Greenstick Fractures – Market, Economy

Investor’s first read – Daily edge before the open
DJIA: 17,773
S&P 500:2,065
Nasdaq Comp.:4,775
Russell 2000: 1,130
Monday, May 2, 2016 9:08 a.m.
We are entering a seasonally unfriendly six months period with the S&P 500 up 14% in 10 weeks. This will be a big week for economic indicators, which hopefully will shed more light on whether the economy is weakening after last weeks dismal Q1 GDP report.
Today, we get the PMI mfg. report (9:45 a.m.), ISM mfg. report and Construction Spending (10:00 a.m.). The ADP Employment report comes at 8:15 a.m. Wednesday and Employment Situation report Friday at 8:30).
Economy: mixed-to-soft. The bear market lead time for recessions is 6 – 12 months.
The Fed: is micromanaging the price level of market too much, allowing a buildup of uncorrected negatives, increasing risk of sharp plunge triggered by unexpected news.
Earnings: The Street is betting on a sharp earnings rebound in Q4 and especially 2017 (+14%). P/Es are above historic norm, so there is no room for disappointment.
Political: Uncertainty mounting.
Seasonal: Eighth year of two term presidential cycle usually bad starting April/May. Worst six months of year is historically May 1 to November 1.* Phenom referred to as “Sell in May and Go Away.” The two patterns combined spell trouble.
Nasdaq stocks took a shellacking last week, breaking down below some important support levels, led by Apple (AAPL), down 12% after disappointing results and weak iPhone sales..
There is still a strong willingness for buying on dips, so traders will be buying battered tech stocks for a trade. Rallies in tech stocks are suspect. Nimble traders only.
There is that outside chance of one more rally before a correction begins. With fixed income yields so low, investors are buying yield stocks, which are now becoming priced above historic norms.
A bear market ?? No, just a painful correction. However, new negatives along the way could set up a bear market.
We are dealing with a greenstick fracture in both the market and economy. Watch rallies for a clue to underlying strength or weakness. Rally failure would be a major red flag.
SUPPORT “today”: DJIA:17,702; S&P 500:2,056; Nasdaq Comp.:4,758.
RESISTANCE “today”: DJIA:17,853; S&P 500:2,077; Nasdaq Comp.:4,796.
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 Apr. 28, 2016, a reasonable risk is 17,661 a more extreme risk is 17,374. Near-term upside potential is 18,039.
(I will repeat this regularly to keep readers aware of the potential for an April correction)
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.
The S&P 500 is in its 8th year of a bull market, selling at 17.8 X earnings, only 2.5% off its all-time highs, after a 212% bull rise.
Corrections started in spring in each of the last six years, the biggest being 19.8% in 2011, and smallest 2.3% in 2,014.
They started: 2010 (Apr. 26), 2011(May 2), 2012 (May 1), 2013 (May 22), 2014 ( May 13), 2 015 (May 15). The 2014 correction was insignificant, the 2015 more of a trading peak that trended sideways-to-down before the August flash crash.
So far, Q1 earnings are mixed-to-slightly better than projected. The key will be guidance and projections for Q3 and Q4.
 STATUS OF MARKET: Neutral – but vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 25% – 45%. Consider 75% now if tolerance for risk is low.
 KEY FACTORS: Outlook for Q1, and 2016 earnings questionable. Fed has market under its spell.
Note: Source of weekly economic calendar and good recap of indicators:
*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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