What Are the Odds of a Big Correction Of 8%-12%?

 

SUMMARY:

    The U.S. economy is tracking a steady but gradual expansion, but is not getting any help from abroad, where European economies are feeling the adverse effect of sanctions imposed on Russia. What’s more, China’s economy is continuing to lose momentum.

    European Central Bank’s Mario Draghi believes the 18-member European Community  needs more stimulus to avoid a deflationary spiral, that its own QE in the form of large-scale bond purchases may be necessary.

TODAY:

    Last week I posed two questions – “Is 2,000 on the S&P 500 a Floor or a Ceiling  ?” and “How Long will Bulls Prop the Market ?”

    We should get an answer this week when a host of key economic reports are released (see below).

    Technically, the bulls have a slight edge as a result of a firm (pre-holiday) performance Friday. The market SHOULD RUN, a sharp spike up of 250 – 300 Dow points. Failure to do so would be a warning sign that the bulls are wary of risk.

    From what I see NOW, that spike would offer a selling opportunity with a sharp slide to follow. 

    Resistance today is DJIA: 17,223; S&P 500: 2,018; Nasdaq Comp.: 4,614

    Support today is DJIA: 17,068; S&P 500: 2,000; Nasdaq Comp.: 4,564

Investor’s first read – Daily edge before the open

DJIA: 17,098

S&P 500: 2,003

Nasdaq  Comp. 4,580

Russell 2000:  1,174

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WHAT ARE THE ODDS OF A BIG CORRECTION OF  8% -12% ?

   I think the odds are getting greater every day.

   Why ? 

   A major correction isn’t factored into many of the Street’s scenarios.  After all the economy is gaining traction, and the Fed  isn’t expected to raise interest rates until mid-2015.

   Outlooks can change quickly, doubts and uncertainties can snowball. Careful !

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INTERNATIONAL TENSIONS:

    While a major military undertaking by the U.S. in the Mid-East would have political consequences here, it does appear the stage is being set for a serious campaign to stop the Islamic State’s advances. A coalition is being formed and the news media is beginning to warn of a threat to our homeland if the Islamic State isn’t stopped !!!

    The unpopularity of an increased military operation  in the Mid-East and uncertainties of  how far it will extend is a negative that is not yet discounted in stock prices. 

    Uncertainty persists in Ukraine as pro-Russia rebels opened up a third front  outside strongholds of Donetsk and Luhansk near the Sea of Azov, suggesting this is far from over regardless of what Russia’s President Putin says.

    BUT, it appears the pro-Russian rebels have softened their demands,

seeking “autonomy” (broad local powers in Eastern Ukraine) in

exchange for recognizing Ukraine’s sovereignty.

    Bottom line: tensions eased for now.

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   Looks like the Street likes what Fed Chief Yellen had to say at Jackson Hole last week. She still believes the  labor markets have further to heal before their economies can handle higher interest rates.

   Obviously, the Street finds security in Yellen’s assurance its zero-based interest rate policy is not changing near-term, but that comfort will be short lived if the economy continues to gain traction.

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TECHNICAL ANALYSIS OF EACH OF THE 30 DOW INDUSTRIALS (8/29)

   At key junctures, I technically analyze each of the 30 Dow industrials, then using the Dow’s “divisor” convert these results back into the DJIA. I seek a near-term resistance level and a primary and secondary support level.

   As of Aug 29, the near-term resistance level is 17,312; the primary support is 16,973 and secondary support is 16,698.

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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.

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THIS WEEK’s ECONOMIC REPORTS:

    Big week for reports, especially employment. 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.”

TUESDAY:

PMI Mfg Ix. (9:45):

ISM Mfg. Ix. (10:00):

Construction Spend (10:00):

WEDNESDAY:

MBA Purchase Apps/Refi’s (7:00):

ICSC Goldman Store Sales (7:45):

ADP Employment Rpt (8:15)

Factory Orders (10:00):

THURSDAY:

Int’l Trade (8:30):

Productivity/Costs (8:30):

Jobless Claims (8:30):

PMI Services Ix. (9:45):

ISM Non-Mfg. Ix. (10:00):

FRIDAY:

Employment Situation (8:30):

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RECENT POSTS:

Aug. 20  DJIA   16, 919 Is Market Now Vulnerable to Bad News ?

Aug. 21  DJIA   16,979  S&P 2000 to Trigger Selling

Aug  22  DJIA   17,039  Will Street Sell When S&P 500 Breaks 2,000 ?

Aug  25  DJIA   17,001  Stronger Economy – a Game Changer for Fed ?

Aug  26  DJIA   17,076  Bull/Bear Tug of War at S&P 2000 Level

Aug  27  DJIA   17,106  Market poised for Sharp Move

Aug  28  DJIA   17, 122 2,000 on S&P 500 – Floor or Ceiling ?

Aug 29   DJIA   17, 098 How Long Will Bulls Prop the Market ?

A Game-On Analysis,  LLC publication

George  Brooks

“Investor’s first read – a daily edge before the open”

[email protected]

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.