More About Earnings Than Politics

Investor’s first read – Daily edge before the open
DJIA: 18,559
S&P 500: 2,163
Nasdaq Comp.:5,036
Russell 2000: 1,200
Wednesday, July 20, 2016 9:03 a.m.
ALERT: Thursday will feature some key economic reports, including Jobless Claims, Philly Fed Business Outlook , Chicago Fed Activity, all at 8:30 a.m.. The FHFA House Price Index (9:00 a.m.), Existing Home Sales (10:00), and Leading Indicators (10:00) round out the week.
The results of both conventions of little consequence. Right now, the focus is where it should be –corporate earnings. Beating estimates isn’t all that tough these days, since they are set on the low side to begin with. That’s not so say a “miss” won’t whack a stock’s price, likewise a disappointing “beat.”
The S&P 500 is pricey at 19.4 times on trailing earnings and 17.1 times on forward earnings. This compares with a 10-year average of 14.4 times and a 2006-2007 (pre-bear) multiple of 16-17.
Presently, the general estimate for 2017 is for a growth rate of 13%.
While the last 12 months earnings have been adversely impacted by the plunge in oil industry earnings, 2017 should be helped by that industry’s rebound.
Right now the market is comfortable with hopes that the gap between normal and pricey can be closed next year.
If hopes are dashed, we have a problem at these levels.
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 A Q2 decline would be the first time Y/Y earnings have declined five consecutive quarters since Q3 2008 – Q3 2009, the Great Recession.
SUPPORT “today” DJIA:18,541; S&P 500:2,161; Nasdaq Comp.:5,032
RESISTANCE “today” DJIA:18,587; S&P 500:2,166; Nasdaq Comp.:5,043.
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 15, 2016, a reasonable risk is 18,415 a more extreme risk is 18,346. Near-term upside potential is 18,723.
(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 Q2, and 2016 earnings questionable. Fed has market under its spell.
Note: Source of weekly economic calendar and good recap of indicators:
* (Excellent pre-market read)
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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