Upside Breakout Possible – Careful !

Investor’s first read – Daily edge before the open
DJIA:16,069
S&P 500: 1,893
Nasdaq Comp:4,506
Russell 2000: 1,003
Friday: Jan. 29, 2016 9:05 a.m.
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What a slugfest between bulls and bears yesterday ! (Frazier/Ali).
While the market was up for the day, it did not breakout of the consolidation pattern, which is roughly DJIA 16,235 – 15,870 (S&P 500: 1,916 – 1,870). The judges are tallying their scorecards – we should have a decision today or Monday.
You can look at it one of two ways. The bulls are relentlessly chewing away at sell orders overhanging the market and will eventually win. Or two, the bears are dumping stocks relentlessly in face of the bulls buying and will eventually succeed and the market will plunge.
If the bulls win, the and the market breaks out on the upside, the risks of a rally failure will be very high. The market will run for a few days, but will then top out and plunge to test the January 20 lows, which is what will happen if the bears win.
Q4 earnings are mixed, but it is what the Street sees for 2016 that counts.
Oil was ahead following renewed rumors that OPEC members and Russia plan production cuts. I have stressed for weeks, that, “If production cuts are mentioned, the bottom “is in.” (see “OIL” below).
One problem with well publicized swing factors (oil) is the news whipsaw – “Yes they will, no they won’t”. Four of the six oil stocks mentioned herein on Jan. 7 hit my “panic” targets on Jan. 20 and are up sharply. Odds favor the selling climax in oil is over, but there is a chance this is just a bear rally in the group. Traders who bought the panic price can exit. Chasing the group is risky near-term since the rumors of production cuts may be premature.
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.
TODAY:
Global markets got a boost from the Bank of Japan’s decision increase stimulus when it adopted a negative interest rate, hammering both the yen and bond yields.
Ugh ! Does that really mean instead of the central bank paying a depositor for the use of their funds, the depositor pays the central bank to keep their money ? Yep !
I don’t see this as good news at all.
Odds favor a two-week, saw-toothed trading range above DJIA 15,500 (S&P 500: 1,840) before a breakout up or down. But we could get a breakout today, resulting in a run up for a few days, but fail to follow through.
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SUPPORT “today”: DJIA:15,978 ; S&P 500:1,881; Nasdaq Comp.:4,477
RESISTANCE ‘today”: DJIA:16,201; S&P 500:1,907; Nasdaq Comp.:4,534
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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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