Will Congress Cave to Trump’s Big Spend ?

Investor’s first read – Daily edge before the open
DJIA: 19,941
S&P 500: 2,265
Nasdaq Com.: 5,471
Russell 2000:1,375
Thursday, December 22, 2016 9:06 a.m.
The driver for this market advance is the expectation that taxes will come down, regulations will be lifted on businesses and a ton of money will be spent on expanding the military and the infrastructure.
For the past six years, Congress has voted against new spending bills, so something will have to change. It will all depend on whether President Trump’s tweets, and pressure from friendly media can intimidate members of Congress to go along with his plans. Sounds absurd, but the “attack/counterattack” mode is Trump’s “m.o.” and he will use it.
If Congress buckles, he will get his way and the stock market will soar. If Congress stands its ground like it did under the Obama administration, the big spend, tax cuts and deregulation will stall, and the stock market will drop to a level that discounts this.
And, so the scramble continues as institutions put cash to work, and make strategic portfolio changes. This is a particularly challenging year-end, since so much has been promised after a seven year, nine month, 241% rise in the S&P 500.
Most year-ends are muddled, this one is on fire. Is this the kind of extreme that marks a top ? Everyone is bullish, desperately buying anything that is moving. There’s a BIG spend out there, lower taxes, and those hated regs that cramp creativity will vanish.
More than taking a loss, investors hate to miss a major upmove. We are bordering on panic. The Street seems to think nothing can go wrong, not with so much pie in the sky !
Aside from the market aping the dot-com insanity back in 1998-2000, it will have to be perceived, or definitely known, that taxes won’t be coming down much, if at all, and that Congress won’t authorize a big spend on the infrastructure and military, and that seems unlikely near-term, intermediate-term.
So yes, the Street and individual investors are acting like they do at market tops. They are approaching the “I can’t stand it anymore mode,” opting to go all-in, but until their cookie in the cupboard is taken away from them, their appetite for stocks, any stock so long as it goes up, is ravenous
Once again, human nature is beginning to play out. For those of you with a decent memory, this is becoming the reverse of February/March 2009 when after a 50% plunge in the stock market, no one would think of buying a stock.
This may be the two-day correction I referred to Monday, one that is followed by a rally at year-end. This is normal. Institutions will be scrambling for stocks that will appeal to investors going into the new year and dumping stocks that won’t.
There is a lot of financial press hype about Dow 20,000. In truth, it’s no different than Dow 19,997, but the press loves this stuff. What’s worth noting is the Dow would then be up 3 X its bear market bottom, which is really the big story.
SUPPORT “today”: DJIA:19,887;S&P 500:2,260; Nasdaq Comp.:5,456
RESISTANCE “today”:DJIA:19,986;S&P 500:2,269; Nasdaq Comp.:5,485
Corporate earnings.
Factset now sees Q3 earnings for the S&P 500 up 3.0%. On Sept. 30, its projection was for a decline of 2.2%. Q4 is projected at a gain of 5.2%, the year projected to come in at plus 0.1%. Earnings for 2017 are expected to increase 11.4%. Currently, the P/E based on 12 months out is 17.1x, which compares with a 10-year average P/E of 14.3x.
The six months between November 1 and May 1, tend to outperform the six months between May 1 and November 1, labelled the “Best Six Months” by the Stock Trader’s Almanac which began tracking the pattern in 1986.
iShares 20-Year Treasury ETF down 14% in 4 months
Long-term bonds have gotten hammered in the last three months. The iShares 20-yr U.S. treasury bond ETF has lost 18.1% since July. That’s nearly 8 times the yield an investor expected over 12 months. Obviously, bonds can be risky. Let’s not forget the name of the game is to buy low and sell high, which applies to long bonds as well as stocks.
A survey of economists reported by Bloomberg yesterday calls for U.S. inflation to surpass the Fed’s target in every quarter of 2017, which if even half true should depress long-term bonds even more.
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 December 14, a reasonable risk is 19,713 a more extreme risk is 19,657 Near-term upside potential is 20,123
 OPPORTUNITY: RISK: Selective opportunity ! Risk is reality at some point
 CASH RESERVE: 25% – 35%.
 KEY FACTORS: Speculative fever driven by expectations of tax cuts, lifting of regs., and lots of money dumped on economy.
Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
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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