Street Still Clueless

Investor’s first read – Daily edge before the open
DJIA:16,204
S&P 500: 1,880
Nasdaq Comp.:4,303.:
Russell 2000: 985
Monday: February 8, 2016 9:07 a.m.
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The Street got picked off second base this year, just when it thought it was in scoring position.
This is ugly and can get uglier when there is no event that this crunch can be attributed to. The angst wrought by the Fed, global economies, Japan, Mid-East, earnings, oil, and the election have been with us for many months. That’s not the BIG reason for this crunch.
This is “technical,” the undoing of what I have referred to as a “phony” market driven by an insane preoccupation with what the Fed will do next and in total disregard for the weighting of core issues that “really” comprise valuation.
A lot of loved-too-much, big names were taken to the cleaners Friday, prompting me to issue a special bulletin at 1:45 to warn that the “greenstick fracture I have been warning of is nearing a full break.”
Linkedin(LNKD) lost 44%, Tableau Software (-49%), Esterline (-16%) Friday.
Safety in high-yield stocks ? ConocoPhillips (COP) lost 15% in two days when its quarterly dividend was cut to 25 cents from 75 cents.
Safety in a mutual fund ? The IBD mutual fund index of 19 funds broke the August lows last week.
The question of what are stocks really worth comes front and center. Price/earnings ratios have been all over the lot in years past. There can be a case for stocks at the current level, but one for stocks 20% to 40% lower. It all depends when enough buyers step in to offset the selling.
TODAY:
Fed Chief Janet Yellen addresses Congress at 10 a.m., Wednesday and Thursday in her semi-annual monetary report on monetary policy.
The press and Street will be parsing every word in an attempt to determine whether the Fed will bump rates again in March.
This will add volatility to a volatile market, but this market is simply going to have to find its comfort level.
This week could produce a one or two day opportunity for the agile trader. Undoubtedly, Yellen will try to stabilize the market with her comments, and may succeed temporarily.
The Street is in a quandary, this one caught them by surprise, and they still haven’t come to grips with it. I see regrets that investors didn’t sell in December, but there really isn’t enough fear yet to comprise capitulation from a technical standpoint.
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SUPPORT “today”: DJIA: 15,873; S&P 500:1,837; Nasdaq Comp.:4,251
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ROBO-ADVISORS – Beware !
ROBO-Advisors are getting a lot of press. I didn’t get any call backs last week to answer the few questions I had. But contact with a person is not what they do. A computer algorithm does most of everything, somewhat like what some institutions and HFT managers use. Only a bull market could spawn something as silly as this. As I understand it, these ploys to capture control of your money have really only been offered to the unfortunate public over the last five years, untested.
So what happens in a bear market when portfolios are fast tracking disaster ? Who do you get to hold your hand ? As I understand it – no one !
IMHO, they’ll disappear after the next bear market, but not before leaving a lot of disillusioned investors with crippling losses. This is a tough business –hard work and either fabulous instincts or a lot of experience cuts it. Lots of twists, the unexpected, manipulation and human emotions run amok to deal with, stuff no one can program a computer to anticipate. Again I say, the best computer for this zoo is a well programmed human brain.
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THE MAKING OF A BEAR
Unless triggered by some horrific event, a bear market isn’t obvious at first. It begins with slippage as if it is just another correction in an up trending bull market. But rallies fail to attract enough buyers to reach new highs. Some begin to sell, others remain on the sidelines. Interest fades and bids weaken in face of one disappointment after another – new negatives surface – stocks start to slide – the Street’s optimism wanes, then sours. Fear mounts, then accelerates, as investors start to raise cash. No longer is it heresy to mention the word “bear.” Doomsters re-surface with talk of DOW 6,000. Fear turns to panic. No one, not anyone, wants to buy a stock. Selling intensifies. “If only I sold at a higher level,” investors lament, “I could be buying here.” The selling drives prices lower until one day when no matter how much selling there is, the market doesn’t go lower (capitulation).
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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.
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OIL :
On Jan. 7, I listed “panic prices of selected oil stocks,” seeking to pinpoint the level where these stocks would bottom out.
Four of the six oil stocks/ETFs plunged below these prices briefly, then rebounded.
I warned that, “If production cuts are mentioned, the bottom ‘is in.’ ”
No one officially said production cuts would be agreed to, but it was implied, ergo the oil stocks bottomed out on Jan. 20. Buyers below those panic prices should lock in a quick gain. We may be ready to test the lows.
As of Jan. 29:
Panic prices selected oil stocks and results:
ETF (OIH) projected bottom: 21 – low was 20.46 – up 18.6%;
ETF (XOP) projected bottom: 24 – low was 22.06 – up 5.3%; 24;
ETF (VDE) projected bottom: 69 – low was 68.63 – up 16.5%;
ETF (XLE) projected bottom 50 – low was 49.93 – up 7.2%.
Exxon Mobile (XOM) Chevron (CVX) did not drop to projected bottom.
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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 February 5, 2016, a reasonable risk is 16,018 a more extreme risk is 15,703. Near-term upside potential is 16,497. I took it further computing the level assuming each stock broke done through “last ditch” support and came up with 14,785.
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 STATUS OF MARKET: Bearish – but trying to turn. Expect volatility
 OPPORTUNITY: RISK: Risk high, but opportunity for traders at lower levels.
 CASH RESERVE: 25% – 45%. Consider 75% now
 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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