Fed Wants to Micromanage Market Again ?

Investor’s first read – Daily edge before the open
DJIA: 19,792
S&P 500: 2,253
Nasdaq Com.:5,436
Russell 2000:1,355
Thursday, December 15, 2016 9:06 a.m.
Year-end activity tends to be choppy. Stocks that should rise tend to stall, stocks that should drop tend to rise, all as a result of portfolio window dressing by institutions and decisions for tax purposes. This year-end may be different, with so much scrambling to get on board for what is expected to be a good 2017.
As a result of all this maneuvering before year-end, poor performers during the year tend to come under extreme selling pressure in mid-December as investors lock in losses to offset gains. Many rebound from oversold conditions in the new year.
Gilead Sciences (GILD: $74.84), a biopharmaceutical company, is a good example. Down 27% from its April high, Gild bounced $1.84 (2.5% yesterday after posting a 2016 low four days ago at $70.83. The buying could be investors looking out to a better year in 2017, or it could be short covering, or a combination of both. The stock sports a number of buy recommendations on the Street.
The post-election up-move of DJIA 8.4%, S&P 500: +5.7%, Nasdaq Comp.: +5.2%, and Russell 2000: +13.8%, is pure speculation on Mr. Trump’s and a Republican Congress’s ability to reduce taxes, lift regs. and spend big on infrastructure and the military.
Anything to delay or thwart those plans will trigger an ugly correction.
The Fed did as expected, it raised its benchmark rate to a range of 0.5 to 0.75 percent from 0.25 to 0.5 percent.
The announcement triggered a sharp drop in the market, which was followed by a rally, which ran into a wall when Fed Chief Janet Yellen suggested the possibility of three rate increases in 2017. She implied the swing factor would be fiscal spending, which with what we know now is at the heart of President-elect Trump’s plans.
In recent posts, I noted that the Street pretty much accepted a rate increase, but I went on to warn that they may not be prepared for multiple rate increases in 2017, and to expect retaliation from Trump.
So, is the Fed back in the driver’s seat ?
What this market does not need is more micro-managing by the Fed., but that’s what I am hearing based on Yellen’s comments yesterday. One year ago, the Fed forecast as many as three bumps in its rate for 2016, and we got one. Throughout the year, we heard conflicting comments from its Governors about the timing of a rate increase, which serves to create volatility and a lot of unnecessary uncertainty. Enough ! Let the market trade freely !
So far, this rally has been all about expectations, with no negatives to test its sustainability.
We got one test yesterday with Fed comments about 2017 rate increases, which stopped the post-election rally in its tracks.
But “fever” is hard to contain once launched. Today’s market action will indicate just how hot the fever is. It will take more than Fedspeak to cool it down.
SUPPORT “today”: DJIA:19,651; S&P 500:2,237; Nasdaq Comp.:5,407
RESISTANCE “today”:DJIA:19,876;S&P 500:2,267;Nasdaq Comp.:5,461
Corporate earnings.
Factset now sees Q3 earnings for the S&P 500 up 3.0%. On Sept. 30, its projection was for a decline of 2.2%. Q4 is projected at a gain of 5.2%, 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 17.1x, which compares with a 10-year average P/E of 14.3x.
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 than 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 18.1% 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 December 14, a reasonable risk is 19,713 a more extreme risk is 19,657 Near-term upside potential is 20,123
 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: mam.econoday.com.
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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