I see a downside risk for the DJIA of 14,250 and a risk for the S&P 500 of 1,542 by early October. Depending on how news unfolds as it declines, the risk could be greater. A 10% correction can become a 12% – 14% correction.
Over the past 18 months, this bull market has been driven by the persistent buying by money managers under pressure to perform but with no other alternative than stocks. They bought as the market rose, and especially when it declined.
Their strategy not only put a floor under the market limiting the size of a correction, but provided a springboard for another advance.
If something changes this pattern, the market will decline.
Money managers may decide to lock up gains, or they may believe a correction is due, which would afford them an opportunity to buy targeted stocks at lower levels.
The Fed’s policy to continue QE has also contributed to the steady rise in prices. The Street became so reliant on the security the Fed’s QE afforded, it actually rooted for a slow growth economy over an accelerating one, because it assured it QE would continue.
Fed policy is expected to change shortly. The change won’t be noticeable, but
it represents the first change in four years, and concern on the Street will turn to the consequences of future changes.
The good news in my scenario is, this is a correction in a bull market and would be a buying opportunity.
OTHER FED STUFF !
Bernanke’s second term will end January 31, 2014 and the buzz is getting hot and heavy about his replacement. That is an uncertainty. Not only is the Street dealing with a Fed policy change, but with a change in chairmanship. While Fed Board of Governors’ Vice-Chair, Janet Yellen, is the front runner, other names are in the running and perhaps less palatable.
What can we expect from the Jackson Hole annual conference hosted by the Federal Reserve Bank of Kansas City on Aug.22 -24.?
Well Bernanke won’t be there, nor a number of big hitters from Europe. Only three of the seven Fed board members will be there. One will be Janet Yellen, and it will be interesting to see how much of a role she plays. This may be an opportunity for here to shine.
But odds favor it will come and go without much impact.
WHERE CAN THIS SCENARIO GO WRONG ?
One thing I have learned over the years about calling for a correction or a bear market. Readers hate you when you do it, and hate you even more if you are right. Nevertheless, I believe in preservation of capital and think it wise to be wrong with one’s money in their pocket rather than in stocks that are going down, or are at risk of going down.
Corporate earnings are “currently” projected to increase 3.3% in Q3, which is hardly a reason to load up on stocks,but if a 10% – plus gain for Q4 and double digits are in store for 2014, any correction here will be brief.
CONCLUSION:
The correction may have already started, but a test of the August 2 highs may be in the offing. The market may even sneak to new highs for a couple days, but I do think the correction will start this month.
Markets that are destined to go down don’t usually waste time doing it.There are cracks in the foundation, IBM for example, that suggest a near-term underlying weakness. It’s not that IBM dropped, it is the way it dropped – like a thinly traded, lesser known stock.
The market is up 25%since mid-November 2012. There has to be a lot of unrealized gains. Many hedge fund managers get compensated with a percentage of the profits generated. I can’t imagine a lot of them not locking in profits before someone beats them to it.
TODAY:
Any rally in coming days must be monitored closely. If brisk, the market will go higher before a correction has a chance of developing. If pained, it is a sign of weakness and the market is headed south.
Look for a rally to DJIA 15,518 (S&P 500: 1,697) this morning. Monitor it closely.
Investor’s first read– an edge before the open
DJIA: 15,470.67
S&P 500: 1,690.91
Nasdaq Comp.: 3,654.00
Russell 2000: 1,044.34
Thursday, August 8, 2013 (6:55 a.m.) EARLY RELEASE TODAY
TECHNICAL OBSERVATION – STOCKS:
Alert: I have successively accomplished my goal of helping readers navigate through the plunges in both AAPL and FB and subsequent recoveries. .I may soon drop coverage and either pick up other fallen angels, or begin the technical tracking of stocks on the move. That said, I am adding IBM. It is struggling, but has the potential of becoming short-term unpopular just like AAPL and FB. There is the possibility the stock may present an exceptional buying opportunity on an unexpected plunge below $180 to a bottom in the low $170s. It is so widely held, the chances are good there will be more sellers than buyers for months, ergo a lower price. NOTE: These comments are based solely on “technical” analysis with no regard for “fundamentals.”
Apple(AAPL: $464.98)
Suddenly, it appears the wait for news about a new product or technology innovation is not that far off. Clearly the stock acts like its disgruntled shareholders have parted, removing that persistent selling that crushed the stock between September 2012 and June.
Today: Again,AAPL found support near $462. A near-term drop to $459-$460 is possible. Unlikely, but possible, would be a quick plunge to $452 in face of further market weakness. Without news, AAPL is likely to bump along sideways.
Near-term resistance is $470, longer term $486.
FACEBOOK (FB – $)
Selling early in the day was quickly reversed, giving FB a shot at higher prices, though resistance starts at $39.17.
IBM ($188.56)
Still under pressure following a downgrade by Credit Suisse, Big boo is trying to stabilize above $188, but the exodus here stands to break it lower to $182. Foreseeable risk is $174. Institutions may simply sell to free up cash for other stocks with more immediate potential. Each point down impacts the DJIA by about 13 points.
I DO NOT OWN, NOR HAVE I EVER OWNED APPLE, FB or IBM.
ECONOMY:
A light week for reports on the economy is shaping up with today’s ISM Non-Manufacturing Index coming at 10 o’clock the highlight. The service industry accounts for close to 90% of our economy. The Fed’s Richard Fisher speaks today at 11:45, Charles Evans tomorrow at 9:30, Charles Plosser Wednesday at 12:30, and Sandra Pianalto at 1:40.
HOME BUYER BUYING PANIC ?
Mortgage rates rising, home prices rising, inventories decreasing !!
For a detailed account of past and current economic reports, including charts go to: mam.econoday.com
MONDAY:
ISM Non-Mfg. Ix, (10:00): July came in at 56.0 vs. 52.2 in June and a forecast of 53.1
TUESDAY:
International Trade (8:30) Non-oil contributed to big drop in trade gap to $34.2 bil from a revised $44.1 bil.
JOLTS (10:00) – Job Openings and Labor Turnover-Designed to be an improve over unemployment rate. BLS survey based on employment, job openings, quits, layoffs, discharges, etc. The number of “unfilled” jobs – used to calculate job openings rate is a measure of the unmet demand for labor. June was 3,936 mil. Vs. 3,907 mil May. Job openings unchanged
WEDNESDAY:
Consumer Credit (3:00p.m.): Proj.: $15 billion
THURSDAY:
Jobless Claims(8:30) Proj.: 338,000 week ended 8/3 vs. 326,000 the prior week. Numbers this time of year can be distorted by temporary summer layoffs in auto industry.
FRIDAY:
Wholesale Trade (10:00) Proj.: +0.4 pct.
RECENT POSTS: 2013
George Brooks
“Investor’s first read – an edge before the open”
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The writer of Investor’s first read, George Brooks, is not 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. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.
