One More Time ?

Investor’s first read – Daily edge before the open
DJIA: 18,516
S&P 500: 2,161
Nasdaq Comp.5,029:
Russell 2000: 1,205
Monday, July 18, 2016 8:53 a.m.
As a sometimes contrarian, a Friday July 15, Marketwatch article caught my eye – “Record Highs on Wall Street is forcing bears to throw in the towel …High-yield funds see largest one-day inflow on record on July 11.”
Excerpts from the article include:
-bears who doubted the market for years decided it was time to join the rally.”
-“the day when bears capitulated into risk assets.”
-“fixed income flows shifted markedly toward riskier assets, including high yield, EM [Emerging Markets] and leveraged loans..”
-“Largest daily inflows to HY [high yield] bond funds on record ($2.1bn)
-“when the S&P 500 ended in record territory, investors poured $6.4 billion into U.S. stock exchange-traded funds.”
This smacks of the late stage of a bull market in stocks and bonds. Really, both are at all-time highs, and even the bears are scrambling to buy ?
What happened to the Street adage, “Buy low, sell high” ? Don’t ask corporate managements that question, their repurchase of shares at these levels continue at a blistering pace.
How much further can either go ? What if just rumors of inflation heat up ?
Major market turns are not accompanied by headlines about the turn, but rather by headlines of a continuation of the trend in force. A few contrary thinkers can scream “BUY” or “SELL” and no one listens.
At market tops, people are making easy money, and don’t want to hear about an end to the party. At bottoms, everyone is too scared to buy. Human nature never ceases to amuse.
We are beginning to see signs of a stretched out bull market, driven by the logic that with interest rates low (Long bond yields 1.57%), there is no other place to invest with any hope of a return.
The market is ignoring risks that have warrant more respect, namely the fifth straight quarter of declining earnings for the S&P 500, excessive valuations on top of that, and an aging bull market and economic expansion.
Throughout this bull market, the Street has marched to the Fed stimulus drumbeat and little else has mattered, but on two occasions within the past two years, the market plunged.
A 5-day 11.7% plunge by the S&P 500 in August 2015 (15.8% drop -Nasdaq) and a 12.9% (15.7%drop Nasdaq) drop in January.
The next correction should be every bit as sharp. My message here is BE ALERT that this can happen.
The Street is looking past the current 5-quarters of declining earnings to a snapback in Q4 and 2017 when energy is no longer expected to be a drag.
If that rebound happens ahead of schedule, we are going higher. If earnings fail to rebound, we are going lower no matter what the Fed does.
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.
Two political party conventions in two weeks – UGH ! This week we will hear about how bad things are, next week how good things are.

SUPPORT “today” DJIA:18,447; S&P 500:2,251; Nasdaq Comp.:5,009
RESISTANCE “today” DJIA:18,587; S&P 500:2,161; Nasdaq Comp.:5,048.
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.
(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.
 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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