Street to Key on Q1 Earnings

Investor’s first read – Daily edge before the open
DJIA: 18,004
S&P 500: 2,094
Nasdaq Comp.4,960:
Russell 2000: 1,139
Tuesday: April 19, 2016 9:07 a.m.
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Referring to Sunday’s oil meet in Doha, Friday’s post noted, “It looks like good news is already discounted in the price of oil. Bad news isn’t ! A blow up or continuing uncertainty would hammer stock and commodity markets Monday.”
WRONG ! The price of oil stabilized and the stock market rose yesterday after an early hit.
Yesterday’s headline, “CORRECTION STARTING ?”
Market’s answer: NO, not today !
The big meet of oil ministers from 16 nations in Doha Sunday was a bust. Iran was the sticking point. It did not attend the meeting, stating it needed to reach pre sanction levels first. Saudi Arabia claimed it would not freeze production unless all oil producers froze production.
While the price of oil was down sharply at the open yesterday but rebounded. The expected drop in oil prices was tempered by the drop in production caused by a labor strike in Kuwait, OPEC’s fourth biggest producer.
Some cracks in the 7-year bull market are beginning to appear, and should be respected.
1-U.S. retail sales have been flat for a year and are now turning down.
2-March Vehicle sales turned in the worst performance in 6 and one-half years.
3-The IMF’s semiannual World Economic Outlook trimmed its 2016 growth forecast with downgrades for the U.S., UK, Japan, the Euro area , Brazil and Russia.
4-The failure of oil producers to agree Sunday on its freeze tosses the issue of oil prices into another quagmire.
5- The flow of Q1 earnings will be mostly negative, with little help expected in Q2.
6-The eighth year of a two term presidency tends to be a bummer. This on won’t be different.
7-The S&P 500 sells at 17.8 X trailing earnings. At 26.3 X , Shiller’s P/E is 58% above its historic norm, leaving little wiggle room for the Bulls.
TODAY
Right now, the Street is betting on a rebound in earnings in Q4, though any big percentage jump would be partly due to its comparison with a weak Q4, 2015.
For most of this 7-year bull market the Street has had a single focus – Fed policy. The adage, “Don’t fight the Fed” has been around forever. There are a host of other key factors that comprise an economic recovery and bull market (see above).
Bear markets start well ahead of the beginning of a recession, anywhere from 6 to 12 months.
My point here is, just because the Fed sugar coats the economy, and the Street fixated on its every move is not good reason to get careless.
The S&P 500 is in its 8th year of a bull market, selling at 17.8 X earnings, only 2.5% off its all-time highs, after a 212% bull rise.
Be careful. The nature of corrections has been to plunge rather than slide gradually, not giving investors much time to react to preserve capital.
On March 31, I set DJIA 18,102 as a near-term potential under “My Technical Analysis of the 30 DJIA” (see below). At the time, I thought that was a “stretch.” It confirms the merit of analyzing each of the 30 Dow stocks separately before converting the results to the DJIA.
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SUPPORT “today”: DJIA:17,947 ; S&P 500:2,087; Nasdaq Comp.:4,945.
RESISTANCE “today”: DJIA:18,067; S&P 500:2,101; Nasdaq Comp.:4,977
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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 March 31, 2016, a reasonable risk is 17,664 a more extreme risk is 16,560. Near-term upside potential is 18,102
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ELECTION YEAR PATTERN BEARISH AFTER MARCH
(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.
This supports my December forecast of an ugly January, a rough year as a whole, but with several buying opportunities.
FED HYPE CREATES POTENTIAL FOR FREE-FALL
The stock market is constantly adjusting for fundamental, economic, monetary, fiscal, political, psychological and global outlook, moving higher or lower depending on how it is perceived, a process I refer to as seeking a comfort level.
This sifting process is what creates rallies and corrections, bull and bear markets. In seeking a comfort level, the market often hits extremes if only momentarily.
By propping stock prices with verbal hype and changing policy projections, the Fed has denied the market the normal processing of all the other factors that comprise value.
Buyers jump in on Fed hype, and sellers defer action, hanging in as long as the Fed is in there with positive feed.
When an event triggers a sudden break, all that deferred selling hits a market that does not have enough buyers to absorb it, and you get a freefall. Throw in some highly leveraged positions on the wrong side of the market, and you get an horrendous freefall.
With a meltdown looming in 2008/2009 and the S&P 500 down 50% , the Fed had to step in. But, there is no good reason for the Fed to be propping the market now after the S&P 500 has tripled from its bear market lows.
What it is doing is creating a highly vulnerable market, one that can devastate investors if the Fed hype suddenly fails to work.
Freefalls come out of nowhere. Before an investor can respond, markets can be down 3% – 5% en route to a 12% – 20% – 35% plunge.
Like a rogue wave, the next one will strike without warning.
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 STATUS OF MARKET: Neutral – but vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 25% – 45%. Consider 75% now if tolerance for risk is low.
 KEY FACTORS: Outlook for Q1, and 2016 earnings questionable. Fed has market under its spell.
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Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Briefing.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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