Shock Waves
Posted on Saturday, November 12th, 2016
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain
What the heck was that? An unexpected Trump victory sent shock waves through markets this week. What was once up is now down and what was down is now up. You have probably heard various explanations to this weeks 5% rally in the stock market. Here is my take. While many predicted that markets would sell off 5-10% in light of a Trump victory traders took their hints from the Brexit vote back in June. After the Brexit vote markets sold off but then rallied furiously. So this time, traders never let them sell off. Thinking like an old floor trader we saw many investors get caught offside. When everyone is on the same side of the boat the exits get small.
As we have written before Wall Street is agnostic when it comes to the election. They just want to know which way to bet. They got it horribly wrong and that wrong-footedness contributed to the volatility that we saw this week. Longs needed to be sold and shorts bought. The deflation trade was sold and the inflation trade was bought. Bonds, REIT’s and utilities got pummeled while financial stocks and biotechnology ran higher reversing their courses from the past year.
Going forward the street is betting on US dollar trades and less on globalization of trade. They also see inflation coming back with the Republicans running fiscal deficits and increasing spending on infrastructure while controlling both Houses of Congress and 1600 Pennsylvania Avenue.
Market internals tell us that something is amiss. While markets ran up 450 points after FBI Director Comey cleared Hilary Clinton and what seemed to be her path to the White House markets rallied 500 points when Trump sailed to victory. Also, declining stocks have been higher than advancing stocks while the market hits new highs. According to Arthur Cashin at the NYSE the market saw the largest number of simultaneous new highs and new lows in nearly 50 years. Not a sign of strength.
We believe that the path going forward is to continue to follow the aftermath of Brexit on British markets. While a honeymoon period is to be expected we believe that, as has been the case in Britain, as the honeymoon ends equity markets will begin to consolidate their gains post election and gravitate towards their lows of election night. Market closed on Friday at 2164 on the S&P 500. For now, resistance is at 2170 and then 2190. Market is now overbought and should take a breather here. Lots to come in the next month with the forming of a Trump Cabinet, an Italian referendum that could spell further problems for the EU and a likely rate increase here in the United States.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.