Tuesday, January 10, 2017

Reminds Me of 2015

The price action, charts, and investor attitudes remind me a lot of 2015.  That is, early 2015, before you had the big August plunge.  The sentiment is similar, we are near all time highs, yet it seems like investors are tepid about this rally, waiting for more proof, as in details of Trump's plans.  If you recall in the spring of 2015, you had bonds selling off while equities were chopping sideways.

As you can see below, the SPX had a thrust higher off a fear bottom in October 2014, and rallied strongly for 6 weeks, and then chop for the next 8 months before the bottom fell out in August.  The reason for the chop was plunging oil prices, and partially the stronger dollar.

This time, we don't have plunging oil prices but we have the return of the strong dollar.  Just like 2014, the market bottomed and ran up strongly for 6 weeks into the FOMC meeting in Nov-Dec 2016, where Yellen quashed some of the animal spirits, and we have chopped for the past 3 weeks.   The sentiment is similar in that you had lots of bullishness on the thrust higher, but then when you started chopping, the sentiment quickly became more neutral and tepid.  There was no enthusiasm at the top, just dull trading.

Hopefully this time we don't get the same scenario where the market turns dull and just flatlines.  One difference this time though is that the VIX has remained quite low during this chop, while the volatility was definitely higher in the early 2015 period.  The more chop that we get here, the less likely that we will have a blowoff top.  Usually blowoff tops require enthusiasm and I don't know if we will be getting that this year.  Perhaps we see some enthusiasm for Trump's policies once they get passed, but I think odds are that we don't.  There is a hard wired pessimism in this market among retail despite 8 year bull market.  It makes it more likely that we have an extended chop at the top rather than blowoff.

Looks like we are going to be hearing from Trump tomorrow, it seems like a sell the rumor situation considering the now widely held belief of buy the election, sell the inauguration.  It is a psychological game of chicken now.  Who will be the sucker left holding the bag when the crap hits the fan?  It seems like there is apprehension to hold the bag but the automatic roboadvisor inflows keep pouring into US equity ETFs.  With the lack of enthusiasm, it seems more and more like a chop till you drop 2015 scenario.
We'll have to see how the market reacts to Trump after inauguration.  My gut feel tells me we selloff before Jan. 20, and then rally after.

SPX October 2014 - October 2015

SPX September 2016 - January 2017


Anonymous said...

"Permaneutral" on twitter: I agree market will go down hard. Trump is still consistently nice and reserved but after the 20th he will unleash his agenda. ..showdown with MSM ..mass deportations....there will be constant conflict until the globalists are neutralized ... He will be a much better president I ever expected so I sold my longs..I expect a market to reset.

Market Owl said...

There is no doubt that Trump will shake things up. He is definitely not a cookie cutter politician. It will make things interesting over the next 4 years. If he goes through with his trade agenda and kicks out illegals, that will unleash a torrent of selling in equities.