Political Uncertainty to Intensify

Investor’s first read – Daily edge before the open
DJIA: 18,613
S&P 500: 2,185
Nasdaq Comp.5,228:
Russell 2000: 1,229
Friday, August 12, 2016 9:04 a.m.
Retail sales for July were flat, the Producer Price Index (PPI) actually slipped 0.3% vs. a like gain in June. Business inventories and Consumer Sentiment will be reported at 10 o’clock.
Q2 earnings are running a smidge better than expected, but will still mark the fifth quarterly decline in a row.
Five of ten S&P 500 industry sectors are reporting declines in Q2, that’s an improvement over six out of ten decliners in Q1 !
For the year, FactSet.com is looking for S&P 500 earnings growth to be minus 0.3%, or plus 2.8% excluding energy’s drag.
For the latter, quarter vs. quarter a year ago should begin to be far more favorable in 2017, where forecasts of an increase in S&P earnings run close to a gain of 13.3%.
Uncertainty about the election does not appear to have had much impact on the stock market to-date. Expect that to change. By default, the Libertarian Party of Johnson/Weld may gain enough traction to muddy the waters, making the final result a tough call.
Yesterday’s burst of strength confirms my belief that August will feature a return to volatility with sharp moves in both directions. As the ugliness of political campaigning intensifies, expect uncertainty and outright concern to begin to dominate investor sentiment.
The Fed may actually have to share Wall Street’s spotlight through November 8, a real shame.
The bulls are still in control, investing in dividend stocks and growth situations in search of a return. What a nasty dilemma for fund managers.
SUPPORT “today”: DJIA:18,556; S&P 500:2,180; Nasdaq Comp.:5,204.
RESISTANCE “today”: DJIA:18,556; S&P 500:2,192; Nasdaq Comp.:5,243.
This market has defied anything I have ever seen EXCEPT that is, near market tops.
News headlines of new all-time highs attracts interest especially from investors who have not participated in this bull market. Likewise, it is forcing investment professionals (brokers, money managers, hedge funds and newsletter writers) to become more fully invested.
It is characteristic of late bull market behavior to prompt talk of a “New Era.”
I have heard the New Era talk before. It comes on stream when the market hits new highs after a long bull run at a time just about everyone concludes the market simply has to go higher and they better jump on board.
I see fundamental and technical signs that warn of a top, but then I started seeing those three weeks ago. It is a matter of how high is high, and a momentum that is self fulfilling.
Bull markets can reach unthinkable extremes when investors stampede into stocks fearing being left behind.
Then too, fear of total ruin at bear market bottoms can trigger panicky selling as investors scramble to salvage what’s left of a portfolio after a 30% -45% plunge.
Major tops and bottoms are marked by extremes. Savvy investors know this. Even so, it is a challenge for any human to resist the urge to chase running stock prices at unreasonable heights, or get chased out after a harrowing plunge in stock prices.
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 August 5, 2016, a reasonable risk is 18,435 a more extreme risk is 18,333. Near-term upside potential is 18,959.
(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: mam.econoday.com.
*Bloomberg.com (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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