Market strength tends to beget more strength and a greater frequency of new highs usually perpetuates higher highs. All major indices hit new all-time highs last Friday. But many folks on The Street are worried that the Trump rally can’t last and that valuations have gotten way ahead of underlying value. Truth is this rally or any rally doesn’t last forever. But this rally has legs and is not likely to get derailed until a new Trump administration fumbles, falters and really screws something up. And that can’t officially happen until January 20 when Trump takes office.
This rally’s legs are supported by a few main pillars. First, growth appears to have picked up and turned the corner. 2016 Q3 GDP was revised higher today, rising at a rate of 3.2% annually. With nearly all S&P 500 index companies reporting results, profits were set to rise 4.2% in the third quarter of 2016, likely ending the streak of five consecutive quarterly earnings declines.
Secondly, although the Fed is extremely likely to raise rates in two weeks (CME Group FedWatch tool has the probability now at 96.3%), the Fed Funds rates will remain historically low at well under 1%. Perhaps the Fed’s “fake it ‘til you make it” mantra is finally paying off and the economy is beginning to grow organically. The fact that they are actually finally ready to raise rates again is the clearest sign the economy is growing on its own. The Fed may yet prove to have been too late in raising rates, causing rampant inflation down the road, but that is some time off and not likely to impact us until after the first 100 days of the Trump Administration or later in Q2 at the earliest.
That brings us to the third pillar: Trump. Whatever your ideology or however you voted, Donald Trump is our next President. And he likely brings about the greatest potential for change in U.S. government policy since the mid-1970s and early 1980s. Rates were at the other end of the spectrum and market has performed much better currently. But it’s a different world now and we are arguably at a similar inflection point at the outset of another secular economic boom and bull market.
There will be setbacks along the way and bear markets and even a recession, but we are at the beginning of the next technological leap for humanity and the planet earth. Artificial intelligence and robotics are on the verge of surpassing human capabilities. Biotech is nearing the holy grail of cracking the genome and curing many diseases. And Energy tech is making breakthroughs that are poised to change the way each and every one of us lives.
But for now, the market is responding to this potential for real constructive change in US government policy that stimulates growth and gets a little more out of the way of the private sector. It remains to be seen if Trump can execute, but the market is already betting he’ll have some positive impact. The major areas of rapture for Wall Street are building out and rebuilding the country’s infrastructure, reducing taxes and regulation and focusing on policies that stimulate the domestic economy. The last tax cut we had in the U.S. was 2001, but Trumps tax cuts are being billed as the most comprehensive since Reagan. As we want to make painfully clear, any Trump Administration stumbles early next year could quickly derail this rally.
The other thing we want you to be on the lookout for is any early December weakness. Early December is notoriously weak due to tax-loss selling, check the
December Almanac (
Stock Trader’s Almanac page 108). We think this will be another solid buying opportunity, so be patient if you missed some of the rally and wait for the typical December weakness to take additional long positions.
The thing we are concerned about with this December’s tax-loss selling season are the prospective Trump tax cuts and loophole closures next year. There are two scenarios we envision. First, folks think that tax rates will be lower next year and Trump will keep the loopholes to benefit corporations and high-net worth people he believes will stimulate the economy. This creates less tax loss selling this year as everyone waits for lower rates and gets the same loopholes next year.
Or the more likely case where Trump has to compromise by getting rid of loopholes to get tax rates down. This would likely keep tax-loss selling at a normal or increased level as everyone tries to take advantage of the existing loopholes this year. Bottom line, get ready to take advantage of any December weakness to buy U.S. equities, sector ETFs and major market ETFs. Ride the Trump revived economic growth rally at least until Inauguration Day or the first 100 days. But be ready to take some profits next year as new policy initiatives shake things up near the end of the Best Six Months.
Pulse of the Market
Our Seasonal MACD Buy Signal issued after the market’s close on October 24 came several days early as the market slipped ahead of Election Day. Buying weakness, as our signals were suggesting, proved correct as the market roared back to life on November 7 and has not looked back since. DJIA (1) was first to breakout to new all-time highs while S&P 500, NASDAQ, Russell 1000 and 2000 quickly followed suit.
DJIA is on the verge of gaining 1000 points this month. This feat has been accomplished in just four other months; March 2016, October 2015, October 2011 and April 1999. This brisk upside momentum has lifted both the faster and slower moving MACD indicators applied to DJIA toward over bought levels (2). It is not uncommon for the market to falter in the first half of December and the market does appear to be setting up once again for at least a period of consolidation and/or mild pullback before resuming its march higher.
The current market rally took hold after a week of losses that was preceded by the ninth Down Friday/Down Monday (DF/DM) (3) of 2016 on October 31. This occurrence was followed by immediate and persistent declines that adequately fulfilled the cautionary aspects of the warning. Four weeks later, DJIA (4) is at new all-time highs and trading above 19000 for the first time ever.
S&P 500 (5) and NASDAQ (6) have also been up three weeks in a row and are also trading at new all-time highs. Across the board new all-time highs is bullish and is likely to lead to even more new highs.
NYSE Weekly Advancers and Decliners (7) have been behaving as expected. Weekly advancers were robust last week which suggests broad participation in the current rally. Again, this is bullish as it indicates most stocks are climbing, not just a limited number of high flyers.
NYSE Weekly New Highs (8) made an abrupt reversal during the second week of November while New Lows continued to expand until last week. This behavior can be attributed to a rotation out of defensive, often rate-sensitive stocks into areas of growth or at least potential growth under a new administration in Washington. The move out of safe havens can also be seen in the rise in 90-day and 30-Year Treasury rates (9). Since the jump in rates easily exceeds the expected Fed increase in December, growth and inflation outlook improvements probably account for the balance of the move.
Provided President-Elect Trump is successful in his first 100 days in office, the market appears poised for further gains. Major indices have decisively broken out to new all-time highs, there is broad participation in the rally and there has been a rotation out of defensive sectors and positions.
Click for larger graphic…