A lot of cycle points to look at today. Last week the markets survived 377 trading days from the S&P 500 May 2015 high. In the very near term, futures charts survived 161 hours up from the election low. The E-mini S&P 500 hit a new high 1,444 hours from the prior high in August and it has slightly backed off. The last one to report to you is the overall market is 720 hours from the Brexit low mid session Monday.
We’ve had a very powerful rally. But the VIX is back down to euphoria levels. I don’t watch CNBC much anymore but I did catch Bob Pisani talk about the Nikkei. He said the folks in Japan were "loving it" and "partying" for the past 10 days. Really? That’s exactly what us contrarians like to hear. I haven’t heard anyone on television get euphoric in a long time. If I’ve told you once, I’ve said it a million times, Tom Hanks said there is no crying in baseball and there is no such thing as happiness in the stock market. It’s an iron law of the market. Euphoria is an emotion by its very nature that can’t last. If you are a in trade and start getting happy, you need to hit that little button called "sell" and take the profits to the bank. If you don’t, chances are the market will take your profits for you. This doesn’t happen every time, nothing happens all the time. That’s why trading and investing is a game of risk. There are isolated points in history where participants are allowed to carry their euphoria a while. But it’s the exception, not the rule. I also looked at various headlines and I’ve seen where other analysts believe this rally can go unimpeded straight through Christmas.
Is that possible? I’m sure it is but it’s just not likely. There absolutely will be a Santa rally; why not? But seasonally speaking, most of the time when we get good action in November there is usually an interruption period in the very least to reset the oscillators. If they are getting overheated now, imagine how overheated conditions could get if the market were to rally for the next 4-5 weeks. I could be wrong but I just don’t see it. But if a pullback is coming, it should start soon, as early as Monday or Tuesday.
Now that the election is over, we can get back to Yellen and interest rates. Prevailing psychology is such that market participants would be upset if there isn’t a hike in December. That would mean eight years out from the crisis the economy hasn’t improved to the point they could raise marginally. I don’t think Mr. Market would handle that very well. Raising rates here is a no brainer and that might end up being the overall buy the rumor sell the news event for the month of December.
We have a whole new environment as far as the economy is concerned. But a lot of this is predicated on Trump doing what he said he will do. On the top of that list is Obamacare which has been the number one job killer during the past five years. Small business is expecting a break and the consumer will be glad to get relief on premiums that are scheduled to go through the roof in 2017. If jobs start manifesting the economy may be able to absorb small rate increases perhaps every six months. The problem we’ve had is we’ve had an economy completely driven by monetary policy and no fiscal policy. The Trump administration will be a welcome return of fiscal policy. The first benefit has already been awarded to Kentucky where 5,000 auto jobs were saved.
Yeah, I know there are reports Ford was never leaving. Let’s be clear about this, while they never signed the papers, people close to the situation knew it was a matter of time until they left. What would stop them? They would just be another empty factory in the rust belt. There are hundreds of them, right?
But we still have more than our fair share of social unrest in a divided country so it won’t be easy. This week holiday shopping starts and the big X factor is how much the so-called ‘protesters’ will interrupt holiday shopping the way they did last year.
We are in different situation here than we were in 1980. But I thought I’d bring out the Dow chart from the time Reagan was elected. Right now, at least half the country feels like it did when Reagan won. The market had been in rally mode most of the year and actually topped not long after Reagan took office. Then they had the vicious correction and retest of the 1980 low which lasted into August of 1982, nearly halfway through his term. There are several key differences from that era to this one.
First of all, the country was stuck in the 70s-high interest rate stagflation environment. Markets were starting to come out of a decade long bear while we’ve mostly been on a bull run for the past eight years. Back then the country was mostly unified behind Reagan, right now the country is deeply divided. But there is one similarity. In both eras, the majority believed the country was headed in the wrong direction.
Regardless of who you voted for, this was a "change" election where the vast majority of the public were either for Trump or Sanders. The mistrust of politicians and institutions was and still is huge.