Tuesday, March 28, 2017

The Morning Call--The Trump trade is not dead

The Morning Call

3/28/17
The Market
         
    Technical

The indices (DJIA 20550, S&P 2341) ended slightly lower, following a big intraday selloff.  Volume fell; breadth was weak.   The VIX (12.5) fell 3 ½ %, ending above the lower boundary of its very short term uptrend, back below its 100 day moving average after having reverted to support on Friday (I am putting that call in abeyance until there is follow through one way or the other), below its 200 day moving average (now resistance) and in a short term downtrend.  Yesterday’s pin action suggests that there are still a lot of buyers (complacency) around.
               
The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {19148-21431}, [c] in an intermediate term uptrend {11884-24736} and [d] in a long term uptrend {5751-23298}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2238-2572}, [d] in an intermediate uptrend {2072-2676} and [e] in a long term uptrend {881-2561}.

The long Treasury was up 0.5%, and remained above its 100 day moving average (now support), below its 200 day moving average (now resistance), in a very short term downtrend and near a minor resistance level.
               
GLD rose 0.5%, finishing above its 100 day moving average (now support), below but near its 200 day moving average (now resistance) and within a short term downtrend. 

The dollar fell 0.5%, ending below its 100 day moving average (now resistance), above but near its 200 day moving averages (now support) and in a short term uptrend.

Bottom line: I thought that the indices did well yesterday, recovering from the big initial down draft. If they can follow through to the upside, it will do a lot to address the issue I posed on Saturday---is the recent sell off noise, reflects consolidation or the start of a directional change. 

            Alarm bells ringing on Trump trade (medium):

    Fundamental

       Headlines

            Only one US economic datapoint was released yesterday: the March Dallas Fed manufacturing index came in below estimates.

            Overseas, March German business sentiment rose to a six year high; OPEC agreed to ‘evaluate’ its production cut plan.

NY Fed says declining oil prices due to drop in demand (medium):

            Investors got a roller coaster ride yesterday as the Market seemingly continued struggled with the implications of the defeat of the healthcare bill; specifically, whether it was only a minor setback and good things still lie ahead for tax reform and infrastructure spending or it signaled the likely demise of the Trump/GOP fiscal reform.  That may remain an open question for a while as a tax bill is likely weeks away. 

That said, we know whatever occurs, the Trump trade has taken a heavy body blow; so it seems probable that some portion of the 300 point post-election rally in the S&P will get taken back.

We also know that (1) the $1 billion in tax savings from the repeal of Obamacare will not be available to offset tax cuts  and (2) the border adjustment tax continues to lose support; it being the source of another $1 billion in tax revenue that was also expected to fund tax cuts.  That, at least, suggests that there could be more disappointment ahead for the dreamweavers.  Certainly, it is too soon to write off Trump/GOP proposals as meaningless but it seems reasonable to assume a scaled back version of the original hype. 

The internal GOP clash on taxes (medium):

In fact, as I have argued repeatedly, given the current magnitude of the budget deficit and the federal debt, any action to reduce tax revenues or increase spending would do more harm to the economy than benefit.   So I believe that the good news scenario is revenue neutral tax reform and a prioritizing of spending versus a big increase.  That is not apt make a lot of investors happy.  So it also seems reasonable that even more of the post-election rally could be recouped.

Bottom line: the economy continues to stumble ahead, perhaps with a bit more consistency than was apparent six months ago.  In addition, its future growth will almost surely aided by the deregulatory efforts of the Donald and may very well be helped more if the GOP can pass a simpler and fairer tax bill.

As far as the valuation question goes, for me at the moment it has a technical component: will the taking back of the Trump trade halt at the lower boundary of the indices short term uptrends or will return to levels of last November?

            Declining sentiment (medium):

            Current fund managers’ asset allocation (medium):


            My thought for the day:  one of the most important thing an investor (or anyone for that matter) to know is what he doesn’t know.  Quoting Charlie Munger:
“If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.”

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