Uncertainties Plaguing Street

Investor’s first read – Daily edge before the open
DJIA: 17,787
S&P 500: 2,096
Nasdaq Comp.:4,948
Russell 2000: 1,154
Wednesday June 1, 2016 9:05 a.m.
This is a huge week for economic reports, with the potential to give the Street a clue on whether the Fed will raise rates at its FOMC meeting June 15.
Personal Income and the S&P Case-Shiller HPI came in before the open yesterday. Personal Consumption Expenditures jumped 1.1 pct. in April, Personal Income rose 0.6 pct. (0.5 pct. wages/salaries). The S&P Case-Shiller Home Price Index for March was up 0.9 pct. (y/y was flat). May’s PMI dropped 1.1 points along with new orders. May Consumer Confidence was mixed, as well as the State Street Investor Confidence Index, and the Dallas Fed Mfg. Svy. dropped sharply.
Wednesday its ADP Employment at 8:15 a.m., PMI Mfg. (9:45), ISM Mfg. and Construction Spending at 10:00. The ADP Employment report comes at 8:15 Thursday, the Jobless Claims come at 8:30, and . the all-important Employment Situation report comes Friday at 8:30, followed by PMI Services (9:45), Factory Orders and ISM Non-Mfg. at 10:00.
Fed Chief Janet Yellen spoke Friday noting the economy is picking up after a sluggish Q1, that the Fed will gradually and cautiously increase interest rates over time and probably in coming months. Some of her colleagues agree.
The Street is currently pondering other UNCERTAINTIES, namely:
– the recent strength of the U.S. dollar and it’s impact on internationally derived earnings in Q4 when the Street is hoping for an earnings rebound.
– OPEC’s meeting on Thursday
– FOMC’s meeting June 15
-Brexit outcome June 23
-can the consumer continue to drive the economy ?
-will corporate America spend less on buying its own shares and spend more on capital goods.
-how long will the economic expansion last. The current one started in June 2009 and is 84 months old. The average post-WWII was 54 months
-Little attention has been given to the drag on the economy caused by the Fed’s low interest rate policy. While it is expected to boost lending and consequently business activity, there is little proof it has. Would consumers be bigger buyers if they had a decent return on their savings ? If low interest rates can’t goose an economy, what will it take ? What does this say about global economies, some of which pursue a negative rate policy ? Something is very wrong here, is anybody giving serious thought to it ?
-the election. Regardless of outcome – expect polarization beyond belief.
There is an outside chance that this rally will punch briefly to new 2016 highs (DJIA: 18,167, S&P 500: 2,111).
Investors have to let their tolerance for risk be their guide and not let fear or greed get in the way.
The question investors must ask themselves is, is it worth rolling the dice with an aging bull market that is selling near its highs (DJIA up 177%, S&P 500 up 215%, Nasdaq up 290%) ?
The stock-index futures indicate a slightly lower open.
There are enough uncertainties (see above) to keep buyers on the sidelines today. With the Fed meeting in two weeks, this week’s reports on the economy could be the swing factor in what the Fed decides on interest rates.
If the Street is resigned to higher rates, the market should be able to take a bump in stride, assuming the Street doesn’t begin agonizing about the timing of the next rate increase right away.
What is not factored in yet is the remote possibility of a sudden surge in the economy led by a rebound in manufacturing.
SUPPORT “today”: DJIA:17,666; S&P 500:2,078; Nasdaq Comp.:4,898.
RESISTANCE “today”: DJIA:17,863; S&P 500:2,109; Nasdaq Comp.:4,963.
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 26, 2016, a reasonable risk is 17,656 a more extreme risk is 17,526. Near-term upside potential is 17,963.
(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: mam.econoday.com.
*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.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.