Volatile Week – Crosscurrents

Investor’s first read – Daily edge before the open
DJIA: 18,533
S&P 500: 2,166
Nasdaq Comp.5,055:
Russell 2000: 1,207
Tuesday, July 19, 2016 9:03 a.m.
Convention rhetoric during these two weeks should create some volatility, but corporate earnings may cause more. No longer is an earnings “beat” as dramatic as it was before guidance and Street estimates were intentionally set low to allow the “beat.”
The key now will be guidance and estimates for Q4 when the Street is hoping for a rebound to offset the drag of preceding quarters. At some point, earnings will have to be factored into the buy/sell equation.
The Street is looking past the current 5-quarters of declining earnings to a snapback in Q4 and 2017 when energy is no longer expected to be as big a d drag.
If that rebound happens ahead of schedule, we are going higher. If earnings fail to rebound, we are going lower no matter what the Fed does.
Fed policy has done little over the years except to prop the stock market, which based on what we know now, is overpriced.
ALERT: Thursday will feature some key economic reports, including Jobless Claims, Philly Fed Business Outlook , Chicago Fed Activity, all at 8:30 a.m.. The FHFA House Price Index (9:00 a.m.), Existing Home Sales (10:00), and Leading Indicators (10:00).
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.
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.
Earnings projections for Q2 call for a drop of 5.3% vs. an estimate of a drop of 2.8% three months ago. While oil and related industries account for much of this decline, nine sectors have lower growth rates now than at Mar.31. This would bring the P/E for the S&P 500 to 16.4 compared to a 5-year average on 14.6 (data FactSet.com). A Q2 decline would be the first time Y/Y earnings have declined five consecutive quarters since Q3 2008 – Q3 2009, the Great Recession.
SUPPORT “today” DJIA:18,481; S&P 500:2,162; Nasdaq Comp.:5,042
RESISTANCE “today” DJIA:18,591; S&P 500:2,173; Nasdaq Comp.:5,071.
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 15, 2016, a reasonable risk is 18,415 a more extreme risk is 18,346. Near-term upside potential is 18,723.
(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.
 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.
Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Bloomberg.com (Excellent pre-market read)
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.