Economy Gaining Traction

Investor’s first read – Daily edge before the open
DJIA: 19,216
S&P 500: 2,204
Nasdaq Com.:5,308
Russell 2000:1,337
Tuesday, December 6, 2016 9:03 a.m.
Hope can empower people to get through tough times. In the stock market it works both ways. Hope that things will get better may encourage investors to step in during the late stages of a bear market. Hope of yet better things to come can drive investors to rush in in the late stages of a bull market, even when stocks are overpriced.
What does it take to shut speculative fever down ? If it was unjustified in the first place, that will do it. If it jacks stock prices up to unreasonable levels, a correction of stocks (and fever) will take place. Breaking news contrary to what sparked the speculation can dampen it. Most likely, it will have to run its course.
That seems to be the case today. The Republicans are in total control and should be able to implement most of the policies it has announced so far. Overreach can be a problem in two years when Congress comes up for re-election, but a lot can happen in the stock market in the interim.
No one wants to be left behind when stocks are running fast and furious. The “lure” for quick profits is simply too irresistible.
Corporate earnings.
Factset now sees Q3 earnings for the S&P 500 up 3.2%. On Sept. 30, its projection was for a decline of 2.2%. Q4 is projected at a gain of 3.3%, the year projected to come in at plus 0.1%. Earnings for 2017 are expected to increase 11.4%. Currently, the P/E based on 12 months out is 16.8x, which compares with a 10-year average P/E of 14.3x.
The Fed will meet next week to announce a decision to bump, or not bump, interest rates higher. Currently, the Street could care less.
The economy has been accelerating in recent weeks, without government stimulus. Both the PMI and ISM Non-Mfg. indices rose smartly yesterday. Both are broad based surveys. The PMI is of 400 purchase managers, the ISM is of 375 firms engaged in non-manufacturing industries.
This confirms my belief that a solid economic base exists for all the extra stimulus that the Trump administration plans to employ.
This suggests the potential for a huge surge in the economy and stock market before a bear market sets in.
Unfortunately, once a bear market gains traction, there will be no tools to trigger a recovery by the Fed and government. However, that day can be well off, clearly beyond memory of my warning here (couple months for some of us, longer for the younger set).
There is little to stop a rise in prices today. Granted, information that the Trump administration won’t nearly accomplish its goals of tax cuts and spending would slow the market down, but where could that come from at this point ? It’s all still an unknown.
SUPPORT “today”: DJIA:19,167; S&P 500:2,198; Nasdaq Comp.:5,268
RESISTANCE “today”:DJIA:19,267;S&P 500:2,211;Nasdaq Comp.:5,326
The six months between November 1 and May 1, tend to outperform the six months between May 1 and November 1, labelled the “Best Six Months” by the Stock Trader’s Almanac which began tracking the pattern in 1986.
What could be better, promises of lower corporate taxes, less oversight, and BIG government spend on top of a sneaky strong economy ?
That’s what it looks like at this point in time. One thing about the stock market, it loves pie in the sky.
How so ?
Because it defies quantification, or at least until the truth is known. You see, this is more about human nature (greed, fear) and less about reality.
Really, a stock’s price is merely a matter of opinion, which is based on confidence or lack thereof.
This could be the grandest of all bull markets. It has a good start, up 231% in 7-1/2 years. It probably has a lot further to go, so long as the Street salivates over the prospects of a corporate windfall in coming years, and nothing gets in the way to prevent it.
When the end comes, no one will believe the few who warn of it, in fact, they will despise such seers for raining on their parade, despise them even more when the market crashes.
Like I said, it is all about human nature.
iShares 20-Year Treasury ETF down 14% in 4 months
Long-term bonds have gotten hammered in the last three months. The iShares 20-yr U.S. treasury bond ETF has lost 16.1% since July. That’s nearly 8 times the yield an investor expected over 12 months. Obviously, bonds can be risky. Let’s not forget the name of the game is to buy low and sell high, which applies to long bonds as well as stocks.
A survey of economists reported by Bloomberg yesterday calls for U.S. inflation to surpass the Fed’s target in every quarter of 2017, which if even half true should depress long-term bonds even more.
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 November 27, 2016, a reasonable risk is 18,556 a more extreme risk is 18,837 Near-term upside potential is 19,556
 OPPORTUNITY: RISK: Selective opportunity ! Risk is reality at some point
 CASH RESERVE: 25% – 35%.
 KEY FACTORS: Speculative fever driven by expectations of tax cuts, lifting of regs., and lots of money dumped on economy.
Note: Source of weekly economic calendar and good recap of indicators:
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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