Rally After a Two-Day Correction ?

Investor’s first read – Daily edge before the open
DJIA: 19,843
S&P 500: 2,258
Nasdaq Com.:5,437
Russell 2000:1,364
Monday, December 19, 2016 9:06 a.m.
As noted recently, year-end trading is very inconsistent. Moves up or down are often not reflective of what stocks will do in the new year. Tax selling, or portfolio adjustments by institutions distort a stock’s prospects.
Institutions want their year-end portfolio to look good, to reflect winners, as well as stocks that investors expect to be big winners in the new year. The year-end report will be read by a lot of investors who are looking for a fund to invest in. These portfolios may change a month later as the fund may take profits in the prior year’s big winner.
Fed Chief Janet Yellen will speak at 1:30 today presumably on the state of the labor market. Again, I would prefer that the Fed would stop micromanaging the market. I am not alone.
If she emphasizes the three rate increases in 2017 that were mentioned in her press conference last Wednesday, the market could drop sharply, since it is up sharply since the election results were announced
(DJIA 8.2%, S&P 500: +5.6%, Nasdaq Comp.: +4.7%, and Russell 2000: +14.1
A quick, sharp correction of a day or two is possible, even probable, and Yellen would be the trigger, but a sharp rebound before year-end would most likely result.
SUPPORT “today”: DJIA:19,776;S&P 500:2,249; Nasdaq Comp.:5,401
RESISTANCE “today”:DJIA:19,911;S&P 500:2,268 ; Nasdaq Comp.:5,456
Corporate earnings.
Factset now sees Q3 earnings for the S&P 500 up 3.0%. On Sept. 30, its projection was for a decline of 2.2%. Q4 is projected at a gain of 5.2%, 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 17.1x, which compares with a 10-year average P/E of 14.3x.
The post-election surge has overrun the classic year-end activity, a usual mishmash of buying and selling that is driven by tax selling, and in this case a scramble by institutions to dress up portfolios that reflect what could be what appeals to investors going forward.
What does that mean ? Probably more bank stocks than money managers would have owned pre-Trump. And maybe select biotech/ biopharma stocks, though the industry is getting mixed signals with talk of deregulation on the one hand and a crackdown on drug price increases on the other hand. Then too, a portfolio may need an infrastructure play.
That’s called window dressing.
But, a lot of these stocks blew out of the gate immediately after news of Trump’s election. So, it’s back to diligent homework, good judgement, emotional control and an instinct for timing.
Quality stocks that are depressed from their high for the year tend to be under selling pressure at year-end due to tax selling decisions. That offers buyers an opportunity to pick up bargains, the following stock stands to be one of them.
Gilead Sciences (GILD: $74.84), a biopharmaceutical company, is a good example. Down 27% from its April high, Gild bounced $1.84 (2.5%) Tuesday after posting a 2016 low four days ago at $70.83. The buying could be investors looking out to a better year in 2017, or it could be short covering, or a combination of both. The stock sports a number of buy recommendations on the Street.
The post-election up-move of DJIA 8.2%, S&P 500: +5.6%, Nasdaq Comp.: +4.7%, and Russell 2000: +14.1%, is pure speculation on Mr. Trump’s and a Republican Congress’s ability to reduce taxes, lift regs. and spend big on infrastructure and the military.
Anything to delay or thwart those plans will trigger an ugly correction.
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.
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 18.1% 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 December 14, a reasonable risk is 19,713 a more extreme risk is 19,657 Near-term upside potential is 20,123
 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: mam.econoday.com.
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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