Rally Attempt “MUST” Hold, or…….

Investor’s first read – Daily edge before the open
DJIA: 18,085
S&P 500:2,127
Nasdaq Comp.:5,125
Russell 2000: 1,219
Monday, September 12, 2016 9:05 a.m.
For years, the Street has looked to Fed policy as its beacon of investment hope, ignoring other benchmarks for valuation, namely the uncertainty, the damage of government inaction, election, the lameness of the economy, absence of earnings growth, and currently the overvaluation of the stock market and uncertainty of the November election.
Fed intervention with Quantitative Easing (QE) and a zero-based interest rate policy was fine when the world was in meltdown in 2007–2009, but the Fed has held the Street captive ever since.
Suddenly, doubts are beginning to surface that this policy doesn’t work seven years into an economic recovery, tantamount to pushing on a string.
Last week, three central banks opted out of further stimulus (Australia, Canada, and the ECB) – a disappointment.
ECB President Mario Draghi was unenthusiastic about extending QE beyond March 2017, the Fed’s Eric Rosengren and Daniel Tarullo implied support for a Fed rate hike in September. Bond guru, Jeffrey Gundlach (DoubleLine Capital’s CIO) said it is time for higher interest rates.
Long-term bonds and yield stocks plunged taking all market averages below major support levels.
-Bank of England Sept. 15
-FOMC releases decision on rates at 2:00 p.m. Sept. 21 followed by a press conference at 2:30.
-First presidential debate Sept. 26
-OPEC meets on Sept. 26-28

There is a chance the presidential polls will show a dead heat this month between Clinton and Trump with the possibility that the Libertarian ticket (Johnson/Weld) could act as a the swing factor in several key states, Ohio for one.
If this happens it would inject major uncertainty into the market with the potential of a plunge in prices, and there would be little the Fed can do to stop it.
Not yet considered by the Street is how good is the estimate for a 13% increase in S&P 500 earnings in 2017 ?
Q2 earnings were down 3.2%, the fifth straight quarterly decline, much of it due to the crunch in energy industry earnings. Q3 is projected to mark the sixth straight decline in quarterly earnings with a drop of 2.1%, but Q5 is projected to increase 5.5%.
Oil prices have been falling, which stands to impact earnings of oil and related stocks. The U.S. dollar is strong and can get stronger if the Fed raises interest rates, which will impact multinational stock earnings. The reverse is true if oil prices rebound as a result of OPEC’s meeting, and the dollar weakens if the Fed opts out of a rate increase – stay tuned.
August manufacturing took another hit with the ISM Index slipping to 49.4 from 52 (50 is the growth/no growth threshold).
Labor costs are up while worker productivity is in its longest slide since the 1970s, crunching margins.
Should the contest for the presidency become a toss up, uncertainty on the Street will mount and the stock market will have to find a comfort level at lower prices.
Sharp declines in the ISM Non-Manufacturing Index, U.S. Services PMI, and Labor Market Conditions Index reports last week combine to give a determined Fed something to think about next week when it decides on a hike in rates.

On top of a number new negatives, a stressed market will have to deal with Quadruple Witching Friday this week. That’s when all four contracts for stock index futures, stock index options, stock options and single stock futures expire.
The event can cause some angst as institutions scramble to even positions before expire. The Street has taken it in stride in recent years, but a turbulent market may stir the pot this time around since it is the Friday before the Wednesday when the Fed announces its decision on interest rates.
Friday I warned of one more high-volume breakout to new highs which would give the BIG money a chance to pull the plug.
It didn’t happen. Selling at the open continued throughout the day, triggered by reports that central banks abroad were giving up on stimulus as a catalyst for further growth.
I’m not so sure of that, but I think the BIG money was a “No Show,” with NYSE declining issues outnumbering advancing issues by 15-to-1.
What concerns me is the totality of the selling. Imbalances of that magnitude should occur in plunging markets accompanied by extreme bearishness, not at the beginning of a decline, that has not been triggered by a huge negative news event.
The bulls may have walked away creating an air pocket of little support until the market finds a comfort level at lower prices.
Expect bargain hunting and some stabilizing comments by Fed officials leading up to the FOMC meeting Wednesday the 21st.
The market will attempt to rebound in early trading. That rebound MUST be powerful to override the technical damage done Friday. It is an opportunity to raise cash if reserves are less than 20%.
Negatives beyond central bank discouragement with further “ease” as a solution to economic sluggishness can trigger a big crunch here.
With one of the most important presidential elections ever just weeks away, the Fed will do whatever possible to ensure a stable environment.
They may not succeed if events overpower its efforts.
SUPPORT “today”: DJIA:18,176; S&P 500:2,138; Nasdaq Comp.:5,146
RESISTANCE “today”: DJIA:17,198; S&P 500:2,107; Nasdaq Comp:5,076 >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
The risk for over-reliance on Fed policy and low interest rates is that it forces investors to seek riskier and riskier stock and bond investments, which will ultimately result in a bubble burst.
We had bubble bursts in January 2000 with dot-coms, and again in 2008 with housing/derivatives. The next one could be the Fed bubble burst when investors get over extended in speculative issues only to find nothing the Fed can do, not even negative rates, can avert and soften the impact of an ugly recession.
Ms Yellen referred to the Fed’s toolkit in her Jackson Hole speech ( Interest on reserves, forward guidance and asset purchases), the implication being the Fed can use these to control future economic cycles. Lot’s of Luck, Ms Yellen.
That event can be months or a year out. Just be aware it can happen, because there will be little warning ahead of time. Prior to that, some nice money can be made, so long as investors watch their back.
Obviously the Fed can only do so much with its low interest rate policy. What is needed is fiscal spending. Competing for funds will be the military and infrastructure needs ( roads, bridges, tunnels, water and sewage piping, the electronic grid, airports, government and school buildings, dams and waterways, harbors).
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 September 2, 2016, a reasonable risk is 17,582 a more extreme risk is 17,353 Near-term upside potential is 18,753.
(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 Q3, and 2016 earnings questionable with strong U.S. dollar.
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.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.