Technical Rally Overdue, But Risky

Investor’s first read – Daily edge before the open
DJIA: 17,492
S&P 500: 2,048
Nasdaq Comp.4,765
Russell 2000: 1,111
Tuesday, May 24, 2016 8:58 a.m.
Pre-market trading in stock-index futures indicates a sharp bounce at the open, more a technical rally than fundamental. Reportedly there is a lot of cash on the sidelines after a 2016 high on April 20 and steady slide since.
Lower prices are attractive to institutions, even in face of well-known negatives, not the least of which is a prospective second increase in the federal funds rate on June 15.
The rally isn’t business-as-usual – i.e., stocks moving up at the same time oil is moving down and the US dollar rising, and the Fed expected to bump interest rates up next month, worst case, July.
But at a price, most stocks are a buy, and money managers have to put money to work.
The key is follow through. Can today’s rally be more than a three day affair ?
The S&P 500 dropped 4.1% since its April 20, 2016 top, the Nasdaq 5.9%.
As corrections go, that is pattycake stuff, so an “all-in” position here in face of negatives and uncertainties is risky.
I suspect, this rally will be the last before the correction started in mid-April gains more momentum.
Serious overhead supply exists at DJIA 17,760, S&P 500: 2,072, Nasdaq Comp.: 4,841
RESISTANCE “today”: DJIA:17,634; S&P 500:2,061; Nasdaq Comp.:4,791.
Earnings: Q1 earnings were a smidge better than forecast. Initially, it appeared the Street was relieved, but weakness has been creeping in, suggesting something else is calling the shots – Try uncertainty, something the Street never dealt well with. Political: A big part of that uncertainty has to be political.
Oil: Crude oil hit a seven-month high after Goldman Sachs analysts forecast $50 oil later in the year.
Seasonal: Eighth year of two-term presidential cycle usually bad starting April/May. Worst six months of year is historically May 1 to November 1.* Phenom referred to as “Sell in May and Go Away.” The two patterns combined spell trouble. Note: Significant rallies have occurred between May and November, testing the validity of this bromide. No indicator is bullet proof.
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 May 20, 2016, a reasonable risk is 17,278 a more extreme risk is 17,140. Near-term upside potential is 17,668.
(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.
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.
Corrections started in spring in each of the last six years, the biggest being 19.8% in 2011, and smallest 2.3% in 2,014.
They started: 2010 (Apr. 26), 2011(May 2), 2012 (May 1), 2013 (May 22), 2014 ( May 13), 2 015 (May 15). The 2014 correction was insignificant, the 2015 more of a trading peak that trended sideways-to-down before the August flash crash.
So far, Q1 earnings are mixed-to-slightly better than projected. The key will be guidance and projections for Q3 and Q4.
 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.
Note: Source of weekly economic calendar and good recap of indicators:
*Stock Trader’s Almanac
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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