Market Extreme in the Making

Investor’s first read – Daily edge before the open
DJIA: 18,347
S&P 500:2,152
Nasdaq Comp.:5,022
Russell 2000: 1,205
Wednesday, July 13, 2016 8:58 a.m.
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The BIG money won’t be buying stocks to capture a 1.1 percentage point edge over the 10-year treasury. It will be using this panic to sell at all-time highs as they cash in on yet another bubble – euphoria over the fantasy of unending Fed stimulus.
In the meantime, for many, this is PANIC time, driven by an urge to jump on board before this market soars into the stratosphere. –
What is happening is very much the reverse of what happened at the bear market bottom in late February and early March 2009 when panicky investors indiscriminately dumped stocks.
Q2 EARNINGS
Earnings will be released in coming weeks. Along with that, the Street will have to deal with revisions of future earnings and corporate guidance. Expect those to be lower than projected.
A stronger U.S. dollar stands to adversely impact Q3 and Q4, S&P 500 earnings, which the Street was counting on to justify these prices.
Earnings projections for Q2 call for a drop of 5.3% vs. an estimate of a drop of 2.8% three months ago. While oil and related industries account for much of this decline, nine sectors have lower growth rates now than at Mar.31. This would bring the P/E for the S&P 500 to 16.4 compared to a 5-year average on 14.6 (data FactSet.com). A Q2 decline would be the first time Y/Y earnings have declined five consecutive quarters since Q3 2008 – Q3 2009, the Great Recession.
DOWNSIDE RISK
This market has good reason to go down. For one, the broad-based S&P 500 is overpriced heading into a Q2 earnings that are projected to be even worse than expected three months ago.
The uncertainties of the presidential election have been ignored, as well as the possibility that the EU will dissolve.
But markets that are ready to go down, waste no time doing just that.
So far this market is hanging tough, obviously transfixed by a Fed policy that has done little to generate business activity since the 2008-2009 meltdown days.
The hint that interest rates will remain low for a year or longer has forced investors to buy yield stocks, even at lofty levels.
When a correction does come, it will be one like August 2015 or January 2016.
TODAY
My analysis of 30 Dow stocks (see below) calculated last weekend, targeted 18,579 as a meaningful resistance point. When I came up with that number, I was suspect it could happen, it seemed extreme, but that’s the value of analyzing each of the 30 Dow stocks to arrive at the DJIA itself .
The S&P 500 is now up 8.1% in 10 days !
Investor interest has turned to small company stocks, as “risk-on” (speculative fever) is gaining.
I will probably be dead wrong about a top for the last 4% of this bull market, but the warning signs are cropping up and they demand respect.
In late February and early March 2009, with the DJIA below 7,500, I frantically urged readers to get ready for the bottom. On March 10, with the DJIA at 6,805, my special bulletin headlined “BUY!”
I am getting a similar feeling of urgency about a top. And while bull market tops are usually accompanied by much more rank speculation in low-priced stocks, the speculation here looks more like a craze to buy yield with little regard for valuation.
Enjoy the playground – look both ways before crossing the street.
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SUPPORT “today”: DJIA:18,268, S&P 500:2,143; Nasdaq Comp.:4,997
RESISTANCE “today” DJIA:18,417; S&P 500:2,161; Nasdaq Comp.:5,041
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NEW PROJECTION:
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 July 11, 2016, a reasonable risk is 16,970 a more extreme risk is 16,812. Near-term upside potential is 18,579.
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ELECTION YEAR PATTERN BEARISH AFTER MARCH
(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.
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 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.
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Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
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George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
Brooks007read@aol.com
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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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