Seeking a Comfort Level

Investor’s first read – Daily edge before the open
DJIA: 17,526
S&P 500:2,049
Nasdaq Comp4,739.:
Russell 2000: 1,102
Thursday, May 19, 2016 9:11 a.m.
The minutes from the FOMC meeting yesterday suggested a greater likelihood of a June bump in interest rates, assuming economic growth picks up, the labor market and inflation continues to strengthen.
The Market took a hit following the 2:00 p.m. report, then stabilized at the close, when the Street realized nothing new was to be learned.
The Street’s quandary about what to do is fed by a host of uncertainties.
-Will the Fed raise interest rates at its FOMC meeting June 15 ?
-How much would that push a rising US dollar higher ?
-What would the impact be on the earnings of U.S. companies with global business ?
-Likewise commodity prices, none the least of which are oil companies.
-What will come out of OPEC’s June 2 meeting ?
-Brexit – June 23 ?
-What about the November election ???
Small wonder we are seeing extreme volatility.
In times of chaos or uncertainty, the market must find a comfort level, one that discounts known and prospective negatives.
That is what is happening now.
Obviously, there are buyers anxious to go in heavy but deterred by the uncertainties. There is enough selling to put a lid on the buyers, but not enough to break the market down.
Yesterday, I said, “If the market is going to break down here, there is a chance of a spike up before it does, giving the bulls one more chance to turn this thing around. That can still happen, but without clarity on the uncertainties, it would be a dangerous rally to chase.
SUPPORT “today”: DJIA:17,327; S&P 500:2,027; Nasdaq Comp.:4,683.
RESISTANCE “today”: DJIA:17,621; S&P 500:2,061; Nasdaq Comp.:4,759.
The Fed: The Street is beginning to worry about a June bump in interest rates. The FOMC reports its minutes from its meeting tomorrow at 2:00. It matters little what the minutes contain, the Street’s expectation of when a rate increase will take place will fluctuate, especially in face of conflicting commentary by Fed officials out on the speakers’ circuit.
Earnings: Q1 earnings were a smidge better than forecast. Initially, it appeared the Street was relieved, but weakness has been creeping in, suggesting something else is calling the shots – Try uncertainty, something the Street never dealt well with. Political: A big part of that uncertainty has to be political.
Oil: Crude oil hit a seven-month high after Goldman Sachs analysts forecast $50 oil later in the year.
Seasonal: Eighth year of two-term presidential cycle usually bad starting April/May. Worst six months of year is historically May 1 to November 1.* Phenom referred to as “Sell in May and Go Away.” The two patterns combined spell trouble. Note: Significant rallies have occurred between May and November, testing the validity of this bromide. No indicator is bullet proof.
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:
*Stock Trader’s Almanac
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.