Yellen Rally to Attack Overhead Supply

Investor’s first read – Daily edge before the open
S&P 500: 2,139
Nasdaq Comp.:5,243
Russell 2000:1,217
Wednesday, October 19, 2016 9:12 a.m.
-The uncertainty of who will be elected president has pretty much vanished, and the Street’s concern may now turn to whether the Republicans will lose control of the Senate or even the U.S. House. That was not considered possible six weeks ago.
-Q3 earnings reports in October, which are expected to mark the sixth straight quarterly decline for the S&P 500.
-a downward revision of 2017’s S&P 500 earnings, currently expected by Factset to increase 12.8%. Oil industry earnings have been crushed over the last two years, punishing the S&P 500 earnings as a group. But, based on $55 WTI oil price projections, the oil industry stands to give back what it took away from the overall earnings for the 500. We’ll see.
Reportedly, three-quarters of UK CEOs surveyed by KPMG are considering relocating HQs due to Brexit. After a four day rout, the British pound rebounded after PM Theresa May agreed to give Parliament a vote on her Brexit plan.
-October madness ! (defies quantification or reason, but happens !
S&P 500 earnings for Q3 are expected to decline 2%, marking the sixth straight quarter of declining earnings.
This shortfall has been expected, and shouldn’t have much impact. What is not expected is if Q4 earnings fail to stabilize, and especially if the Street begins to revise 2017 earnings down from a projected growth rate of 12.8% .This week Factset revised this number down from 13.1%.
The U.S. dollar has been firming since May, which stands to hurt multinational earnings. While the Street has ignored earnings and their overvaluation by the benchmark S&P 500 for years, opting for full focus on the Fed’s policy on interest rates, that can change if the prospect for a sharp earnings rebound in 2017 vanishes.
But let’s not overlook two potential catalysts.
We now have $50+ oil and efforts to put a lid on production. Pendulums do swing back from extremes, and the demise of profitability in the oil industry has clearly breached extremes, adversely impacting S&P 500 earnings. Year-ago numbers will be easier to beat in coming quarters, which would have a positive impact on S&P 500 earnings, helping to narrow the over valuation gap existing now.
That’s what can happen if the price of oil stabilizes and moves higher.
The S&P 500 is up 6.3% so far this year, with 53% of the days advancing.
The “Best Six Months for Owning Stocks (November 1 to May 1)* is just around the corner. As with any seasonal pattern, the beginning and ending month can vary, but generally speaking this six month period is far better than the May1 to November one.
The question now is, will we see lower prices between now and a general liftoff ?The uncertainty about who will win the presidency is less now according to polls than several weeks ago, but control of the Senate and House up in the air. I am not sure that the Street has factored that into its decision process.
At some point, a historically high level of cash on the sidelines will fuel a sustained recovery in the stock market. According to Bloomberg Markets (Oct. 18) cash reserves held by fund managers surveyed have reached 5.8% of portfolios, well above the 4.5% level considered by contrarians as extreme.
The upside of so much cash on the sidelines is not just that its investment can drive stocks up, but that sellers then have cash to buy another stock. The downside of that would be if the sellers want out and have no intention of re-investing.
It looks like the Fed has moved the goalposts. Last week, Fed Chief Janet Yellen implied that it may raise the 2% inflation target it has targeted as a threshold for raising rates to 3% if it thinks it will help stimulate the economy. Her remarks encouraged buyers to step in Monday just as the market was testing a key support level.
The S&P 500 is now in the sixth straight quarter of declining earnings. While the crunch in energy and related industries has adversely impacted these quarters, this industry will eventually contribute positively to the S&P’s results.
The Street is counting on a sharp rebound in earnings in 2017. If it happens, it will erase most of the current overvaluation of stocks. If the earnings rebound doesn’t develop, the market will head lower, and there is little the Fed can do about it, though they will try.
While the market averages gave back all of their gains yesterday, they will attempt to run higher today and hold the gain. Another rally failure would be a bad sign.
SUPPORT today: DJIA:17,998: S&P 500:2,127; Nasdaq Comp.:5,209
RESISTANCE “today”: DJIA:18,246; S&P 500:2,152; Nasdaq Comp.:5,209
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 September 16, 2016, a reasonable risk is 18,129 a more extreme risk is 17,908 Near-term upside potential is 18,435.
(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 Q3, and 2016 earnings questionable with strong U.S. dollar. Forecasts for 2017 still for a gain in S&P 500 earnings of 13.4%. It has been there for months in spite of deteriorating earnings this year. Any downward revision could impact the market significantly.
Note: Source of weekly economic calendar and good recap of indicators:
*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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