Easy Does It ! January Could Get Ugly

Investor’s first read – Daily edge before the open
S&P 500: 2,043
Nasdaq Comp:4,995
Russell 2000: 1,131
Wednesday: Dec. 16, 2015 8:56 a.m.
Look for a rally at the open today, then a sharp sell off this afternoon as institutions use today’s buying to wrap up their year-end selling.
I think institutions have stocks to sell and stocks to buy based on action today on interest rates. They need a decision by the Fed first before they can act, ergo a host of both selling and buying in coming days.
The buying should ultimately override the selling in coming days, leading to a year-end rally of sorts in face of a lot of forecasts for 2016, most positive.
I don’t believe in annual forecasts. Too many things happen within a 12-month span, but I am worried about January.
I expect, odds are good for the market to top out during the first week in January 2016, kicking off a correction of 8% – 14%.
I don’t know now whether a decline of that magnitude will turn into a bear market. Unfolding events will determine that.
A declining market before year-end would blunt the negative impact of a January decline with stabilization sometime in late January and February.
The Street has waited and waited for a decision by the Fed on interest rates. While the Empire State Manufacturing Index reported yesterday reflects economic weakness in manufacturing, today’s Housing Starts suggests (Up 10%) indicates that sector of the economy is alive.
If the Fed postpones a decision (unlikely), look for a brief rally, then a nasty plunge of 350 – 450 DJIA points. Postponement would be unsettling and imply the Fed is clueless.
NOTE: Quadruple Witching Friday teams up with the complexities of December this week, as if there wasn’t enough to consider. Q-Witch occurs four times a year (Mar.,June, Sept. and Dec.) and is when index futures, index options, stock options and stock futures expire on the same day. The event has the potential to disrupt trading.

SUPPORT “today”: DJIA:17,373; S&P 500:2,025; Nasdaq Comp.:4,952.
RESISTANCE “today”:DJIA: 17,693; S&P 500:2,063; Nasdaq Comp.:5,042.
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.
OIL (Doubt we have seen lows – depends a lot on the US dollar)
The energy sector is down 20% year-to-date, forecasts are for lower prices and no rebound. I can see a selling climax in this sector at lower levels, but the ingredients are there. The sector will bottom out well before any news of stabilization. Beware of false rallies, one-day affairs that look like the turn, but yield to another leg down.
Right now some traders may be tempted to catch the falling knife. There will come a point when no one in hell would even think of buying anything to do with oil, that’s when they are a buy.
Hey, it’s coming !
We are seeing a lot of bad press on oil – $30, low $20s. The big names are probing levels not seen in 5 years, and before that 2005. An institution with a 5 – 10 – 15 year horizon has no reason not to be buying, so they will be in there ahead of the ultimate low.
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.
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 11, 2015, a reasonable risk is 17,023 a more extreme risk is 16,643. Near-term upside potential is 17,611.
 STATUS OF MARKET: Bullish but “at risk” of a major correction in January.
 OPPORTUNITY: RISK: Risk increases with higher market, but light on the Street is GREEN in spite of negatives.
 CASH RESERVE: 25% – 45% depends on tolerance for risk.
 KEY FACTORS: Fed decision on rates; strength of economic rebound; Outlook for Q3/Q4 earnings; Stimulus Europe/China a catalyst !!
 CONCLUSION: Suddenly, odds of a December bump up in interest rates has increased dramatically. Over the years, the market has sold off when it appeared that an increase was imminent. It did not do so after the announcement Friday, but did on Monday as the Street began projecting the timing of subsequent rate increases in 2016 – 2017.
Note: Source of economic data
For a weekly economic calendar and good recap of indicators, go to mam.econoday.com.
*Stock Trader’s Almanac
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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