Rate Bump to Trigger Year-End Action

Investor’s first read – Daily edge before the open
DJIA:17,749
S&P 500: 2,073
Nasdaq Comp:5,071
Russell 2000: 1,148
Thursday: Dec. 17, 2015 8:56 a.m.
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If institutions used the relief rally yesterday following the Fed’s long awaited bump in interest rates to sell, it didn’t have any impact on prices.
I think institutions have stocks to sell and stocks to buy based on the Fed’s decision yesterday to raise its federal funds rate. Now that the bump is official, they can go ahead.
The sell off late yesterday didn’t develop as I expected, it may today.
Buying should ultimately override the selling in coming days, leading to a year-end rally of sorts in face of a lot of forecasts for 2016, most positive.
I don’t believe in annual forecasts. Too many things happen within a 12-month span, but I am worried about January.
Odds are good for the market to top out during the first week in January 2016, kicking off a correction of 8% – 14%.
I don’t know now whether a decline of that magnitude will turn into a bear market. Unfolding events will determine that.
A declining market before year-end would blunt the negative impact of a January decline with stabilization sometime in late January and February.
This bull market hasn’t lacked for negatives, and 2016 won’t be spared. Subsequent bumps in the federal funds rate can be expected to take the rate up to anywhere from 0.85 percent to 1.375 percent, depending on who you ask.
The timing of the next bump will dampen enthusiasm. While both the economy and stock market have demonstrated they can do well with higher rates than these, it is the angst of another increase that worries the Street.
Election year ugliness can hardly be good for sentiments with the orchestration of the fear factor leading the charge.
While corporate earnings are expected to jump smartly next year, I am not sure why. They were expected to jump this year and didn’t, even ex-energy.
While bull markets have a rep of climbing a wall of worry, this bull market has already done a lot of climbing.
TODAY
I see the potential for a year-end rally that takes the DJIA above 18,000 (S&P 500: 2,100; Nasdaq Comp. 5,150) into the first week in January. Much can happen in the interim, but the markets are currently tracking that pattern.
It would be easy to get carried away by a surge in prices in coming weeks accompanied by a bunch of optimistic annual forecasts.
NOTE: Quadruple Witching Friday teams up with the complexities of December this week, as if there wasn’t enough to consider. Q-Witch occurs four times a year (Mar.,June, Sept. and Dec.) and is when index futures, index options, stock options and stock futures expire on the same day. The event has the potential to disrupt trading.

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SUPPORT “today”: DJIA:17,596; S&P 500:2,056; Nasdaq Comp.:5,027
RESISTANCE “today”:DJIA:17,889; S&P 500:2,089; Nasdaq Comp.:5,117.
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NOTE: Support and resistance levels are where I expect the intraday prices of the DJIA, S&P 500 and Nasdaq Comp. to reverse or close. Buyers should be cautious when a resistance level is reached but consider buying when support levels are reached. Sellers should consider taking action when resistance levels are reached and defer selling when support levels are reached. These levels are picked daily and based on my application of technical analysis.
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OIL (Doubt we have seen lows – depends a lot on the US dollar)
The energy sector is down 20% year-to-date, forecasts are for lower prices and no rebound. I can see a selling climax in this sector at lower levels, but the ingredients are there. The sector will bottom out well before any news of stabilization. Beware of false rallies, one-day affairs that look like the turn, but yield to another leg down.
Right now some traders may be tempted to catch the falling knife. There will come a point when no one in hell would even think of buying anything to do with oil, that’s when they are a buy.
Hey, it’s coming !
We are seeing a lot of bad press on oil – $30, low $20s. The big names are probing levels not seen in 5 years, and before that 2005. An institution with a 5 – 10 – 15 year horizon has no reason not to be buying, so they will be in there ahead of the ultimate low.
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ELECTION YEAR MARKETS
Pre-presidential election years have a record of being the best of the four-year election cycle with presidential election years running a close second. But the eighth year of a two-term presidency is the exception with the S&P 500 losing an average of 10.9% going back to 1901.*
This supports my expectation of a correction in January setting the precedent of a volatile year for stocks in 2016.
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MY TECHNICAL ANALYSIS of the 30 DJIA Companies:
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 DJIA “divisor” (0.149677) 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 11, 2015, a reasonable risk is 17,023 a more extreme risk is 16,643. Near-term upside potential is 17,611.
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 STATUS OF MARKET: Bullish but “at risk” of a major correction in January.
 OPPORTUNITY: RISK: Risk increases with higher market, but light on the Street is GREEN in spite of negatives. January plunge possible.
 CASH RESERVE: 25% – 45% depends on tolerance for risk.
 KEY FACTORS: Fed decision on rates; strength of economic rebound; Outlook for Q3/Q4 earnings; Stimulus Europe/China a catalyst !!
 CONCLUSION: Fed bump in interest rates now official.
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Note: Source of economic data
For a weekly economic calendar and good recap of indicators, go to mam.econoday.com.
*Stock Trader’s Almanac
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George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
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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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