Fed’s Yellen to Speak Friday

Investor’s first read – Daily edge before the open
DJIA: 18,552
S&P 500: 2,183
Nasdaq Comp.:5,238
Russell 2000: 1,238
Monday, August 22, 2016 9:18 a.m.
When you shuffle along in this investment environment pretty much assured it is safe to buy long-term bonds and stocks, you should know from experience nirvana never lasts forever, and the picture can change for some unanticipated reason.
Deflation is a bigger danger than inflation. The economy can stumble and tank, yet it seems to regain its balance without falling.
I prefer to dwell on the positive, but have a responsibility to keep investors alert for unhittable sinkers.
The Street is solely focused on Fed policy, nothing else counts – until suddenly it does.
Based on the markets resilience to any whisp of bad news, I suspect most of the Street’s algos are programmed to act and react to the same set of metrics.
The computers have been saying – buy on dips. What is to prevent them from saying sell, all at the same time ? Happened a year ago, and in January.
The problem facing investors is, the market is not indicating anything has changed, so why not leverage up and try for some semblance of a return. It has worked in the past. It even worked in October 2015 and February after the big breaks ?
S&P 500’s Q2 earnings are in the process of chalking up their fifth straight decline, with a drop of 3.2% according to FactSet.com.
Q3 is expected to be its sixth decline, or 0.25% with all of 2016 posting a loss of 0.4%.
Currently, 2017 earnings are expected to post a gain of 13%. Even if that happens, the S&P 500 would be pricey at 17.1 times earnings vs. a 10-year average of 15.9.
This is the second longest bull market in history (90 months) and the economic expansion accompanying it is the third longest (86 months) on record.
The S&P 500 Index is misleading, dominated by big-name stocks. Over the last 12 months, more than half of the 500 stocks have had declines of 20%, the benchmark that comprises a bear market. The mathematical weighting enabled the largest market cap stocks to offset the decline in those stocks.
Sunday, Federal Reserve, Vice Chairman Stanley Fischer warned that a hike in interest rates is still a possibility. His comment comes after three colleagues, Dudley, Lockhart and Williams also warned of a hike last week.
All eyes will be on Fed Chief Janet Yellen who will speak at the Fed’s annual Monetary Policy Symposium this Friday at Jackson Hole, Wyoming.
Look for a mixed open today and a test of support (DJIA: 18,495, S&P 500: 2,172). There is overhead supply at DJIA 18,581 (S&P 500:2,189) that must be overcome.
Most likely, the Street will wait for Yellen’s comments before making any big decision.
SUPPORT “today”: DJIA:18,495; S&P 500:2,172; Nasdaq Comp.:5,209
RESISTANCE “today”: DJIA:18,581; S&P 500:2,189; Nasdaq Comp.:5,251.
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 August 12, 2016, a reasonable risk is 18,501 a more extreme risk is 18,404. Near-term upside potential is 18,808.
This market has defied anything I have ever seen EXCEPT that is, near market tops.
News headlines of new all-time highs attracts interest especially from investors who have not participated in this bull market. Likewise, it is forcing investment professionals (brokers, money managers, hedge funds and newsletter writers) to become more fully invested.
It is characteristic of late bull market behavior to prompt talk of a “New Era.”
I have heard the New Era talk before. It comes on stream when the market hits new highs after a long bull run at a time just about everyone concludes the market simply has to go higher and they better jump on board.
I see fundamental and technical signs that warn of a top, but then I started seeing those three weeks ago. It is a matter of how high is high, and a momentum that is self fulfilling.
Bull markets can reach unthinkable extremes when investors stampede into stocks fearing being left behind.
Then too, fear of total ruin at bear market bottoms can trigger panicky selling as investors scramble to salvage what’s left of a portfolio after a 30% -45% plunge.
Major tops and bottoms are marked by extremes. Savvy investors know this. Even so, it is a challenge for any human to resist the urge to chase running stock prices at unreasonable heights, or get chased out after a harrowing plunge in stock prices.
(So far this is not holding up)
The market is tracking a pattern for presidential election years where an administration is in its second term.* The news is bad.
Historically, these markets have declined in Jan./Feb., rallied in March then topped out in early April, plunged in May with brief rallies in June and August and a plunge into October prior to the election.
 STATUS OF MARKET: Neutral – but very, very vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 45%. Consider 75% now if tolerance for risk is low.
 KEY FACTORS: Outlook for Q2, and 2016 earnings questionable. Fed has market under its spell.
Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Bloomberg.com (Excellent pre-market read)
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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