President Hope (FAS)
Let’s run it down…
Stocks took off with the conclusion of campaigning last November and haven’t looked back. We have new record highs on at least one of the indices almost daily, and despite a slightly less enthusiastic slope over the last few months, the rise continues.
And that has led many to ask if there’s more to come.
Well, the gains themselves notwithstanding (they’ve been extraordinary and almost unprecedented), traders and analysts have led us to believe that the surge higher was predicated on the policies of the incoming president, that included, among other things, significant infrastructure spending, a massive tax reform package, and a repeal of the Affordable Care Act.
Lo and behold, though, we’re now approaching a year since the election results were tabulated, and none of these things has happened – nor do they appear likely to pass into law in the foreseeable future!
So what of the stock market?
If it gained on a hope of these items being implemented, shouldn’t it just as quickly nose-dive on realization that they won’t?
On the other hand, what if they didn’t exactly rise on the hope of being implemented? What if – as we contend – they simply rose on … hope itself?
What we mean to say is that yes, the policy package was legitimate, and yes, it may eventually be passed, and equally so, it may have fairly discounted higher prices for stocks.
But our point is a finer one.
Our point is that the markets required a hope in order to give impetus to the massive buying binge that took place between November and January. And it didn’t matter that it was a repeal of the ACA or tax reform or anything else. It was simply a bull market in search of something – anything – on which to pin a reason to buy.
And it’s precisely for that reason that the market will not fall now, precisely when the president has shown a willingness to cross the aisle and work with Democrats on anything he believes will advance, even slightly, the agenda he has set for his presidency.
Why? Because that provides hope. And investors want hope. And if the entire country and media is obsessive compulsive over the president and what he said, and what he did, and what he thought or might have thought, or might think of in the future – or who likes him or doesn’t like him, or might like or be liked by him, then it’s quite clear that everything rests on his shoulders.
And furthermore, we’ve a hunch that the only thing at this stage that might derail the current uptrend in equities is if the president were to be unseated. If the ‘master of hope’ (ironic, no, that this was precisely his predecessor’s slogan?) is no longer working from the oval office, then all hope will be lost.
And moreover, all the fun will be gone, too. Because absolutely everyone seems to revel in the man, and no one, apparently, can just ignore him and get on with his life.
When the Emmy awards are about Donald Trump, and the Pope and the Russians and British and Germans and Chinese can’t stop talking about him; when the uproar and the comedy and the riddles and even the weather (!) are about this man…
Then a wall of worry (and distraction) far higher than the proposed Rio Grande border fence remains firmly in place, and only the gentleman’s ouster will bring it down.
Now have a look here –
After eight and a half years, the current bull market now stands in third place historically in terms of total percentage returns. We note that the annual rate of gain has not been as high as any of the top six bulls, but the duration has been better than nearly all of them.
For this is a bull market, we believe, that will not only eventually soar higher than all of its predecessors, but will also carry longer than any of them – longer, in fact, than anyone can imagine. This is the final blow-off top to the bull that began – as we measure it – back in 1932.
And the only thing that’s required to set off the next leg higher, is a fresh serving of hope.
Whether this comes by way of a face-saving resolution to the North Korean standoff, or a surprise cooperative turn from congress, or the completion or resolution or even semi-resolution to the work of the Russiagate independent counsel, we don’t know. But it will come soon, somehow, by hook or by crook. And when it does, stock prices will again soar.
They have to.
Because as the chart below shows, the moving averages of all the major financial stocks have now caught up to current price.
After President Trump’s win, the financials soared (in blue), with the three issues above being representative of the whole pack.
It followed that there would have to be a retracement, or a sideways slide at least, before we set off again for the moon. And that’s precisely what happened. We’ve been stuck in an eastward drift for three full quarters (in red), and there may be more to come, but we’re not likely pull back.
As much as it pains us to say it – and we’ve said it many times – this market is no longer connected to the fundamentals, or, indeed, any of the traditional metrics that served the investing public for the last century. We have now entered the era of ‘faith investing’. And we say that with a tear, not a smile.
The Hope. Just the Hope. And Nothing but the Hope.
This is an era when only a solid understanding of cash flows, sentiment and a rough technical know-how will help us prognosticate market direction.
And with that in mind, we return to the aforementioned financial sector, where, after a near nine-month hiatus, we fully expect the banks and brokers to separate from their moving averages and begin a fresh ascent.
And we’re playing it using the ultra-leveraged Direxion Daily Financial Bull 3x Shares (NYSE:FAS).- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,