Risk Level Rises

Investor’s first read – Daily edge before the open
DJIA: 17,830
S&P 500:2,075
Nasdaq Comp.:4,805
Russell 2000: 1,139
Friday: April 29, 2016 8:58 a.m.
Yesterday I warned, “What cannot be overlooked is the CBOE Volatility Index (VIX). Based on index options puts and calls, the VIX is referred to as the “investor fear gauge,” bullish after rising sharply, bearish when down big-time.
Hitting four year lows, the VIX is telling us the Street hasn’t a fear in the world – close to la-la land.”
I went on to note that the best opportunities in the stock market exist at extremes when things couldn’t get worse (BUY), or things couldn’t get better (SELL).
This is one of those indicators that is well worth respecting when it hits an extreme.
I revised my TECHNICAL ANALYSIS of the 30 Dow stocks last night lowering support and resistance levels for each stock before converting to DJIA (see below).
Before getting too bearish across the board, it is worth noting that with fixed income rates so low, the Street will keep buying “yield” stocks, which dominate the DJIA.
Earnings are a tiny bit better than expected, yet the market does not trade well.
Q1 GDP was weak, most likely hurt by the brutal sell off in stocks in January.
This is one of the most uncertain presidential election years in 40 years. That should be a drag on stocks.
There are cracks in the foundation warranting a healthy cash reserve.
SUPPORT “today”: DJIA:17,903; S&P 500:2,085; Nasdaq Comp.:4,837.
RESISTANCE “today”: DJIA:17,716; S&P 500:2,061; Nasdaq Comp.:4,774.
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 Apr. 28, 2016, a reasonable risk is 17,661 a more extreme risk is 17,374. Near-term upside potential is 18,039.
(I will repeat this regularly to keep readers aware of the potential for an April correction)
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.
The S&P 500 is in its 8th year of a bull market, selling at 17.8 X earnings, only 2.5% off its all-time highs, after a 212% bull rise.
Corrections started in spring in each of the last six years, the biggest being 19.8% in 2011, and smallest 2.3% in 2,014.
They started: 2010 (Apr. 26), 2011(May 2), 2012 (May 1), 2013 (May 22), 2014 ( May 13), 2 015 (May 15). The 2014 correction was insignificant, the 2015 more of a trading peak that trended sideways-to-down before the August flash crash.
So far, Q1 earnings are mixed-to-slightly better than projected. The key will be guidance and projections for Q3 and Q4.
 STATUS OF MARKET: Neutral – but vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 25% – 45%. Consider 75% now if tolerance for risk is low.
 KEY FACTORS: Outlook for Q1, and 2016 earnings questionable. Fed has market under its spell.
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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