Year End Rally – Spill Over Into Early January

Investor’s first read – Daily edge before the open
DJIA: 17,528
S&P 500: 2,056
Nasdaq Comp:5,040
Russell 2000: 1,148
Tuesday: Dec. 29, 2015 9:04 a.m.
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The market is well ahead of its 2002 – 2007 bull market high – DJIA: 23.3%; S&P 500: 30.9%; Nasdaq Comp.:76.3%; Russell 2000: 35.5%.
Since the 2009 bear market bottom, it has risen DJIA: 172%; S&P 500: 209%; Nasdaq Comp.: 299%; Russell 2000: 237%.
The Bull’s best hope for higher prices is corporate earnings. An increase of 6% to 8% would turn 2016 into a stable, perhaps banner year. Even the expectation of higher earnings would avert a wipeout, or until it became evident earnings were going to disappoint. Earlier this year, the Street was projecting earnings growth of 8%, but it looks like the year will end up with little growth at all.
Again, this year, the Street is expecting a 7% – 8% increase in corporate earnings. That could be bolstered by a rebound in earnings of oil companies after a disastrous year in 2015.
We should know by mid-January whether the Street is a believer. I’ll stick to my forecast of a January correction and give it a second look as we enter the second week. January has a consistent record for forecasting the overall tone of the market for the year as a whole. It’s called the January Barometer, and its track record is impressive.*
Institutions tend to tip their hand as on-balance buyers or sellers early in the new year. Next year is loaded with question marks, including a presidential election.
TODAY:
The year end rally lives. After an early sell off, the market closed at the highs for the day, a strong indication the market would open on the upside the next day.
Pre-market trading in the stock-index futures today confirms that with a good probability the strength will spill over into January, as expected.
Obviously, a rally failure under these conditions would be a bad sign. It shouldn’t happen today. Market should post big numbers today.
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RESISTANCE “today”: DJIA:17723; S&P 500: 2,073; Nasdaq Comp.:5,093.
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NOTE: Support and resistance levels are where I expect the intraday prices of the DJIA, S&P 500 and Nasdaq Comp. to reverse or close. Buyers should be cautious when a resistance level is reached but consider buying when support levels are reached. Sellers should consider taking action when resistance levels are reached and defer selling when support levels are reached. These levels are picked daily and based on my application of technical analysis.
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OIL (Not yet)
I am not an expert on oil or commodities, not even close, but basic industries in a free fall will eventually become attractive either by way of a change (or perception thereof) in the fundamentals or extreme undervaluation as a result of emotional /panic selling.
The severe plunge in Brent and West Texas Intermediate crude oil prices over the last 18 months has crushed oil stocks and the stocks of related industries.
The potential exists for a selling climax in these stocks as negative press and industry forecasts gain momentum forcing investors to simply dump these stock, funds and ETFs indiscriminately, hammering prices down to a point they attract enough bargain hunters to stabilize prices.
There can be false rallies along the way, sucking traders in prematurely, creating losses within hours, days. These are usually triggered by rumors or commentary by industry sources, mainly OPEC..
Timing buys can be treacherous even for the pros.
Whether oil stocks will get hit this hard depends on whether institutions with a long-term horizon believe they are a bargain and step in.
There is an opportunity shaping up for those who can afford the risk.
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ELECTION YEAR MARKETS
Pre-presidential election years have a record of being the best of the four-year election cycle with presidential election years running a close second. But the eighth year of a two-term presidency is the exception with the S&P 500 losing an average of 10.9% going back to 1901.*
This supports my expectation of a correction in January setting the precedent of a volatile year for stocks in 2016.
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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 DJIA “divisor” (0.149677) 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 24, 2015, a reasonable risk is 16,950 a more extreme risk is 16,722. Near-term upside potential is 17,611.
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 STATUS OF MARKET: Bullish but “at risk” of a major correction in January.
 OPPORTUNITY: RISK: Risk increases with higher market, but light on the Street is GREEN in spite of negatives. January plunge possible.
 CASH RESERVE: 25% – 45% depends on tolerance for risk.
 KEY FACTORS: Concern for the number and extent of additional bumps in interest rates by the Fed; strength of economic rebound; Outlook for Q3/Q4 earnings; Stimulus Europe/China a catalyst !!
 CONCLUSION: Fed bump in interest rates now official. While Fed has assured the Street additional bumps will be modest, doubts by some will have an impact.
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Note: Source of economic data
For a weekly economic calendar and good recap of indicators, go to mam.econoday.com.
*Stock Trader’s Almanac
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George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
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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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