Time for Reflection

November 21, 2016

Despite the attempts by retailers to skip from Halloween straight to Christmas season, this is the week many Americans pause to reflect on the blessings they've been given. After a contentious election campaign that has widen the divide in our country I think it's important to realize that we still live in the greatest country in the world. We may have our differences, but Americans have overcome far greater problems than we are currently facing and always came out stronger. 

 

Emotions are running high on both sides, which often times leads to emotional decisions. We discussed this during our What Really Matters Podcast over the weekend (click here for the replay). Going into the week we find the market participants overwhelmingly optimistic about the prospects of a Trump Presidency. My opinion is this is VERY pre-mature as there are far too many obstacles in the way for most of his agenda items to be easily put into action I (click here for the details). Our systems are highly cautious, mostly due to the sell-off in the bond market (long-time readers know bond traders are typically early, but right on their fundamental outlook). Our systems also do not like what seems to be a futures driven rally (speculators versus investors). 

 

I read a few articles over the weekend saying it would be a light trading week (no Fed speeches, little economic data or earnings, & the "B-Team" manning the trading desks.) I will be here for any of you that are working this week as well.

Tuesday, November 22

Stocks are starting the day at all-time highs. Nothing seems to be able to derail the enthusiasm the market participants are having for a Trump Presidency. Keep in mind these same people spent months telling us how horrible it would be if he were elected.

 

In order to find any sort of rationality, it's sad that I had to go to the folks at Societe Generale, who provided a list of some "black swans" that could "shock" market forecasts. Keep in mind that by definition a "black swan" is something that few people thought was possible, so the very fact a large investment house is warning about these risks means they are not a true "black swan". The key point of this chart is the MAJORITY of market participants are ignoring these risks at the moment, so if they do begin to show up we could see a major reversal in prices. 

Note the largest of the swans and one that is likely to hurt growth forecasts is already occurring -- rapidly rising interest rates.  A Chinese "hard landing" is certainly possible based on the data we are seeing lately. Isolation and trade wars are also entirely possible based on how much we are hearing about the damaging trade agreements on BOTH sides of the political spectrum. The President certainly cannot make NEW trade agreements without Congressional approval, but he can change the way they are enforced as well as choose to no longer honor them. That could get real ugly, real fast.

Wednesday, November 23

Another day, another record close. We have just witnessed something that has not happened since December 1999 -- The Dow, S&P 500, NASDAQ, & Russell 2000 all closed at record highs on the same day. This chart from the Reformed Broker shows the impressive push of all 4 indices.

The big question as we get set to pause for Thanksgiving is whether or not this is similar to the final push we saw in December 1999 or the fall of 2007 or if this is the end of the 2 year consolidation that will lead to a "Reaganesque Bull Market". Given the overwhelming enthusiasm for stocks and the sell-off in bonds I would be cautious falling into the trap that it is the latter. If it is, our Dynamic programs are well positioned to take advantage and our traditional Tactical programs are not too far away from shifting to a bullish allocation.

 

We won't know the answer today or the rest of this week, so you may as well take some time to enjoy your family and reflect on the many blessings we enjoy simply because we live in the United States. 

 

May God bless you and your family this Thanksgiving holiday and for many more to come.

 

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