“Last Rally” – Still a Rally

Investor’s first read – Daily edge before the open
DJIA: 17,938
S&P 500: 2,112
Nasdaq Comp.:4,961
Russell 2000:1,179
Wednesday, June 8, 2016 9:03 a.m.
The “last rally before a plunge” that started May 19, should persist until the BIG money walks away creating a vacuum.
We will know it when they do – like pulling a plug in a full bathtub.
There is an outside chance that this rally will punch briefly to new 2016 highs (DJIA: 18,167, S&P 500:2,111).
It would only take a 2.14% move by the DJIA and 1.57% move by the S&P 500 to hit new all-time highs. New all-time highs would be accompanied by a lot of press hoopla and a lot of panicky buying. The BIG money does not buy that kind of market. It sells it.
The Street has little choice today except to buy. Fixed income offers no attractive alternative with the ten-year treasury yielding 1.72%.
Stocks are the only game in town, assuming they go higher.
Three things suggest that trek will be difficult. One, they are historically over-priced, with the S&P 500’s P/E a lofty 24.4 vs. a mean of 14.6. Earnings are expected to pick up in Q4, but will have to follow with better numbers in 2017.
Two, signs of weakness are showing up in the economy with auto sales, retail sales, and new hires sliding. While these numbers may be a mere blip in a more positive trend, they are worth concern, especially since the stock market tops out three-to-six months ahead of the beginning of a recession
Three, campaigning for the November elections will get ugly, creating a lot of uncertainty.
Yes, the rally is still intact, and can press higher, especially if the Fed confirms it will not be raising rates next Wednesday.
Risks are increasing as the market presses higher – take care
SUPPORT “today”: DJIA:17.841; S&P 500:2,105; Nasdaq Comp.:4,947.
RESISTANCE “today”: DJIA:17,981; S&P 500:2,117; Nasdaq Comp.:4,966.
Earnings: Q1 earnings were a smidge better than forecast. Initially, it appeared the Street was relieved, but weakness has been creeping in, suggesting something else is calling the shots – Try uncertainty, something the Street never dealt well with. Political: A big part of that uncertainty has to be political.
Oil: Crude oil hit a seven-month high after Goldman Sachs analysts forecast $50 oil later in the year. Meeting in Vienna today could change a lot.
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. Note: Significant rallies have occurred between May and November, testing the validity of this bromide. No indicator is bullet proof.
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 May 26, 2016, a reasonable risk is 17,656 a more extreme risk is 17,526. Near-term upside potential is 17,963.
(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 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 Q1, and 2016 earnings questionable. Fed has market under its spell.
Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*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.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.