Friday, August 22 , 2014 8:59 a.m. BEFORE the OPEN
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All of a sudden, things are going along smoothly, Russian trucks have crossed the Ukraine border with humanitarian aid without incident, ISIL has been pushed back in Iraq, the U.S. economy is beginning to hum more loudly and the stock market is hitting new highs. Commentary in the Street is more upbeat, as if nothing can stop this bull !
It’s the perfect setting for a piece of bad news to turn the S&P 500 down after a 10-day, 4.7% run.
I am wondering how the Street’s computers are programmed to react when the S&P 500 breaks through 2,000. For some it may be a “buy” signal, but does that make sense after such a sharp run ?
Others may be programmed to use the increased buying driven by press headlines to sell. It would only take 0.0038% move in the S&P to break 2000, roughly the equivalent of a gain of 66 points on the DJIA.
What could trigger a setback ?
For one, Fed Chief Janet Yellen’s comments at 10:00 a.m. at the Fed’s annual economic symposium in Jackson Hole, Wyoming, could gently warn of a sooner-than-expected rise in the Fed’s benchmark interest rate (Q1 instead of Q2, 2015).
I expect the Fed to use every opportunity to ease the Street’s angst about a hike in interest rates prior to its announcement to do so.
Then too, Russia’s humanitarian convoy that crossed Ukraine’s border today could encounter resistance, or the U.S. could announce an expansion of air strikes beyond Iraq into Syria to hit ISIL closer to its base of support.
Finally, ECB President Mario Draghi will address the symposium commenting on the stalled economies in Europe, clearly a negative if the U.S. economy is going to get any help from abroad. Columbia University professor and Nobel Laureate Joseph Stiglitz was quoted today as saying the austerity policies in Europe employed to address its debt crisis have been a “dismal failure.
TODAY:
Investors should be ready to raise cash if the S&P 500 crosses 2,000, a round number, which I suspect will trigger a host of “computer programmed” selling.
Expect a “wait and see” market prior to Yellen’s comments at the Jackson Hole symposium, starting at 10 a.m..
If the Street likes what it hears, the market should surge to DJIA 17,171 (S&P 500: 2,007). If not, it should sell off to DJIA 16,895 (S&P 500: 1,978). Under this scenario, the Nasdaq would run to 4,566, or drop to 4,501.
If the market surges, the key will be – can it hold that gain, or will institutional selling crunch it with the market closing down for the day.
I am still bullish, I am just wary of a correction in coming weeks, buy look forward to a buying opportunity in September / October.
Investor’s first read– Daily edge before the open
DJIA: 17,039
S&P 500: 1,992
Nasdaq Comp.4,532
Russell 2000: 1160
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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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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.
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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 ?
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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 to www.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.”
MONDAY:
Housing Market Ix. (10:00): Index jumped to 55 in Aug. from 53 inJuly
TUESDAY:
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): CORRECTION: Starts rose in 15.7 pct. July to 1.093 million units from 0.945 million in June.
WEDNESDAY:
MBA Mtge Purchase Apps/Refi’s (7:00)): Down 0.4 pct. in Aug. 15 week; Year/year down 11.0 pct. Refi’s (55 pct. of apps were up 3.0 pct. in same week
FOMC Minutes from July 29-30 FOMC meeting (2:00):
(No FOMC meeting scheduled for August, but Yellen speaks Friday 10:00 a.m.)
THURSDAY:
Jobless Claims (8:30): Down 14,000 to 298,000 in the Aug. 16 week.
PMI Mfg Ix. Flash rpt (9:45): Strong reading at 58.0 for Aug. flash read vs. 55.8 in final read for July.
Philly Fed Svy (10:00):Ix. Up to 28.0 in Aug from 23.9 in July.
Existing Home Sales (10:00): Up 2.4 pct. in July to an annual rate of 5.15 million units from 5.03 in June. Year/year down 4.3 pct..
Leading Indicators (10:00): Up a big 0.9 pct. in July vs. upwardly revised 0.6 pct. in June.
FRIDAY:
No reports
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RECENT POSTS:
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
Aug. 19 DJIA 16,838 Increasing Speculative Fever
Aug. 20 DJIA 16, 919 Is Market Now Vulnerable to Bad News ?
Aug. 21 DJIA 16,979 S&P 2000 to Trigger Selling
*www.agaryshilling.com
A Game-On Analysis, LLC publication
George Brooks
“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.
