Only a BIG Push Would Change “Last Rally”

Investor’s first read – Daily edge before the open
DJIA: 17,828
S&P 500: 2,090
Nasdaq Comp.:4,901
Russell 2000: 1,139
Thursday, May 26, 2016 9:01 a.m.
Wednesday’s headline, “Last Rally Before a Plunge” was based on a striking similarity between today’s technical pattern and the patterns that existed prior to severe plunges in August 2015 and January 2016.
Nothing has changed. The market can move higher before voiding the comparison with August and January.
Fed Chief Janet Yellen speaks today at 10:30. Expect the market to react to her comments. Going in to that speech, the Street expects a bump in the federal funds rate at the June 15 meeting.
She may hedge on that, trying to maintain a stable and positive tone to a stock market that has every reason to become nervous about the outcome of the November election.
Again, the question investors must ask themselves is, is it worth rolling the dice with an aging bull market that is selling near its highs (DJIA up 171%, S&P 500 up 206%, Nasdaq up 273%).
Two good things can happen here. The market can stabilize and move sideways within a trading range, or it can begin another leg up in this 7-year bull market.
The bad thing that can happen is a five month plunge that will take investors well into 2017 to recover from, assuming 2017 is not a recession year.
Investors have to let their tolerance for risk be their guide and not let fear or greed get in the way.
In December I called for a top in January and we had the worst January on record. I said 2016 would be a rough year with a few buying opportunities of which we have had two. In March I called for a peak in April and so far the 20th holds. So far, I hold to my forecast.
SUPPORT “today”: DJIA:17,651; S&P 500:2,064; Nasdaq Comp.:4,841.
RESISTANCE “today”: DJIA:17,987; S&P 500:2,101 Nasdaq Comp.:4,945. This assumes Yellen suggests a rate increase may not happen in June, maybe not in 2016. A jump to these levels would be a SELL for traders and investors needing to raise more cash reserve to protect capital.
OPINION: One of these days all this digital stuff is going to come down around our ankles and it will be a long time before they can put humpty dumpty back together again. Keep hard copies of everything. Too much outsourcing without supervision – right hand doesn’t know what left hand is doing. Just my HO.
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.
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 vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 25% – 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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