Market Rallying Into Overhead Supply

Investor’s first read – Daily edge before the open
DJIA: 17,435
S&P 500: 2,040
Nasdaq Comp.:4,712
Russell 2000: 1.094
Friday, May 20, 2016 8:56 a.m.
Bulls and bears – musical chairs – who sits it out next ?
The Street’s quandary about what to do is fed by a host of uncertainties.
-Will the Fed raise interest rates at its FOMC meeting June 15 ?
-How much would that push a rising US dollar higher ?
-What would the impact be on the earnings of U.S. companies with global business ?
-Likewise commodity prices, none the least of which are oil companies.
-What will come out of OPEC’s June 2 meeting ?
-Brexit – June 23 ?
-What about the November election ???
Small wonder we are seeing extreme volatility.
Look for a solid open across the board, that should have difficulty gaining traction much beyond my “resistance” levels noted below.
This week’s economic numbers were mixed raising questions whether the Fed will raise rates at its June 15 FOMC meeting. Nevertheless, commentary out of this month’s meeting suggested a June bump was a good possibility, triggering selling Wednesday and Thursday.
With so many uncertainties facing the market, it is hard to see one piece of news turning the market up near-term, other than a rally or two.
Buyers are there to catch stock for sale, but aren’t aggressive enough to turn control over to the bulls. If for some reason they withdraw to the sidelines, this market goes south in a hurry.
This is a trader’s market, but only the nimble can scalp a quick profit with the swings up and down too abbreviated.
To date, the S&P 500 has dropped 4.1% (Nasdaq Comp. 5.9%) since the April 20 highs in keeping with my forecast for an April top before a correction set in. I expect more downside before the correction finds a bottom with technical rallies along the way.
SUPPORT “today”: DJIA:17,401; S&P 500:2,034; Nasdaq Comp.:4,696. Breaking these levels, look for DJIA: 17,290; S&P 500: 2,021; Nasdaq Comp.: 4,676.
RESISTANCE “today”: DJIA:17,557; S&P 500:2,053; Nasdaq Comp.:4,743.
The Fed: The Street is beginning to worry about a June bump in interest rates. The FOMC reports its minutes from its meeting tomorrow at 2:00. It matters little what the minutes contain, the Street’s expectation of when a rate increase will take place will fluctuate, especially in face of conflicting commentary by Fed officials out on the speakers’ circuit.
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.
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 20, 2016, a reasonable risk is 17,278 a more extreme risk is 17,140. Near-term upside potential is 17,668.
(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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