
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Q3 EARNINGS
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.
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TODAY
The market finally spoke, not mincing its words. Suddenly, it is not just the Fed, but other issues that are spooking the Street.

The minutes from last month’s FOMC meeting will be released at 2 o’clock today (no press conference), and may suggest an big increase in support for a bump in rates in December, maybe November 2 !!
Then too, it may have just dawned on the Street that the Republicans may lose control of Congress, not just the presidency.
And of course, there are Q3 earnings (see above), which are expected to be down for the sixth straight quarter. This has been known for nine months, but it may just be sinking in. What’s more, the Street may now be worrying about 2017 and an expected earnings rebound of close to 13%.
These issues spell uncertainty, as well as trouble if the cards fall in that direction.
Regardless, yesterday’s market action was technically, UGLY !
While we are approaching the best six months for owning stocks (Nov. 1 to May 1),* October is known for doling out excruciating pain before that six month period is launched.
Expect a soft open, but be alert for a rebound if the Street senses September’s FOMC minutes reflect ease rather than tightening. A quarter of a point bump in rates should not toss the economy into a tailspin, but it is the perception of further increases that will worry the Street.
Yield stocks and long-term bond prices have taken hits, suggesting the Street expects a bump in rates by December.
Yesterday’s plunge shattered an attempt to take a run at old highs, in fact it put a lid on any near-term advance at DJIA 18,400 (S&P 500:2,170).
Expect volatility. We have had one-two day downdrafts like yesterday’s before only to be followed by sharp rebounds.
The Fed minutes at 2 o’clock today may spark a brief rally – don’t chase the rally. Odds favor a rally failure and another plunge in prices.
We will not know the outcome of the election or Q3 earnings for a month.
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SUPPORT “today”: DJIA: 18,017;S&P 500:2,121;Nasdaq Comp.:5,211
RESISTANCE “today”: DJIA:18,173; S&P 500:2,142; Nasdaq Comp.:5,261
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NEW PROJECTION:
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 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.
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ELECTION YEAR PATTERN BEARISH AFTER MARCH
(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.
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 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.
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Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Stock Trader’s Almanac
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George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
Brooks007read@aol.com
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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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