Earnings in 2016 Critical

Investor’s first read – Daily edge before the open
DJIA:16,346
S&P 500: 1,922
Nasdaq Comp:4,643
Russell 2000: 1,646
Monday: Jan. 11, 2016 9:10 a.m.
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Friday, I warned of two things.
One, not to buy the rally at the open. A short-lived spike got nailed by selling resulting in a drop rally high-to-low of 337 DJIA points.
I also warned that with global markets plunging, expect the Fed to dispatch a bunch of its high-placed spokes-persons to temper the carnage. Today Fed’s Lockhart and Kaplan speak, Tuesday, it’s Lacker, Wednesday Rosengren and Evans, Thursday it’s Bullard and Friday, Dudley. See what I mean.
This can do far more harm than good. It interferes with the market’s genuine effort to find a comfort level that discounts a host of negatives and uncertainties. This can result in drawing investors off the sidelines prematurely and that can result in losses. I can see the need when investor sentiment is devastated and investors are selling at fire-sale prices, but when further downside is possible, it’s a bad idea.
It’s safe to assume this 7-day, 1,400-point plunge in the DJIA is a test of the August/September lows (DJIA 15,370; S&P 500: 1,870; Nasdaq Comp.:4,292) is in the process. The major market averages haven’t gotten there yet, but the IBD Mutual Funs Index of 19 funds “has.”
How bad can it get ? Has a bear market begun ?
It “is” the down January and the beginning of the rough year I have expected for six weeks. That’s the bad news, the good news is – there will be several good buying junctures – be patient, because false rallies will intervene.
There are a number of “won’t go away anytime soon” negatives here and abroad to give bulls and bears something to chew on, but corporate earnings will rise to the surface in 2016 as the decider. Q4 earnings will start to flow today with Alcoa’s (AA) report. (note: Alcoa just got a $1.5 bn GE contract).
S&P 500 earnings for 2015 will drop some 5.5% (ex-energy – flat). The Street is looking for some 7% growth this year. Projections were for growth of 8% last year and ended with zilch for the year, though the market held up well considering.
Stock prices won’t hold up as well if revisions start to plunge again this year. Expect a bear market if they do, or it is perceived that they will.
TODAY:
The futures are trading up prior to the open indicating institutional interest in lower prices.
As noted above, the Fed will be pumping out optimism this week, perhaps reference to fewer bumps in interest rates than expected. Definitely, confidence that the economy is tracking a positive year.
Another rally failure is possible today, but the Feds could extend the rally for a few days with its hype.
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SUPPORT “today”: A break below Friday’s close DJIA:16,346; S&P 500:1,922; Nasdaq Comp:4,643 would signal another leg down.
RESISTANCE ‘today”: DJIA: 16,471; S&P 500:1,937; Nasdaq Comp.:4,679.
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THE FED !!!!!!!!!!!!!!!!!!!!!!!!
Expect the Fed to trot out a few of its “spokes-persons” to stem the carnage. Expect these Fed messengers to say, “In light of the market turmoil, we plan to delay any further increase in interest rates until conditions stabilize.” Re-assuring commentary would trigger a sharp, but temporary rally, which would trigger a surge of buying only to be followed by another leg down. Sound sleeping traders with deep pockets can play this kind of rally, but the rally would be a bear trap, unless it comes out of an incredibly deep selling climax well below current levels.

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OIL : Watch for huge Selling Climax (SOON !)
I have been writing that 2016 is the year to buy oils.
For weeks, I have alerted readers to expect oil stocks to make a bottom in 2016, but have not seen the panic conditions that would signal capitulation. I am looking for a selling climax that depresses this group enough to attract the BIG money. With some help from the weakness in the stock market, and continued outpouring of gloom, a panic may occur, a high-volume, one-day spike down that closes on the upside.
However, just one word about production cuts by a well-placed official and the bottom “is in.”
The Saudi’s are playing a dangerous game. Too many big hitters getting hurt. Pressure from within or the outside will force them to trigger a price rebound, just like they triggered a plunge.

Panic prices selected oil stocks: Exxon (XOM): 67; Chevron (CVX): 74: Market sector oil service ETF (OIH): 21; SPDR S&P O&G ETF (XOP): 24; Vanguard energy ETF (VDE): 69; Energy select SPDR ETF (XLE): 50. These are “technical” projections only and subject to change as conditions in the oil industry and stock market unfold. These prices are 12% – 16% below the current market and may never be hit. Under panic conditions, the prices at a turn are only hit momentarily. Orders must be placed below the market in advance to catch the lows. Obviously, this is only for investors who can afford the risk.
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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 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 January 7, 2016, a reasonable risk is 15,901 a more extreme risk is 15,621. Near-term upside potential is 16,698
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 STATUS OF MARKET: Bearish – buying opportunity in mini-crash scenario
 OPPORTUNITY: RISK: Risk high, but opportunity for traders at lower levels.
 CASH RESERVE: 25% – 45% depends on tolerance for risk.
 KEY FACTORS: Fear taking hold. 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: Bear market (20% drop S&P 500) likely
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Note: Source of economic data
For a weekly economic calendar and good recap of indicators, go to mam.econoday.com.
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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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