Street Expects Help From the Fed

Investor’s first read – Daily edge before the open
DJIA:15885
S&P 500: 1,877
Nasdaq Comp:4518
Russell 2000: 997
Tuesday: Jan. 26, 2016 9:07 a.m.
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Expect a technical rally today as the Street front-runs the release of the minutes from the FOMC meeting Wednesday at 2:00 p.m..
January’s harrowing plunge in stock prices has given the Fed an excuse to step in and prop the market. Its likely ploy would be to indicate it will not raise its federal funds rate again until the market settles down.
There is no press conference scheduled after the meeting, so the Street will have to read between the lines, or maybe a Fed official (Yellen or Bullard) will have some post-meeting comments.
I don’t think January’s decline is totally Fed based, so a rally based on what the Fed says is suspect. If robust, it would give investors a chance to raise cash.
A solid technical rally here could drive the market averages up to DJIA 16,537; S&P 500:1,944; Nasdaq Comp.: 4,682. Currently, I see that as a big stretch – it can happen, but needs help from corporate earnings projections, the economy and a Fed policy comment.
Without that input, a rally from this area would be challenged to reach DJIA” 16,316; S&P 500:1,932; Nasdaq Comp.: 4,655.
Dowside Risk:
Below DJIA 15,000 (S&P 500:1,750) would be a reasonable number. Toss in new negatives, and DJIA 14,000 (S&P 500: 1,650) are not out of the question.
This decline is related to the entire bull market March 2009 to May 2015, not just one of the legs of that bull market. A reasonable one-third retracement of the bull market would be DJIA 14,380 (S&P 500: 1,645).
After all, the 2007-2009 bear market declined 55%, this one is only down 11% now after a plunge of 15% to Jan. 20.
Odds favor a two-week, saw toothed trading range above DJIA 15,500 (S&P 500: 1,840) before a breakout up or down.
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SUPPORT “today”: DJIA:15,803 ; S&P 500:1,862 ; Nasdaq Comp.:4,476.
RESISTANCE ‘today”: DJIA: 16,035; S&P 500:1,897 ; Nasdaq Comp.: 4,559.
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NEGATIVES/UNCERTAINTIES
The Street is spooked by a realization that the U.S. economy may be sagging in face of rising interest rates; a bitterly contested presidential election; the unknown consequences of an oil glut; and corporate earnings which may fail to achieve the 6.8% growth the Street expects, the second year in a row.
Under these conditions, the market must find a level that discounts negatives and uncertainties.
EARNINGS
Corporate earnings will rise to the surface in 2016 as the “decider”. The flow of Q4 earnings started with Alcoa’s (AA) report yesterday.
S&P 500 earnings for 2015 will drop some 5.5% (ex-energy – flat). The Street is looking for some 7% growth this year. As of Friday’s close, that works out to a P/E of 14.9 vs a 10-year average of 14.2. Projections were for growth of 8% last year and ended with zilch for the year, though the market held up well considering.
Stock prices won’t hold up as well if revisions start to plunge again this year. Expect a bear market if they do.
A decline of 20%, the criteria for a bear market, would take the S&P 500 down to 1,707. Based on FactSet.com’s current forecast of $125.71 for 2016 earnings, that would translate into a P/E of 13.6.
OIL :
Oil spiked last week after Khalid al-Falih, chairman of Saudi Aramco, said oil has overshot on the downside and will turn up. He did not indicate what would trigger a rise in price, but declined it would be production cuts, unless other non-OPEC countries cut production.
IF PRODUCTION CUTS ARE MENTIONED, THE BOTTOM IS IN.
I have been writing that 2016 is the year to buy oils.
For weeks, I have alerted readers to expect oil stocks to make a bottom in 2016, but have not seen the panic conditions that would signal capitulation. I am looking for a selling climax that depresses this group enough to attract the BIG money. With some help from the weakness in the stock market, and continued outpouring of gloom, a panic may occur, a high-volume, one-day spike down that closes on the upside.
The Saudi’s are playing a dangerous game. Too many big hitters getting hurt. Pressure from within or from the outside will force them to trigger a price rebound, just like they triggered a plunge.
Talk of $20 oil has been around for weeks pumped by the likes of Goldman Sachs, RBS and Morgan Stanley. International Monetary Fund’s chief, Christine Lagarde expects oil to stay low for a “sustained period.”
Now investment bank, Standard Chartered, is talking $10 oil, not seen since the big global crunch – 2009.
Keep it up, guys and girls, and you’ll create a full-scale PANIC !
FactSet .com is projecting a sizable rebound in 2016 and 2017, though that growth rate is based on earnings that have been hammered by the plunge in oil prices.
Panic prices selected oil stocks: Exxon (XOM): 67 (strong in down market due to yield); Chevron (CVX): 74 strong in down market due to high : Market sector oil service ETF (OIH): 21; SPDR S&P O&G ETF (XOP): 24; Vanguard energy ETF (VDE): 69; Energy select SPDR ETF (XLE): 50. These are “technical” projections only and subject to change as conditions in the oil industry and stock market unfold. These prices are 12% – 16% below the current market and may never be hit. Under panic conditions, the prices at a turn are only hit momentarily. Orders must be placed below the market in advance to catch the lows. Obviously, this is only for investors who can afford the risk.
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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 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 January 20, 2016, a reasonable risk is 15,737 a more extreme risk is 15,210. Near-term upside potential is 16,396
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 STATUS OF MARKET: Bearish – buying opportunity in mini-crash scenario
 OPPORTUNITY: RISK: Risk high, but opportunity for traders at lower levels.
 CASH RESERVE: 25% – 45% depends on tolerance for risk.
 KEY FACTORS: Fear taking hold. Concern for the number and extent of additional bumps in interest rates by the Fed; strength of economic rebound; Outlook for Q1, 2016 earnings
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Note: Source of economic data
For a weekly economic calendar and good recap of indicators, go to mam.econoday.com.
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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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