Will Bulls Head Off a Bigger Correction ?

Investor’s first read – Daily edge before the open
S&P 500: 2,157
Nasdaq Comp.5,137:
Russell 2000: 1,202
Wednesday, August 3, 2016 9:01 a.m. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Q2 earnings have been a smidge better than forecast, even so a down quarter would be the fifth in a row for the S&P 500.
There are times when the direction on stock prices hinges on earnings, but that hasn’t been the case over the last 12 months.
In spite of the carnival tone of presidential politics, the market has paid little heed. Corrections are a mere pothole in a relentless bull market more recently driven by a panicky search for some kind of return on capital.
Investors invested more than $30 billion in equity funds in July alone, prompting contrarians to shout “Whoa !” Sudden and pronounced interest in the stock market is seen by them as one of those “I can’t stand it anymore,” buying panics, that so characteristically signal a top in the market.
The Street has been so preoccupied with Fed policy, it overlooked more fundamental yardsticks for valuation, such as an aging economy and historically high price/earnings ratios.
Friday brings us the Employment Situation report, which may have a bearing on the next bump in interest rates by the fickle Fed.
Yesterday, I warned that a technical correction can develop at any time, taking the DJIA below 18,000, S&P 500 below 2,105.
The market did take a hit breaking an orderly consolidation pattern for the S&P 500 and DJIA, and interrupting an uptrend in the Nasdaq Comp.
If past market action has predictive value, this slight concession in stock prices should bring buyers rushing in.
At some point though, it will be a “buyer no-show,” and the market will sink into a more pronounced correction, as I have so wrongly been expecting for more than a month.
Expect the Fed to dispatch some speakers in coming weeks if the market begins to tumble. That has worked in the past. At some point, other issues will command more serious consideration.
SUPPORT “today” DJIA: 18,164 ; S&P 500:2,135; Nasdaq Comp.:5,111
RESISTANCE “today” DJIA:18,371 ; S&P 500:2,165 ; Nasdaq Comp.:5,157.
8 Years and 1,960 blog posts
Eight years ago, I launched “Investors first read,” with the market in a tailspin, the reverse of what it is today. No stranger to bear markets, I understood the wrenching emotions my readers would experience as they saw unthinkable events unfold and their portfolio values first drop 25%, then 35%, 45%, some more.
My goal was to keep them out until the market reached an extreme that minimized further risk, then attempt to convince them to buy. Don’t buy the takeover of Fannie Mae and $700 billion Wall Street “bailout” (DJIA 11,200), I wrote. O.K. for nimble traders to buy the October 10 crunch at DJIA 8,451 and likewise the November 21 crunch at DJIA 7,500. Otherwise wait.
My countdown to prepare for the bear market bottom started February 24, 2009 (DJIA: 7,114) with, “Does the Cauldron of Fear Have to Boil Before This market Turns ?” I followed that with pleas to get ready for a major BUY with headlines including, “When the Fear of Owning Stocks Turns to Fear of Not Owning Stocks,” Surge of 2,000 Points in the DJIA ?” “$9 Trillion Cash on the Sidelines vs. $8 trillion NYSE Market Value,” “Big Money Reaching For the Bushel Basket,” “Climactic Buy Possible by Tuesday (March 5, 2009).”
Finally on the following Monday, March 10, after hitting a bear market intraday low of 6,440, I issued a Special Bulletin “BUY !”
So here I am, more than 1,960 posts later, urging caution in face of a stubborn bull market up 3-fold from its bear market bottom, and over valued by conventional yardsticks.
Both the stock market and long-term bond market are at all-time highs, the inverse of the norm.
Frustrated by ultra-low interest rates, investors are frantically seeking a return through stocks sporting a dividend yield exceeding 2 percent or stocks with appreciation potential.
There is simply no other place to invest !
That is a philosophy doomed to fail in time. While this upside momentum can carry further, a shift in the buyer/seller sentiment is bound to turn the market down as the BIG money (unconcerned with yield) lock in fat profits.
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.

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 29, 2016, a reasonable risk is 18,445 a more extreme risk is 17,972. Near-term upside potential is 18,959.
(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.

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