Sharp Move in the Offing

Investor’s first read – Daily edge before the open
DJIA:18,268
S&P 500: 2,160
Nasdaq Comp.:5,306
Russell 2000: 1,246
Friday, October 7, 2016 9:05 a.m.
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WHAT COULD HURT THE MARKET
-The uncertainty created by a dead heat in the race for the presidency.
-Q3 earnings reports in October, which are expected to mark the sixth straight quarterly decline for the S&P 500.
-a downward revision of 2017’s S&P 500 earnings, currently expected to increase 13.1%. The strength of the U.S. dollar stands to adversely impact 2016 and 2017 earnings of multi-nationals, which will make that target more difficult. Oil industry earnings have been crushed over the last two years, punishing the S&P 500 earnings as a group. But, based on $55 WTI oil price projections, the oil industry stands to give back what it took away from the overall earnings for the 500. We’ll see.
-if the Street suddenly realizes Fed doesn’t have an exit strategy, never did.
-a recession in Europe. Numbers starting to stink. Markit flash Eurozone PMI at 20-mo. Low Sept; Germany PMI service sector slowest 16 mo..
Reportedly, three-quarters of UK CEOs surveyed by KPMG are considering relocating HQs due to Brexit. The British pound has been getting pounded, and experienced a flash-crash Oct. 6.
-October madness ! (defies quantification or reason, but happens !)
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TODAY
The Q3 earnings season officially gets underway next Tuesday with Alcoa (AA) reporting before the open. Q3 earnings are expected to mark the sixth straight declining quarter with the S&P 500 earnings coming in at a negative 2%, no thanks to the oil industry.
This shortfall has been expected, and shouldn’t have much impact. What is not expected is a failure of Q4 to stabilize and for 2017 to fall short of its projected 13.1% rebound.
Speculation for a Fed bump in interest rates sooner rather than later has gained some traction in recent days with weakness in dividend-paying companies utilities, communication companies and REITS.
This is confirmed by a jump in 10-year treasuries yields to 1.77%, which punishes
Bond holders.
Countering the prospect for a bump in rates is today’s Employment Situation report which showed a disappointing job gain of 156,000 vs. 250,000 in July. The unemployment rate edged up to 5.0% from 4.9%.
All this suggests, the Street remains in a quandary. We will know what the Fed plans on November 2 and who will be the nation’s next president November 8.
In spite of this lethargy, there is still the possibility of a pronounced move one way or another. All it takes is for a couple big players to break ranks and buy or sell in size to trigger a stampede. Think of a long line of big hitters with fistfuls of money lined up, each looking up and down the line to see what others are doing, not wanting anyone to get the jump on them. Suddenly, a couple break ranks and buy or sell. Then a few more, then everyone jumps in, driven by computers that were never told how to cope with such a phenom. Yep, could happen.
Beyond a stab at comic relief, I am saying, don’t be fooled by the market’s inaction – be alert for anything. Think “dry tinder.”
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SUPPORT “today”: DJIA:18,212;S&P 500:2,154; Nasdaq Comp.:5,287
RESISTANCE “today”: DJIA:18,357; S&P 500:2,171; NASDAQ COMP.:5,331
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NEW PROJECTION:
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 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 16, 2016, a reasonable risk is 18,011 a more extreme risk is 17,908 Near-term upside potential is 18,435.
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ELECTION YEAR PATTERN BEARISH AFTER MARCH
(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.
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 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. Forecasts for 2017 still for a gain in S&P 500 earnings of 13.4%. It has been there for months in spite of deteriorating earnings this year. Any downward revision could impact the market significantly.
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Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Stock Trader’s Almanac
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George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
Brooks007read@aol.com
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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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