Market Should Plunge, May Rally Instead

Investor’s first read – Daily edge before the open
DJIA:17,930
S&P 500: 2,088
Nasdaq Comp.:5,058
Russell 2000:1,156
Friday, November 4, 2016 8:51 a.m.
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A Wall Street bromide suggests the winner of the presidency is forecast by the direction of the stock market between July 31 and October 31. The logic here is that the sentiments of the country and investors are reflected in the stock market. If positive, the market rises during this period, if negative, it declines. It is currently down 2.6%. The indicator boasts an 86% accuracy according to Sam Stovall, chief investment strategist CFRA.
That being the case, a Trump win is possible. However, there is that 14% where the indicator has been wrong, and it is worth noting that the market surged 9.8% to new highs in late June and early July, so some correction thereafter was justified.
THE BEST SIX MONTHS
The six months between November 1 and May 1, tend to outperform the six months between May 1 and November 1, labelled the “Best Six Months” by the Stock Trader’s Almanac which began tracking the pattern in 1986.
I am a big believer in seasonal patterns, I discovered the Stock Trader’s Almanac in 1968 when no one was crunching seasonality. Published by Yale Hirsch (Now by his son Jeffrey), the Almanac broke a lot of ground in pattern recognition.
The new edition is just off the press.
Over the last 50 years, the November 1 to May 1 period has sported 40 gainers vs. 28 for the May to November period.
This does not mean the best six months won’t have corrections and the worst six months rallies. It does suggest that counter moves in each period may offer opportunities to buy or sell going against the grain !
The best months can last longer than six months and vice versa. Bull markets and unexpected crises can alter the pattern.
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iShares 20-Year Treasury ETF down 9% in 4 months
On Wednesday, the Fed indicated that the case for a bump in interest rates has increased, but opted out of doing it this month. It looks like it will happen in December.
Long-term bonds have gotten hammered in the last three months. The iShares 20-yr U.S. treasury bond ETF has lost 9.1% since July. That’s four times the yield an investor expected over 12 months. Bonds can be risky. Let’s not forget the name of the game is to buy low and sell high, which applies to long bonds as well as stocks.
A survey of economists reported by Bloomberg yesterday calls for U.S. inflation to surpass the Fed’s target in every quarter of 2017, which if even half true should depress long-term bonds even more.
The Employment Situation report came in this morning, 161,000 jobs were added in October, the unemployment rate was 4.9%.
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FBI PROBE
The two major political parties are severely polarized, and the outcome of the election is more uncertain now than last Friday when the FBI announced it was extending its search into emails of people close to Senator Clinton.
The market has demonstrated it is more comfortable with a Clinton victory, since she is better known and her policies would track what we have seen in the last seven years. A Trump presidency is an unknown, which makes the market uneasy.
BEWARE !
Reportedly, the Justice Department has been pushing for a clarification of the FBI’s investigation of emails believed to be related to associates of Clinton, but which may include Clinton herself.
As a result, and again reportedly, the FBI is running a sophisticated key word scan of the emails. Investors must be prepared for the FBI to announce before the election that there is enough reason to probe in more depth in which case the market will get clobbered, and Clinton could lose.
But the FBI does not have to announce anything. Fox News and the Wall Street Journal, which yesterday AOL.com editors headline, “Sources say Clinton to be indicted in new investigation” did it for them.
Surprisingly, this news had little effect on the market. If the Street is more comfortable with Clinton, the FBI/Fox tag-team of should have crushed a jittery market yesterday.
TODAY.
There is a historically high level of cash on the sidelines. A Bloomberg Markets survey indicates fund manager cash reserves are 5.8%, well above 4.5%, the level that is considered “extreme.”
That combined with the seasonally strong November-to-May six months suggests opportunity. If the market continues to plunge, nimble traders could get a buying opportunity Monday. Their risk would be if Trump wins, which would be followed by a huge gap down Wednesday through Friday, since a Trump presidency is largely an unknown.
TECHNICAL
Investors have been rewarded for buying corrections in the stock market over 7 years. At some point, a correction will turn into a bear market.
It is a question of one’s tolerance for risk. Nimble traders can buy a crunch from here with a “close” stop sell in case they are wrong. Others can take a partial position getting rewarded if the market soars, but not decimated if it drops further.
Unless we have total political upheaval, or governmental paralysis worse than we have had to-date, this correction smacks of opportunity, especially if the market gets hammered.
There is the risk that the market could plunge to the Brexit announcement level (DJIA: 17,003; S&P 500:1,991; Comp:4,574). That is extreme, but I doubt the Street’s computers were programmed for events like what we are experiencing now.
Logically, the last thing anyone expects today is a strong rally. If that is going to happen today, it will develop in the first half hour of trading.
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SUPPORT “today: DJIA:17,861:S&P 500:2,073; Nasdaq Comp.:5,017
RESISTANCE “today”:DJIA:17,966;S&P 500:2,097; Nasdaq Comp.:5,076
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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 October 21, 2016, a reasonable risk is 18,026 a more extreme risk is 17,986 Near-term upside potential is 18,481.
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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 Q3, and 2016 earnings questionable with strong U.S. dollar. Forecasts for 2017 still for a gain in S&P 500 earnings of 12.9%.
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Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Stock Trader’s Almanac
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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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