Fed Lost Its Magic – Market on Its Own

Investor’s first read – Daily edge before the open
DJIA:15,914
S&P 500: 1851
Nasdaq Comp.:4,283
Russell 2000:963
Thursday: February 11, 2016 7:43 a.m.
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A dead cat bounces higher than that. Fedspeak carries no weight anymore – none. Once upon a time, just a hint moved markets.
Fed Chief Janet Yellen addresses Congress at 10 a.m., again today in her semi-annual report on monetary policy.
She does that in face of a plunge in stock prices.
The BIG money was not buying at the turn of the year and is not buying now.
This 13% break happened without one single news event, so it caught the Street and most investors by surprise. The market is down 13%, which is enough to get everyone’s attention, but its potential downside is SCARY !
THE REAL REASON
Again, it is important to emphasize this plunge is the “technical,” undoing of what I have referred to as a “phony” market driven by the Street’s insane preoccupation with what the Fed will do next, and in total disregard for the weighting of core issues that should comprise valuations.
This is what happens when the Street ignores basic fundamentals and keys on one single issue, in this case Fed policy.
For years Fed policy ruled. It no longer does and the Street doesn’t know how to respond. It is rudderless.
Top make matters worse, in addition to negatives (European banking crisis, fears of global recession, Japan, Mid-East, 2016 earnings, and oil), the market is faced with political uncertainty, a lame duck administration, and the potential for more “change” than we have seen in decades.
There is good reason to be bearish on Wall Street in addition to the market. It is once again in the public’s crosshairs.
The DJIA is down 12.7% (S&P 500: 13.2%) from its all-time high. For it to qualify as a bear market, the DJIA must drop to 14,680, the S&P 500 to 1,707. That’s the minimum for a bear market. The 2007 – 2009 bear was down 57%, 2000 – 2002 down 50%
TODAY:
Fed Chief Janet Yellen speaks again this morning, but it would be better if she didn’t. Her comments simply indicate the Fed is clueless and cannot prop the market like it has for years.
The Street doesn’t know what to do without its “blankie.”
There is no one problem that has to go away to turn the market back up.
Left on its own, stock prices are going to have to find a level where big buyers say – “enough.”
Look for a series of sharp sell offs, which if well timed can give traders a chance to scalp a quick profit. Friday or Monday stands to be one of them if the market gets crunched big today.
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SUPPORT “today”: DJIA: 15,371; S&P 500:1,787 ; Nasdaq Comp.:4,137
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ROBO-ADVISORS – Beware !
ROBO-Advisors are getting a lot of press. I didn’t get any call backs last week to answer the few questions I had. But contact with a person is not what they do. A computer algorithm does most of everything, somewhat like what some institutions and HFT managers use. Only a bull market could spawn something as silly as this. As I understand it, these ploys to capture control of your money have really only been offered to the unfortunate public over the last five years, untested.
So what happens in a bear market when portfolios are fast tracking disaster ? Who do you get to hold your hand ? As I understand it – no one !
IMHO, they’ll disappear after the next bear market, but not before leaving a lot of disillusioned investors with crippling losses. This is a tough business –hard work and either fabulous instincts or a lot of experience cuts it. Lots of twists, the unexpected, manipulation and human emotions run amok to deal with, stuff no one can program a computer to anticipate. Again I say, the best computer for this zoo is a well programmed human brain.
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THE MAKING OF A BEAR
Unless triggered by some horrific event, a bear market isn’t obvious at first. It begins with slippage as if it is just another correction in an up trending bull market. But rallies fail to attract enough buyers to reach new highs. Some begin to sell, others remain on the sidelines. Interest fades and bids weaken in face of one disappointment after another – new negatives surface – stocks start to slide – the Street’s optimism wanes, then sours. Fear mounts, then accelerates, as investors start to raise cash. No longer is it heresy to mention the word “bear.” Doomsters re-surface with talk of DOW 6,000. Fear turns to panic. No one, not anyone, wants to buy a stock. Selling intensifies. “If only I sold at a higher level,” investors lament, “I could be buying here.” The selling drives prices lower until one day when no matter how much selling there is, the market doesn’t go lower (capitulation).
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EARNINGS
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.
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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 February 5, 2016, a reasonable risk is 16,018 a more extreme risk is 15,703. Near-term upside potential is 16,497. I took it further computing the level assuming each stock broke done through “last ditch” support and came up with 14,785.
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 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, 2016 earnings
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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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