Will the FBI Announce “Cause” ?

Investor’s first read – Daily edge before the open
S&P 500: 2,097
Nasdaq Comp.:5,105
Russell 2000:1,162
Thursday, November 3, 2016 9;04 a.m.
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.
I am a big believer in seasonal patterns, I discovered the Stock Trader’s Almanac in 1968 when no one was crunching seasonality. Published by Yale Hirsch (Now by his son Jeffrey), the Almanac broke a lot of ground in pattern recognition.
The new edition is just off the press.
Over the last 50 years, the November 1 to May 1 period has sported 40 gainers vs. 28 for the May to November period.
This does not mean the best six months won’t have corrections and the worst six months rallies. It does suggest that counter moves in each period may offer opportunities to buy or sell going against the grain !
The best months can last longer than six months and vice versa. Bull markets and unexpected crises can alter the pattern.
Bloomberg’s daily newsletter reports that U.S. commercial banks held $754 billion in Treasury and non-mortgage federal agency debt at the end of Q2. Over that past year, more large and mid-size banks have tightened credit to businesses than at any time since 2009, when the nation was crushed by the housing/mortgage debacle.
What does this mean ? Could be banks are nervous about an economy which is a bit long in the tooth at 7 years and 3 months, or maybe they want higher rates.
Yesterday, the Fed indicated that the case for a bump in interest rates has increased, but opted out of doing it this month. It looks like it will happen in December.
The ADP Employment report came yesterday with September payrolls growing by 147,000 jobs, a good number taking the labor market close to full employment. A more important labor market report comes Friday at 8:30 a.m., the Employment Situation report. If good, we can be sure the Fed will bump rates in December.
Long-term bonds have gotten hammered in the last three months. The iShares 20-yr U.S. treasury bond ETF has lost 8.6% since July. That’s four times the yield an investor expected over 12 months. Bonds can be risky. Let’s not forget the name of the game is to buy low and sell high, wh applies to bonds as well as stocks.
There is a historically high level of cash on the sidelines. A Bloomberg Markets survey indicates fund manager cash reserves are 5.8%, well above 4.5%, the level that is considered “extreme.”
That combined with the seasonally strong November-to-May six months suggests opportunity. If the market continues to plunge, nimble traders could get a buying opportunity Monday. Their risk would be if Trump wins, which would be followed by a huge gap down Wednesday – Friday, since a Trump presidency is largely an unknown.
The two major political parties are severely polarized, and the outcome of the election is more uncertain now than last Friday when the FBI announced it was extending its search into emails of people close to Senator Clinton.
The market has demonstrated it is more comfortable with a Clinton victory, since she is better known and her policies would track what we have seen in the last seven years. A Trump presidency is an unknown, which makes the market uneasy.
Reportedly, the Justice Department has been pushing for a clarification of the FBI’s investigation of emails believed to be related to associates of Clinton, but which may include Clinton herself.
As a result, and again reportedly, the FBI is running a sophisticated key word scan of the emails. Investors must be prepared for the FBI to conclude there is enough reason to probe in more depth in which case the market will get clobbered, and Clinton could lose.
Then too, even if Clinton wins, there is a possibility Trump won’t initially concede creating a short-lived crisis.
There is the risk that the market could drop to the Brexit announcement level (DJIA: 17,003; S&P 500:1,991; Comp:4,574). That is extreme, but I doubt the Street’s computers were programmed for events like this.
Our system of government was designed to work under most circumstances, but not if deliberate efforts to undermine it persist. There are written rules, and unwritten rules. There are lines that should not be crossed.
This stock market is selling 4.3% off its all-time highs and up 215% from its bear market bottom in March 2009.
Investors have been rewarded for buying corrections in the stock market over 7 years and especially big ones. At some point, the correction will turn into a bear market.
It is a question of one’s tolerance for risk. Nimble traders can buy with a “close” stop sell in case they are wrong. Others can take a partial position getting rewarded if the market soars, but not decimated if it drops further.
Unless we have total political upheaval, governmental paralysis, this one smacks of opportunity especially if the market gets one of those “gap-at-the-open” days.
SUPPORT “today: DJIA:17,866:S&P 500:2,083; Nasdaq Comp.:5,061
RESISTANCE “today”:DJIA:18,037;S&P 500:2,119; Nasdaq Comp.:5,137
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 October 21, 2016, a reasonable risk is 18,026 a more extreme risk is 17,986 Near-term upside potential is 18,481.

 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 Q3, and 2016 earnings questionable with strong U.S. dollar. Forecasts for 2017 still for a gain in S&P 500 earnings of 12.9%.
Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Stock Trader’s Almanac
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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