Technical Bounce – Easy Does It

Investor’s first read – Daily edge before the open
DJIA:15,660
S&P 500: 1,829
Nasdaq Comp.:4,266
Russell 2000: 953
Friday: February 12, 2016 9:03 a.m.
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Fed Chief Janet Yellen addressed Congress twice this week, but failed to stir optimism. It took a 400-point plunge in the DJIA to attract buyers.
The market is in the process of decoupling from years of addiction to Fed policy.
That addiction became so absurd that the Street rooted for bad news, because it assured the Street the Fed would not abandon its stimulus, first with QE, then with interest rates.
While the market responded to crises here and abroad from time to time, it always returned to the Fed.
That created a phony market, one not based on solid fundamentals.
Now with the impact of the Fed reduced, the market is probing for a level that discounts all the things that count – global economies, commodities, the Mid-East, political uncertainty, and corporate earnings/guidance.
The BIG money was not buying at the turn of the year and is not buying now.
This 13% break happened without one single news event, so it caught the Street and most investors by surprise. The market is down 13%, which is enough to get everyone’s attention, but its potential downside is SCARY !
The DJIA is down 14.7% (S&P 500: 14.3%) from its all-time high. For it to qualify as a bear market, the DJIA must drop to 14,680, the S&P 500 to 1,707. That’s the minimum for a bear market. The 2007 – 2009 bear was down 57%, 2000 – 2002 down 50%
TODAY:
Yesterday we got the quick sell off I referred to that “if well timed can give traders a chance to scalp a quick profit.” The sell off was so steep, the market rebounded yesterday, not today as I was expecting.
That means that buying on a big jump at the open today has the risk of paying up too much, leaving little room for a gain today or in coming days.
What is needed here is for undeniably BIG money to step up to the plate and relentlessly buy.

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RESISTANCE “today”: DJIA:15,863 ; S&P 500:1,873 ; Nasdaq Comp.:4,321
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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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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 11, 2016, a reasonable risk is 15,374 a more extreme risk is 14,888. Near-term upside potential is 15,888. I took it further computing the level assuming each stock broke done through “last ditch” support and came up with 14,046.
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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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