Will the Street Ignore Bad Q1 Earnings ?

Investor’s first read – Daily edge before the open
DJIA:17,556
S&P 500:2,041
Nasdaq Comp.:4,833
Russell 2000: 1,084
Tuesday: April 12, 2016 8:59 a.m.
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FED HYPE CREATES POTENTIAL FOR FREE-FALL
The stock market is constantly adjusting for fundamental, economic, monetary, fiscal, political, psychological and global outlook, moving higher or lower depending on how it is perceived, a process I refer to as seeking a comfort level.
This sifting process is what creates rallies and corrections, bull and bear markets. In seeking a comfort level, the market often hits extremes if only momentarily.
By propping stock prices with verbal hype and changing policy projections, the Fed has denied the market the normal processing of all the other factors that comprise value.
Buyers jump in on Fed hype, and sellers defer action, hanging in as long as the Fed is in there with positive feed.
When an event triggers a sudden break, all that deferred selling hits a market that does not have enough buyers to absorb it, and you get a freefall. Throw in some highly leveraged positions on the wrong side of the market, and you get an horrendous freefall.
With a meltdown looming in 2008/2009 and the S&P 500 down 50% , the Fed had to step in. But, there is no good reason for the Fed to be propping the market now after the S&P 500 has tripled from its bear market lows.
What it is doing is creating a highly vulnerable market, one that can devastate investors if the Fed hype suddenly fails to work.
Freefalls come out of nowhere. Before an investor can respond, markets can be down 3% – 5% en route to a 12% – 20% – 35% plunge.
Like a rogue wave, the next one will strike without warning.
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Q1 EARNINGS
Q1 earnings have begun to flow and are projected to be down, as are Q2 earnings. Q3 are expected to make better reading, but going up against a weak Q4 a year ago, earnings growth in Q4 2016 are projected to exceed 10%.
What is least expected here is the Street may ignore Q1 and look out to Q4 and even rally further this month before hitting serious resistance.
However, I don’t think that can happen if guidance and projections for Q4 are revised down.
Just be aware that the Street may do the unexpected in this case, and that means one more surge before a correction.
FactSet Research’s April 1 forecast revised Q1 earnings down to minus 8.5% (-3.7% ex energy) from a plus 0.8% projected in December. Of 121 company’s Q1 guidance, 94 have issued lower estimates. Currently, estimates for 2016 as a whole vary by source, but the trend appears to be downward revision.
OIL
April 17 meeting in Doha will confirm a production freeze. The Saudis insist Iran agree, but Kuwait says that isn’t necessary. Adding to the jump in oil prices is an unexpected drop in U.S. crude inventories.
TODAY
Yesterday marked the third straight rally failure – not good, but the real test lies ahead as Q1 earnings hit and new projections for the rest of 2016 are drawn.
While, the market should go down under these conditions, I just think investors should be reminded that when least expected it often defies the consensus and goes in the opposite direction, i.e. there are not enough investors now who are convinced the market is going higher.
I can see a good technical case for DJIA 17,200 (S&P 500: 2,005) this week. So much depends on how the Street greets Q1 earnings.
None of this changes my expectation for more plunges and a couple trading opportunities before year-end and even that it begins this month.
There is an even chance, we will see one more head fake before the plug is pulled.
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SUPPORT “today”: DJIA:17,436; S&P 500:2,029; Nasdaq Comp.:4,811.
RESISTANCE “today”: DJIA:17,661; S&P 500:2,058; Nasdaq Comp.:4,875.
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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 March 31, 2016, a reasonable risk is 17,664 a more extreme risk is 16,560. Near-term upside potential is 18,102
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ELECTION YEAR PATTERN BEARISH AFTER MARCH
(I will repeat this regularly to keep readers aware of the potential for an April correction)
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.
This supports my December forecast of an ugly January, a rough year as a whole, but with several buying opportunities.

OIL
The hedge funds are shorting oil for the first time in two months, according to Bloomberg.com. Seems there is doubt the price freeze agreed to by Saudi Arabia, Russia, Venezuela and Qatar is in ineffective if Iran does not go along. A meeting held in Doha, Qatar on April 17 will shed more light on the future of a global surplus.
The stock market has been getting its marching orders from both the direction of the price of oil and the U.S. dollar.

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 STATUS OF MARKET: Neutral – but vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 25% – 45%. Consider 75% now
 KEY FACTORS: Outlook for Q1, and 2016 earnings questionable.
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Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Briefing.com
**Stock Trader’s Almanac
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George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
Brooks007read@aol.com
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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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