Increasing Speculative Fever
Investor’s first read – Daily edge before the open
S&P 500: 1971
Russell 2000: 1,157
Tuesday, August 19 , 2014 9:16 a.m. BEFORE the OPEN
Fed Chief Janet Yellen will address the annual Kansas City Fed’s economic symposium at Jackson Hole, Wyoming, at10:00 a.m., Friday. There is no reason to expect any unpleasant surprises.
European economies are currently sluggish, especially Germany’s, and that is partly due to sanctions on Russia for its incursion of Crimea. Expect ECB President Mario Draghi to shed light on conditions abroad.
INTEREST RATES: On numerous occasions, I have reminded readers that stock prices can rise along with interest rates, but to a point where higher rates draw money away from stocks to bonds and where higher rates adversely impact the economy. Realistically, that point must be a lot higher than the zero-based interest rates existing today. I conceded that the stock market would take a brief hit when a move to higher rates was perceived by the Street, but stabilize before moving higher.
A recent study by Andrew Garthwaite, chief equity strategist for Credit Suisse concludes just that. Since 1977, he found the S&P 500 peaked no earlier than four months prior to the Fed’s first rate increase, but gained as much as 4 percent in the six months after the first increase. He notes, that while rate rises have increased volatility in the stock market, they did not mark the end of the bull market.
Clearly, the Street wants to be bullish. Recently, events in Iraq and Ukraine sent investors to the sidelines, only to return quickly when the outlook for both situations improved. Expect, selling to return, if either worsens, especially Ukraine. This is still a news sensitive market. The strength in Nasdaq stocks suggests the Street does not just want to BUY, it is willing to take greater risks, which also suggests a move to more speculative low-priced stocks, in time.
Support today is DJIA: 16,848; S&P 500: 1,960; Nasdaq Comp.: 4,488.
Resistance today is DJIA: 16,935; S&P 500: 1,981; Nasdaq Comp.: 4,539.
Risk of the news whipsaw still exists.
HOW DO WE MEASURE THIS BULL MARKET’S ADVANCE ?
The DJIA has advanced 160% (the S&P 500: 194%) through August 14.
But the base point for calculating that advance was March 2009 from DJIA 14,279 (S&P 500: 666) and came after an unprecedented bombardment of unthinkable events, including failures and bailouts of the Street’s most prestigious names: AIG, Lehman Bros., Merrill, Wachovia, Washington Mutual, F.Mae and F. Mac, etc. and a global scramble for survival. A total meltdown appeared imminent between September 2008 and March 2009, panicking investors and crushing stock prices beyond reason.
The final bear market plunge from DJIA 9,000 (S&P 500: 970) to DJIA 6,440 (S&P 500: 666), a drop of 28.4% and 31.3% respectively, was driven by pure hysteria.
While I am stretching the rules of technical analysis a bit here, there is merit in the concept that the final plunge was so emotionally charged, a more reasonable base for the bear market bottom would be DJIA 9,000 (S&P 500: 970) where the market began to fall apart in October 2008.
Based on that assumption, the DJIA would have advanced 85% (S&P 500: 101%) through August 14, 2014, not 160% and 194% respectively. Put another way, that whole panic zone serves as the base for a bear market bottom, not the actual lows, owing to the extreme nature of events that produced the crunch.
Conclusion: While not cheap, stocks are not as over priced as the doomsters think.
IS the ECONOMIC RECOVERY FAILING TO GAIN TRACTION ?
Depends on who you ask. A.Gary Shilling, publisher of “INSIGHT” * challenged government press releases in an August 4, Special Report, “After the Government Report Releases.”
Among the first to warn readers in advance of the Great Recession, Shilling was quick to point out that the July 30, Q2 GDP report of an annualized gain of 4.0% was misleading with 1.66 percentage points attributed to a change in inventories, bringing the growth number down to 2.3%, a rate he feels is not great enough to “spawn meaningful growth in wages and labor income.” Excess inventories that are not worked off by sales penalize future production.
He attributes last week’s plunge in the stock market to the Street’s concern that the economy is not rebounding.
If he is right, the question arises, Will the Fed have to revise its taper schedule ?
We will hear more cautionary comments from the Fed going forward in an attempt to ease an interest rate hike when its reality hits early next year. The Fed does not want speculative fever to run rampant prior to the rate increase.
The Fed’s “easing in” policy is bad news for those who want the feeding frenzy to continue unabated, but good news for investors who opt for a more stable market and an inevitable crunch instead of crash.
CURRENT: Aug. 15:
St. Louis Fed President James Bullard warned the Street the rise in the Fed benchmark interest rate may come earlier that generally expected, possible by the end of Q1, that in terms of the Fed’s employment mandate, “We’re way ahead of where we expected to be.”
TECHNICAL ANALYSIS of 30 DOW JONES INDUSTRIALS
(UPDATED ANALYSIS: AUGUST 8
At key junctures, I technically analyze each of the 30 Dow industrials seeking a reasonable near-term support and a more extreme support leyel, as well as a short-term resistance level. By technically studying the balances of buying and selling in each stock, then converting that data back to the DJIA using the “divisor” (0.1557159) I can get a better reading on the average itself. The DJIA is a price-weighted average and subject to distortion by higher priced issues.
After yesterday’s crunch, Iran my analysis based on the July 31 close and concluded the near-term upside for the DJIA HAS DROPPED TO 16,765, a reasonable downside from here is 16,391 and more extended downside risk to 16,264.
Note: My daily support/resistance levels are more short-term oriented
THIS WEEK’s ECONOMIC REPORTS:
Big week for reports on housing. FOMC meets, no press conference planned.
For detailed analysis of both the U.S. and Foreign economies along with charts, go towww.mam.econoday.com. Also included is an explanation of each indicator. If you want to know when the next Employment report or any other key report will be released that info is also there under “event release date.”
Housing Market Ix. (10:00): Index jumped to 55 in Aug. from 53 in July
ICSC Goldman Store Sales (7:45): Down 1.3 pct. in Aug. 16 week vs. drop of 1.3 pct prior week
Consumer Price Ix. (8:30): Up 0.1 pct in July vs. gain of 0.3 in June
Housing Starts (8:30): Down 9.3 pct. in July vs drop of 7.3 pct in June
MBA Mtge Purchase Apps/Refi’s (7:00)):
FOMC Minutes from July 29-30 FOMC meeting (2:00):
(No FOMC meeting scheduled for August)
Jobless Claims (8:30):
PMI Mfg Ix. Flash rpt (9:45):
Philly Fed Svy (10:00):
Existing Home Sales (10:00):
Leading Indicators (10:00):
July 30 DJIA 16,912 Market on the Verge of Big Move ?
July 31 DJIA 16,880 Huge Test for Bulls
Aug. 1 DJIA 16,563 False Alarm, or ………
Aug. 4 DJIA 16,493 Trader’s Buy, but Risks are High.
Aug. 5 DJIA 16,569 Bulls “Must” Step In Now, or…….
Aug. 6 DJIA 16,429 Is The Economy Really Rebounding ?
Aug. 7 DJIA 16,443 Rally to Give Investors a Good Read on Near-Term
Aug. 8 DJIA 16, 368 News Whipsaw = Increased Volatility
Aug. 11 DJIA 16, 553 Rebound to Good News – How Far ?
Aug. 12 DJIA 16,569 News Whipsaw – Watch Your Back !
Aug. 13 DJIA 16,560 Rally ? Be Very Careful !
Aug. 14 DJIA 16,651 Better Off Now than in October 2007 ?
Aug. 18 DJIA 16,662 All Eyes on Fed at Jackson Hole Thursday
A Game-On Analysis, LLC publication
“Investor’s first read – a daily edge before the open”
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 decisions in keeping with their tolerance for risk.