Earnings, the Fed, and Oil

Investor’s first read – Daily edge before the open
S&P 500: 1,978
Nasdaq Comp.:4,689
Russell 2000: 1,054
Wednesday: March 2, 2016 9:12 a.m.
Super Tuesday was also a super day for stock prices with the DJIA up 348 points as the markets broke out of its Jan./Feb. base (see “2016 Mirror Image” below).
Super Tuesday has a rep for boosting stock prices if not temporarily. Combine that with the tendency for buying during the first week of the month, and we got a good pop.
Unless reversed by the following factors, the market can push higher into late April, not in a straight line, but more positive than negative.
That is when the market will run into a consistent seasonal tendency to flatten out, or decline.*
Earnings expectations stand to be a big factor in which way the market goes. Earnings are expected to grow again in Q3 and Q4. Any downward revision to that expectation would hammer stocks. But it works both ways. Any upside revisions to 2016 earnings would drive stocks up sharply. The Street should be getting a handle on Q 3 and Q4 this month.
But 2016 is NOT off to a good start. According to S&P IQ earnings for Q1 are now expected to decline6.1% vs. a 1.2% growth rate projected two months ago. Q2 are now projected to decline 1.2% vs. an increase of 4.1% projected two months ago.
Currently, the Street doesn’t care, but that may change when arnings for Q1 start to flow.
The stock market has moved in tandem with oil prices in recent months. While oil prices are still depressed, a global inventory glut will in time limit how high they can go.
The Fed:
On March 15 we should know if the Fed is going to bump rates for the second time in three months. With global markets stabilizing and some economic indicators suggesting the same, the Fed may bump rates.
That in itself is enough to jolt the market, but the angst about how many more are out there this year could be enough to tank the market.
SUPPORT “today”: DJIA:16,979; S&P 500:1,964; Nasdaq Comp. :4,647.
RESISTANCE : “today”: DJIA:17,003; S&P 500:1,994; Nasdaq Comp.:4,726
2016 Mirror Image of Aug./Sept. 2015 ???
Again, I want to note that the pattern of trading over the last two months is a near mirror image of the rebound last October from the big sell off in August.
The August 2015 crunch, 11.4% in five days, was one of those “flash crash” phenoms that occurs when the highly leveraged, quant-driven trading mechanisms gets disjointed.
January’s 12.9% crunch took 14 days and was driven by concern about a host of things – plunging oil prices, earnings, the Fed, economy, Europe, and the election.
A double bottom marked the Aug./Sept. 2015 bottom with a solid rebound to previous highs. The Jan./Feb. bottom has yet to sustain a breakout from its base.

Corporate earnings will rise to the surface in 2016 as the “decider”. The flow of Q4 earnings started with Alcoa’s (AA) report yesterday.
S&P 500 earnings for 2015 will drop some 5.5% (ex-energy – flat). The Street is looking for some 7% growth this year. As of Friday’s close, that works out to a P/E of 14.9 vs a 10-year average of 14.2. 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.
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 February 26, 2016, a reasonable risk is 16,484 a more extreme risk is 16,258. Near-term upside potential is 16,840
 STATUS OF MARKET: Bearish – but trying to turn. Expect volatility
 OPPORTUNITY: RISK: Risk high, but opportunity for traders at lower levels.
 CASH RESERVE: 25% – 45%. Consider 75% now
 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 Q1, and 2016 earnings as a whole.
The Street is counting on a big jump in Q3 and Q4.
Note: Source of economic data
For a weekly economic calendar and good recap of indicators, go to mam.econoday.com.
*Stock Trader’s Almanac – “End of Best Six Months”
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.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.