Uncertainty (The Fed, Earnings, Election)

Investor’s first read – Daily edge before the open
DJIA: 18,472
S&P 500: 2,166
Nasdaq Comp.: 5,139
Russell 2000: 1,218
Thursday, July 28, 2016 9:04 a.m.
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THIS WEEK’S ECONOMIC REPORTS
The Federal Open Market Committee (FOMC) decided to stick with 0.25% – 0.50% for its benchmark rate, though was more upbeat than a month ago, citing a strong labor market and reduced risk of economic disruption abroad as a result of Britain’s intent to leave the European Union (EU).
This raised speculation of a rate increase at its September 21 meeting. Less than a year ago the Fed planned four rate increases in 2016, so don’t hold your breath.
Yesterday’s reports were mixed. The S&P Case-Shiller Home prices Index for May was flat, but New Home Sales for June sizzled. The Richmond Fed Mfg. Index for July jumped smartly, but PMI Services for July slipped. Consumer Confidence held solid, but the State Street Investor Confidence tumbled. Wednesday: Durable Goods Orders for June were down sharply, Pending Home Sales for June were flat. Today: International Trade, Jobless Claims (8:30), Kansas City Fed Index (11:00). Friday: 2nd Qtr GDP (8:30), Chicago PMI (9:45), Consumer Sentiment (10:00).
The S&P 500 is pricey at 19.4 times for trailing earnings and 17.1 times on forward earnings. This compares with a 10-year average of 14.4 times and a 2006-2007 (pre-bear) multiple of 16-17.
Right now the market is comfortable with hopes that the gap between normal and pricey can be closed next year when earnings for the S&P are expected to rebound 13%. After five straight quarters of lower earnings, the market cannot hold these levels if the Street begins to doubt 2017 will improve significantly.
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Q2 EARNINGS
Earnings will be released in coming weeks. Along with that, the Street will have to deal with revisions of future earnings and corporate guidance. Expect those to be lower than projected.
FactSet.com’s earnings projections for Q2 call for a drop of 3.7% vs. an estimate of a drop of 2.8% three months ago. While oil and related industries account for much of this decline, eight sectors have lower growth rates now than at Mar.31. A Q2 decline would be the first time Y/Y earnings have declined five consecutive quarters since Q3 2008 – Q3 2009, the Great Recession.
What is more, a stronger U.S. dollar stands to adversely impact Q3 and Q4, S&P 500 earnings, which the Street was counting on to justify these prices.
This factor is already showing up in FactSet’s calculations with its projected earnings growth for Q3 dropping to a minus 0.1% from a plus 3.3% projected on March 31.
TODAY
Bulls and bears are at a standoff as we head into the open today. The Street should be happy, though not surprised by the Fed’s decision to hold pat on interest rates this month.
Whether the Street will be uneasy about speculation on a September bump will play out today and tomorrow.
Meanwhile Q2 earnings pour in with mixed results. Everyone knows Q2 will be down making it the fifth straight quarter of flat-to-down reports. Q3 and Q4 have been expected to post some growth. Now Q3 is questionable.
There is enough uncertainty about the Fed, earnings and the election to justify deferring aggressive buying and locking in some profits.
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SUPPORT “today” DJIA: 18,392; S&P 500: 2,157; Nasdaq Comp.:5,121
RESISTANCE “today” DJIA:18,535; S&P 500:2,171; Nasdaq Comp.:5,146.
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LATE STAGE BULL MARKET BEHAVIOR
This market has defied anything I have ever seen EXCEPT that is, near market tops.
News headlines of new all-time highs attracts interest especially from investors who have not participated in this bull market. Likewise, it is forcing investment professionals (brokers, money managers, hedge funds and newsletter writers) to become more fully invested.
It is characteristic of late bull market behavior to prompt talk of a “New Era.”
I have heard the New Era talk before. It comes on stream when the market hits new highs after a long bull run at a time just about everyone concludes the market simply has to go higher and they better jump on board.
I see fundamental and technical signs that warn of a top, but then I started seeing those three weeks ago. It is a matter of how high is high, and a momentum that is self fulfilling.
Bull markets can reach unthinkable extremes when investors stampede into stocks fearing being left behind.
Then too, fear of total ruin at bear market bottoms can trigger panicky selling as investors scramble to salvage what’s left of a portfolio after a 30% -45% plunge.
Major tops and bottoms are marked by extremes. Savvy investors know this. Even so, it is a challenge for any human to resist the urge to chase running stock prices at unreasonable heights, or get chased out after a harrowing plunge in stock prices.

NEW PROJECTION:
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 July 23, 2016, a reasonable risk is 18,476 a more extreme risk is 18,421c. Near-term upside potential is 18,828.
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ELECTION YEAR PATTERN BEARISH AFTER MARCH
(So far this is not holding up)
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.
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 STATUS OF MARKET: Neutral – but very, very vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 45%. Consider 75% now if tolerance for risk is low.
 KEY FACTORS: Outlook for Q2, 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.
*Bloomberg.com (Excellent pre-market read)
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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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