Thursday, December 29, 2016

Finally Some Selling

It seems like we haven't seen selling like yesterday for months.  The market was overbought, and it has chopped since the FOMC meeting to consolidate the gains.

 Bonds finally caught a strong bid.  That is a good sign if you are a bull not only in bonds, but also in stocks.  I see very little upside in yields, perhaps up to 2.80% 10 year, which means this equities rally probably has more to go.  The biggest bear case was a bond market continuing to selloff, infecting its weakness onto equities.

Yesterday, it looks like we had those looking to sell stocks ahead of the newly feared January. Market professionals are much simpler than you think.  They remember what happened in the past 3 Januarys, when we had chunky pullbacks, and are projecting January 2017 to also present a pullback.  The contrarian in me thinks that this market will receive a bunch of inflows in the start of the year, as the trend of big inflows continues, propelling the market to all time highs.

Despite the big inflows, I see no euphoria in the financial media or on Twitter.  Sure, there is no more outright bearishness that you saw for much of the year, when people like CNBC's Brian Kelly screamed sell at every opportunity.  But there is also a reluctance to fully buy in to the rally because of the uncertainty of what Trump will do when he enters office.  And whenever there is uncertainty, there is untapped potential for the market to go higher.

The markets usually top out when there is the most certainty and it seems like there is nothing to fear.  A lot of investors are still worried about what policies Trump will enact, especially his trade policies, or even his abrasive tweets.  I think the uncertainty is overblown because the Republican playbook is right out in the open.  Cut taxes, cut some more taxes, spend on defense, and then cut some regulations.   Those are short term bullish for the stock market, and that carrot of those new tax bills being passed will keep this market afloat.

As for Trump's various rants and tweets, they are irrelevant and the market ignores them.  You have to consider the source.  Trump spews out a lot of abrasive and unpresidential tweets, but at the end of the day, they don't mean anything when it comes to his policies or to the economy.

There is some complacency in this market, but given how strong this market has been, with breadth very strong, it shouldn't lead to more than a couple percent pullback before you test the highs again.  Due to the complacency, I am not bullish, but because of the strong uptrend and expectations for strong equity inflows in January, I cannot be bearish.  There are no high probability trades here, but if I had to choose, I would rather buy S&P 2250 then sell it.

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