Metal Prices Picking UP – a Message ?

Investor’s first read – Daily edge before the open
S&P 500: 2,151
Nasdaq Comp.:5,309
Russell 2000:1,226
Tuesday, October 25, 2016 9:15 a.m.
The following are VALID CONCERNS that have impacted the stock market in the past. They have had limited impact in recent years, since the Street’s computers are mostly focused on Fed policy. At some point “other factors” will have a greater impact, so don’t disregard them. This will probably occur after a Fed bump in interest rates in December
-The uncertainty of who will be elected president has pretty much vanished, and the Street’s concern may now turn to whether the Republicans will lose control of the Senate or even the U.S. House. That was not considered possible six weeks ago.
-Q3 earnings reports in October, are expected to mark the sixth straight quarterly decline for the S&P 500.
-a downward revision of 2017’s S&P 500 earnings, currently expected by Factset to increase 12.8%. Oil industry earnings have been crushed over the last two years, punishing the S&P 500 earnings as a group. But, based on $55 WTI oil price projections, the oil industry stands to give back what it took away from the overall earnings for the 500. We’ll see.
– Reportedly, three-quarters of UK CEOs surveyed by KPMG are considering relocating HQs due to Brexit. After a four day rout, the British pound rebounded after PM Theresa May agreed to give Parliament a vote on her Brexit plan.
-October madness ! It defies quantification or reason, but it happens !
S&P 500 earnings for Q3 are expected to decline 2%, marking the sixth straight quarter of declining earnings.
This shortfall has been expected, and shouldn’t have much impact. What is not expected is if Q4 earnings fail to stabilize, and especially if the Street begins to revise 2017 earnings down from a projected growth rate of 12.8% .This week Factset revised this number down from 13.1%.
The U.S. dollar has been firming since May, which stands to hurt multinational earnings. While the Street has ignored earnings and their overvaluation by the benchmark S&P 500 for years, opting for full focus on the Fed’s policy on interest rates, that can change if the prospect for a sharp earnings rebound in 2017 vanishes.
.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.”
We now have $51+ oil and efforts to put a lid on production. Pendulums do swing back from extremes, and the demise of profitability in the oil industry has clearly breached extremes, adversely impacting S&P 500 earnings. Year-ago numbers will be easier to beat in coming quarters, which would have a positive impact on S&P 500 earnings, helping to narrow the over valuation gap existing now.
Halliburton (HAL) reported a small profit in face of projections for a loss. Its stock closed 4.25% higher. Jefferies published 15 energy stocks with a “buy” or equivalent ratings from 75% of analysts polled by Factset.
Suddenly, it appears that Eurozone economies are picking up. The “flash” reading on the October E-zone PMI Composite Index rose sharply to 53.7 from 52.6 with Germany leading the way. The region experienced the largest increase in prices charged in five years. This is an interim reading in the PMI after a slump, but the pick up in inflation cannot be ignored.
The “Best Six Months for Owning Stocks (November 1 to May 1)* is just around the corner, and time is running out for an ugly “October surprise”. As noted yesterday, the surprise may be a market rally against all reason, namely uncertainty about an election outcome, especially relating to Congress.
Reports on the economy here and abroad have been all over the map for years. Central banks around the world have pursued policies designed to trigger more inflation with QE and zero-based interest rates. What if they suddenly get their wish ?
Commodities are showing signs of rebounding from a prolonged slump with metals leading the charge, namely iron ore, zinc, aluminum, copper, and nickel).
A December bump in interest rates by the Fed, could be followed by as many as two bumps in 2017, depending on the economy with housing perking up. Some economists are looking for the 10-year treasury to top 2% by the end of 2017, up from 1.76 today.
What is the last thing expected ?
TECHNICAL: Yesterday, the market closed at its high for the day after five straight days where it closed close to the lows for the day. That indicates a lot of selling (overhead supply) has been absorbed, setting the stage for a rebound in coming weeks.
We will see how the tug of war plays out in the interim. Bulls have a slight edge based on yesterday’s show of strength, but it’s still October !
SUPPORT “today: DJIA:18,159: S&P 500:2,143; Nasdaq Comp.:5,286
RESISTANCE “today”:DJIA:18,297;S&P 500:2,163; Nasdaq Comp.:5,327
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.
(So far this is not holding up)
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.
 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%.
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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