Profit Taking to Wait for 2017

Investor’s first read – Daily edge before the open
DJIA: 19,614
S&P 500: 2,246
Nasdaq Com.:5,417
Russell 2000:1,386
Friday, December 9, 2016 9:03 a.m.
With so many goodies promised for corporate America over the next four years, it is easy for investors to scramble to own a piece of that projected windfall, buying up stocks big and small.
This is usually a difficult business, picking the right stock at the right time. When it becomes too easy, watch your back.
The American Assn. of Individual Investors publishes a graph that reflects its survey of individual investors’ sentiments. It is used as a contrary indicator, where too many bulls is bearish and too many bears is bullish. The index has historical merit. Currently, it is 43.1% bulls/ 26.5% bears, which suggests sentiment is running too high. A week ago it was 49.7%.
All this suggests is that investors may be getting recklessly bullish.
At some point, possibly before President-elect Trump’s inauguration, the markets will hit a temporary high.
Corporate earnings.
Factset now sees Q3 earnings for the S&P 500 up 3.2%. On Sept. 30, its projection was for a decline of 2.2%. Q4 is projected at a gain of 3.3%, the year projected to come in at plus 0.1%. Earnings for 2017 are expected to increase 11.4%. Currently, the P/E based on 12 months out is 16.8x, which compares with a 10-year average P/E of 14.3x.
The Fed will meet next week to announce a decision to bump, or not bump, interest rates higher. Currently, the Street could care less.
Odds more and more favor a bump in rates, especially with the economic reports indicating a pickup in traction.
The economy has been accelerating in recent weeks, without government stimulus. Both the PMI and ISM Non-Mfg. indices rose smartly Monday. Tuesday, Factory Orders followed October’s strong month with yet another solid performance. The Gallop U.S. Job Creation index for Nov. was solid, though job openings in the JOLTS Index were off slightly. Consumer Credit rose again.
This confirms my belief that a solid economic base exists for all the extra stimulus that the Trump administration plans to employ.
The Street should take a bump in rates next Wednesday in stride. What may be upsetting is Fed Chief Janet Yellen may allude to numerous bumps in rates in 2017.
Clearly, it makes sense to wait until 2017 to take profits, since tax cuts are anticipated in the near future.
At this fast pace upward, the Trump rally, may be over by Inauguration Day, January 20, especially if investors sell to lock in gains.
A correction at that time would offer investors a chance to get back in at more reasonable prices.
SUPPORT “today”: DJIA:19549; S&P 500:2,234; Nasdaq Comp.:5,391
RESISTANCE “today”:DJIA:19,697;S&P 500:2,257;Nasdaq Comp.:5,438
The six months between November 1 and May 1, tend to outperform the six months between May 1 and November 1, labelled the “Best Six Months” by the Stock Trader’s Almanac which began tracking the pattern in 1986.
What could be better than promises of lower corporate taxes, less oversight, and BIG government spend on top of a sneaky strong economy ?
That’s what it looks like at this point in time. One thing about the stock market, it loves pie in the sky.
How so ?
Because it defies quantification, or at least until the truth is known. You see, this is more about human nature (greed, fear) and less about reality.
Really, a stock’s price is merely a matter of opinion, which is based on confidence or lack thereof.
This could be the grandest of all bull markets. It has a good start, up 231% in 7-1/2 years. It probably has a lot further to go, so long as the Street salivates over the prospects of a corporate windfall in coming years, and nothing gets in the way to prevent it.
When the end comes, no one will believe the few who warn of it, in fact, they will despise such seers for raining on their parade, despise them even more when the market crashes.
Like I said, it is all about human nature.
iShares 20-Year Treasury ETF down 14% in 4 months
Long-term bonds have gotten hammered in the last three months. The iShares 20-yr U.S. treasury bond ETF has lost 16.1% since July. That’s nearly 8 times the yield an investor expected over 12 months. Obviously, bonds can be risky. Let’s not forget the name of the game is to buy low and sell high, which applies to long bonds as well as stocks.
A survey of economists reported by Bloomberg yesterday calls for U.S. inflation to surpass the Fed’s target in every quarter of 2017, which if even half true should depress long-term bonds even more.
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 November 27, 2016, a reasonable risk is 18,556 a more extreme risk is 18,837 Near-term upside potential is 19,556
 OPPORTUNITY: RISK: Selective opportunity ! Risk is reality at some point
 CASH RESERVE: 25% – 35%.
 KEY FACTORS: Speculative fever driven by expectations of tax cuts, lifting of regs., and lots of money dumped on economy.
Note: Source of weekly economic calendar and good recap of indicators:
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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