Street’s Mounting Fear – Earnings and Politics

Investor’s first read – Daily edge before the open
DJIA:15,944
S&P 500: 1,882
Nasdaq Comp4,468.:
Russell 2000: 1,002
Thursday: Jan. 28, 2016 9:08 a.m.
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The market spiked briefly when the minutes of this week’s FOMC meeting were released indicating no increase in the federal funds rate this time.
It looks like the Street was hoping for more assurance that the Fed won’t be raising the benchmark rate any time soon, because it sold off sharply thereafter.
The market isn’t getting a big boost from the stream of Q4 earnings/guidance reports with disappointments in Apple (AAPL), Boeing (BA), Norfolk Southern (NSC), US Steel (X), VMware (VMW)Coach (COH), Microsoft (MSFT), Procter Gamble (PG).
The Street is spooked about something more than the Fed, and it could be the prospect of another flat earnings season, possibly the above average levels of global corporate debt, and who will be running the country a year from now.
Then too, it may be “technical,” a correction to the grand bull market that increased the broad-based S&P 500 by 220% in a little less than 7 years.
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.
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.
TODAY:
It’s a toss-up at the open, but possession of the ball is increasingly important.
The market in consolidating after rebounding from last Wednesday’s climactic low. A break above DJIA 16,235 (S&P 500: 1,916 would pave the way for a sharp move up.
A break below DJIA 15,878 (S&P 500: 1,872) indicates a test of last week’s lows.
The price of oil is up sharply, which may influence the direction of a breakout.
Then too, a big jump in pre-market futures trading following the December Durable Goods report showing a surprise plunge of 5.1 pct. vs. projections of a gain of 0.2 pct. suggests the Street is still cheering bad news.
Why ?
Because it pressures the Fed to delay further interest rate increases.
WOW ! Bad news is good news is back ! Who are these guys/gals ?
Careful what you wish for.
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SUPPORT “today”: DJIA: 15,776; S&P 500: 1,861; Nasdaq Comp.: 4,426
RESISTANCE ‘today”: DJIA: 16,037; S&P 500:1,893; Nasdaq Comp.:4,504
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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. That panic occurred on Jan. 20, though it may not be the last selling climax.
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.
CONCLUSION: So far OIH, XOP, VDE, and XLE dipped below the panic price on Jan. 20, then rebounded above it. Neither XOM or CVX dropped enough to hit the panic price.
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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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