Street Ponders a Rate Increase

Investor’s first read – Daily edge before the open
DJIA: 18,395
S&P 500:2,169
Nasdaq Comp.: 5,218
Russell 2000: 1,238
Monday, August 29, 2016 9:13 a.m.
In her address Friday to the Monetary Policy Symposium, Fed Chair Janet Yellen, said the case for a rate hike has strengthened in recent months. Going forward, she expects interest on excess reserves, forward guidance and asset purchases will important tools in its toolkit.
An astute observation (IMHO) regarding the nation’s lagging productivity came from Vice Chair Stanley Fischer, who said the key to boosting productivity (output per man-hour) is gained from fiscal and regulatory policies, such as improved infrastructure, better education, and incentives for private investment.
Yellen’s comments about rates were on the same page as those made recently by other Fed bank presidents Dudley, Lockhart, Williams, Mester , and Fischer all expecting a rate hike this year.
Yellen noted the next hike would depend on subsequent economic data and would be gradual, not rapid-fire, as some fear.
The Street gives a September hike a modest probability (30%), leaning more toward December (59%).
The Durable Goods report for July was last week’s big economic surprise with a 4.4 % rise in new orders. New home Sales in July sizzled with a gain of 12.4%, though sales of existing homes were flat.
The biggest news this week will be the ADP Employment Wednesday (8:15 a.m.) and Employment Situation report Friday (8:30 a.m.)
The major market averages rallied Friday on Fed Chief Yellen’s comments, but failed to hold their gain.
Even so, the Fed demonstrated it still has a lock on the Street’s decision process. While the Street is wary of any interest rate increase, it appears to be encouraged by Yellen’s assurance that future rate bumps will be gradual.
We’ll get a better read first at 8:15 a.m. Wednesday when the ADP Employment report is released, but more importantly Friday at 8:30 a.m. when the Employment Situation report is released.
A strong report in excess of 225,000 new jobs would raise odds of a September 21, bump in rates. That would jolt the Street, as it begins to fear a pattern of continuing increases.
SUPPORT “today”: DJIA:18,361; S&P 500:2,164; Nasdaq Comp.:5,207
RESISTANCE “today”: DJIA:18,466; S&P 500:2,179; Nasdaq Comp.:5,234
The risk for over-reliance on Fed policy and low interest rates is that it forces investors to seek riskier and riskier stock and bond investments, which will ultimately result in a bubble burst.
We had bubble bursts in January 2000 with dot-coms, and again in 2008 with housing/derivatives. The next one could be the Fed bubble burst when investors get over extended in speculative issues only to find nothing the Fed can do, not even negative rates, can avert and soften the impact of an ugly recession.
Ms Yellen referred to the Fed’s toolkit in her Jackson Hole speech ( Interest on reserves, forward guidance and asset purchases), the implication being the Fed can use these to control future economic cycles. Lot’s of Luck, Ms Yellen.
That event can be months or a year out. Just be aware it can happen, because there will be little warning ahead of time. Prior to that, some nice money can be made, so long as investors watch their back.

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 August 26, 2016, a reasonable risk is 17,650 a more extreme risk is 17,587 Near-term upside potential is 18,527.
This market has defied anything I have ever seen EXCEPT that is, near market tops.
News headlines of new all-time highs attracts interest especially from investors who have not participated in this bull market. Likewise, it is forcing investment professionals (brokers, money managers, hedge funds and newsletter writers) to become more fully invested.
It is characteristic of late bull market behavior to prompt talk of a “New Era.”
I have heard the New Era talk before. It comes on stream when the market hits new highs after a long bull run at a time just about everyone concludes the market simply has to go higher and they better jump on board.
I see fundamental and technical signs that warn of a top, but then I started seeing those three weeks ago. It is a matter of how high is high, and a momentum that is self fulfilling.
Bull markets can reach unthinkable extremes when investors stampede into stocks fearing being left behind.
Then too, fear of total ruin at bear market bottoms can trigger panicky selling as investors scramble to salvage what’s left of a portfolio after a 30% -45% plunge.
Major tops and bottoms are marked by extremes. Savvy investors know this. Even so, it is a challenge for any human to resist the urge to chase running stock prices at unreasonable heights, or get chased out after a harrowing plunge in stock prices.
(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.
 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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