Stimulus Fever Mounts

Investor’s first read – Daily edge before the open
DJIA: 18,372
S&P 500: 2,152
Nasdaq Comp.:5,005
Russell 2000: 1,201
Thursday, July 14, 2016 7:52 a.m.
Close to $10 trillion of the world’s bonds yields less than zero, two-thirds of which is Japanese debt. Fear of deflation is the driver. Germany is now able to float 10-year debt at a zero interest rate, Switzerland as well. “Helicopter” money, central bank’s direct funding of government spending is talked about more frequently.*
Central banks around the world are running the show, desperately trying to juice their respective country’s economies. The U.S. Fed is no exception with its QE and low interest rate policy.
Their efforts upstage all other considerations for our economy’s expansion and the valuation of the stock market.
My problem here is, this kind of support was necessary when the world was in meltdown in 2008 – 2009. But, our economic expansion and bull market are seven years old, what is the Fed going to do when a bear market and recession hits next year or in 2018 ?
The stock market is hitting new highs every day, the S&P 500 up 223% since its bear market bottom. If the economy, and corporate earnings are lagging, it just may be because the economy is tiring.
This is a “new era,” some say – Right ! I have heard that one many times, all right before a bear market.
It’s distressing to see central banks around the world in panic mode, a change any time soon is unlikely.
If it doesn’t work ? Bombs away !
Earnings will be released in coming weeks. Along with that, the Street will have to deal with revisions of future earnings and corporate guidance. Expect those to be lower than projected.
A stronger U.S. dollar stands to adversely impact Q3 and Q4, S&P 500 earnings, which the Street was counting on to justify these prices.
Earnings projections for Q2 call for a drop of 5.3% vs. an estimate of a drop of 2.8% three months ago. While oil and related industries account for much of this decline, nine sectors have lower growth rates now than at Mar.31. This would bring the P/E for the S&P 500 to 16.4 compared to a 5-year average on 14.6 (data A Q2 decline would be the first time Y/Y earnings have declined five consecutive quarters since Q3 2008 – Q3 2009, the Great Recession.
The text from the Fed’s Beige Book yesterday were vague enough to reassure the Street that there won’t be a rate increase. The Fed’s James Bullard will be speaking at 10:00 today.
The market will jump ahead at the open today. The S&P 500 is up 8.1% in 11 days. This move surprised the Street and myself, as well. Surprise moves like this trigger panic, and that is hard to shut off. The financial press, with its “new all-time highs” headlines, adds to the euphoria.
Because I was wrong recently when I expected this market to sell off before the recent surge, is no reason to get caught up in this madness and go all-in.
The truth is, there are a lot of time-tested reasons to expect a correction, corporate earnings, and an overvaluation of the stock market leading the pack.
We are witnessing yet another bubble due to burst. In 1999, it was the dot-com craze. In 2007, it was housing/derivatives. It is now a Fed bubble. An economy and stock market cannot be artificially propped indefinitely.
RESISTANCE “today” DJIA:18,523; S&P 500:2,168; Nasdaq Comp.:5,045
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 July 11, 2016, a reasonable risk is 16,970 a more extreme risk is 16,812. Near-term upside potential is 18,579.
(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.
 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 Q2, and 2016 earnings questionable. Fed has market under its spell.
Note: Source of weekly economic calendar and good recap of indicators:
* (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.

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