May Auto Sales and Payrolls Slumped

Investor’s first read – Daily edge before the open
DJIA: 17,838
S&P 500: 2,105
Nasdaq Comp.:4,971
Russell 2000: 1,170
Friday, June 3, 2016 9:05 a.m.
This was a huge week for economic reports, but with mixed results with the exception of a shocker – Nonfarm Payrolls, up a mere 38,000 vs projections ranging between 145,000 – 190,000. March and April data was revised sharply downward. Ironically the unemployment rate is 4.7 pct..
Good results: Personal Consumption Expenditures and Personal Income, S&P Case Shiller Home Prices
Mixed Results: Consumer Confidence, State Street Investment Confidence, PMI, ISM, Jobless Claims
Bad results: ADP Employment, Chicago PMI Mfg., Dallas Fed Mfg., the Employment Situation report. This report will be followed by PMI Services (9:45), Factory Orders and ISM Non-Mfg. at 10:00.
Fed Chief Janet Yellen spoke last Friday, noting the economy is picking up after a sluggish Q1, that the Fed will gradually and cautiously increase interest rates over time and probably in coming months. Some of her colleagues agree.
Now what ? Can the Fed raise rates with this data.
The Street is currently pondering other UNCERTAINTIES, namely:
– the recent strength of the U.S. dollar and it’s impact on internationally derived earnings in Q4 when the Street is hoping for an earnings rebound.
– OPEC’s meeting on Thursday (ho-hum)
– FOMC’s meeting June 15. Can it raise rates in face of the payroll data, slumping auto sales ?
– Brexit outcome June 23
– can the consumer continue to drive the economy ?
– will corporate America spend less on buying its own shares and spend more on capital goods.
– how long will the economic expansion last. The current one started in June 2009 and is 84 months old. The average post-WWII recession was 54 months.
– Little attention has been given to the drag on the economy caused by the Fed’s low interest rate policy. While it is expected to boost lending and consequently business activity, there is little proof it has. Would consumers be bigger buyers if they had a decent return on their savings ? If low interest rates can’t goose an economy, what will it take ? What does this say about global economies, some of which pursue a negative rate policy ? Something is very wrong here, is anybody giving serious thought to it ?
– Sales of cars, trucks and SUVs for May were reported down 6.1%, the biggest monthly drop in six years. This may cap the longest streak since the roaring 1920s and a warning sign for the continuance of the present economic expansion.
-the election. Regardless of outcome – expect polarization beyond belief.
The “rally” that started May 19, is still intact (barely). That trend can continue if the Street sees weak economic data as a reason the Fed won’t raise rates this month ?
Or will the Street begin to fear a recession ?
There is an outside chance that this rally will punch briefly to new 2016 highs (DJIA: 18,167, S&P 500:2,111).
It is hard to ignore the potential overhead supply that exists at these levels, but the computers are programmed to buy, until they are programmed pull the plug and say “stop buying”, even “SELL”. This is clearly seen in a two-year chart.
Investors have to let their tolerance for risk be their guide and not let fear or greed get in the way. I think we are getting closer to a big drop. If the BIG money takes a hike, it’s straight down as in January and August.
Little thought has been given to a recession – the Street is so obsessed with the Fed. Bear markets begin 3 to 6 months ahead of recessions.
SUPPORT “today”: DJIA:17,676; S&P 500:2,086; Nasdaq Comp.:4,926.
RESISTANCE “today”: DJIA:17,901; S&P 500:2,110; Nasdaq Comp.:4,987.
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:
*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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