Yellen “Spike” Possible

Investor’s first read – Daily edge before the open
DJIA: 18,529
S&P 500: 2,182
Nasdaq Comp.:5,244
Russell 2000: 1,239
Tuesday, August 23, 2016 9:18 a.m.
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EARNINGS
S&P 500’s Q2 earnings are in the process of chalking up their fifth straight decline, with a drop of 3.2% according to FactSet.com.
Q3 is expected to be its sixth decline, or a drop of 0.25% with all of 2016 posting a loss of 0.4%.
Currently, 2017 earnings are expected to post a gain of 13%. Even if that happens, the S&P 500 would be pricey at 17.1 times earnings vs. a 10-year average of 15.9.
THE BULL
This is the second longest bull market in history (90 months) and the economic expansion accompanying it is the third longest (86 months) on record.
The S&P 500 Index is misleading, dominated by big-name stocks. Over the last 12 months, more than half of the 500 stocks have had declines of 20%, the benchmark that comprises a bear market. The mathematical weighting enabled the largest market cap stocks to offset the decline in those stocks.
TODAY
As expected, intraday volatility has increased, which can be attributed to comments by Fed officials increasingly in favor of a rate increase. Fed Chief Janet Yellen will address the Fed’s annual Monetary Policy Symposium at 10 o’clock, Friday at Jackson Hole, Wyoming.
Expect volatility to continue. Selling over the last five days has been absorbed in face of speculation of a bump in rates before year-end, but Yellen has the last word.
New Home Sales and the Richmond Manufacturing Index reports come at 10 o’clock today.
The Fed’s ultra-low interest rate policy has done little to trigger economic activity, beyond a survival mode. The subject of Yellen’s Friday speech is the Fed’s toolkit. My guess is it outlines additional steps the Fed can take to prompt economic activity.
The risk here for over-reliance on Fed policy and low interest rates is that it forces investors to seek riskier and riskier stock and bond investments, which will ultimately result in a bubble burst.
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SUPPORT “today”: DJIA:18,481; S&P 500:2,177; Nasdaq Comp.:5,227
RESISTANCE “today”: DJIA:18,596; S&P 500:2,187; Nasdaq Comp.:5,257.
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NEW PROJECTION:
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 August 12, 2016, a reasonable risk is 18,501 a more extreme risk is 18,404. Near-term upside potential is 18,808.
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LATE STAGE BULL MARKET BEHAVIOR
This market has defied anything I have ever seen EXCEPT that is, near market tops.
News headlines of new all-time highs attracts interest especially from investors who have not participated in this bull market. Likewise, it is forcing investment professionals (brokers, money managers, hedge funds and newsletter writers) to become more fully invested.
It is characteristic of late bull market behavior to prompt talk of a “New Era.”
I have heard the New Era talk before. It comes on stream when the market hits new highs after a long bull run at a time just about everyone concludes the market simply has to go higher and they better jump on board.
I see fundamental and technical signs that warn of a top, but then I started seeing those three weeks ago. It is a matter of how high is high, and a momentum that is self fulfilling.
Bull markets can reach unthinkable extremes when investors stampede into stocks fearing being left behind.
Then too, fear of total ruin at bear market bottoms can trigger panicky selling as investors scramble to salvage what’s left of a portfolio after a 30% -45% plunge.
Major tops and bottoms are marked by extremes. Savvy investors know this. Even so, it is a challenge for any human to resist the urge to chase running stock prices at unreasonable heights, or get chased out after a harrowing plunge in stock prices.
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ELECTION YEAR PATTERN BEARISH AFTER MARCH
(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.
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 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 Q2, and 2016 earnings questionable. Fed has market under its spell.
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Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Bloomberg.com (Excellent pre-market read)
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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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