Catalyst that Could Jumpstart Volatility this Week…
Promises… and more promises! Investors like them and got their fair share this past week from newly elected President Trump. “Talk is cheap,” though, goes the saying – and this week, it seems like we’ve reached the point where “The Donald” will need to make good on his word and pay up on his deferred checks, something likely to propel stocks to new additional highs.
Stocks soared to a serious of repeated new highs after Trump was elected, on the background on the then president-elect’s growth-driven agenda, which had included: a huge infrastructure spending platform, restricted regulation, and more important than anything else, lower taxes. At the same, in his first few weeks in office, Trump got “sidetracked,” focusing on other topics – and that’s the reason indexes had stagnated and that’s also why the S&P 500 had been stuck in place below the 2,300 point level.
Finally, this past week, Trump twitted on Thursday about lower taxes, with a promise to reveal a new plan within the next 2-3 weeks. That was all the persuasion investors needed to take the S&P 500 up and beyond the 2,300 point level. Furthermore, risk aversion fell by the wayside, as players gobbled up small cap and growth stocks, which significantly outperformed the rest of the market.
Since having been elected, President Trump has taken the driver’s seat, becoming the big mover and shaker behind market movement as he cast aside his obsessive focus on the Fed with promises of new and large fiscal programs to substantially boost growth.
The backseat driver, Fed Chair Janet Yellen, is likely to retake the steering wheel – for at least 2-days this week – as she testifies before the U.S. Senate on the economy and central bank policy. Investors will give her their full attention and when considering that the VIX is traded at an extremely low level, we definitely can’t rule out the possibility of a jump in volatility. The VIX, i.e. the volatility index of the Chicago Exchange, traded at a level of just 10 points this past Friday, signaling a high level of market complacence, stocks climbing to new historic highs.
On Wall Street, traders are waiting to hear whether Yellen will signal that the Fed will hike rates three times this year as per the Fed’s projection in December ’16, while also perking up to hear when the next rate hike will be. Likewise, investors will be looking to hear the Chairwoman’s answers to questions regarding Fed policy and what Yellen thinks about the new tax policy, fiscal stimulus, limiting banking regulation, and new efforts to monitor the Fed’s activity itself by use of a new body that would oversee it.
This week we’ll be getting a number of significant economic reports. On Wednesday, consumer inflation figures (CPI) and retail chain sales will be released. Likewise, be primed this week for last quarter figures from PepsiCo (PEP), and Cisco (CSCO), Kraft-Heinz (KHC) and AIG.
SPY Technical Perspective: Indexes closed slightly beneath their intraday high on Friday, though succeeded in carrying out a classical breakup, lending continuity to the push seen earlier in the week. This past week, a jaw dropping number of stocks broke up to new yearly highs, small cap stocks likewise taking a step forward. Of late, momentum had been the biggest problem for the bulls, and now, they’ve finally succeeded in dealing with the problem with a nice helping of continuity.
It’s reasonable to assume that what helped movement was those skeptics who had contrived a “Sell the Donald” trading approach, things though backfiring when discussion of a new tax policy to be released over the coming weeks undermined the efforts of the bears. The market is still optimistic in everything regarding an uptick in growth – and is ready to make short shrift of the political concerns commanding headlines.
So what now?! Can the market build on this latest strongly-grounded break up? There’s a high chance that we’ll see some back and forth seesaw movement, some investors choosing to lock in short-term profits, though bet your guns that correction buyers are well-aligned on support lines and ready to pounce in the face of any market weakness.
In a market environment like this, the problem for the bulls is always the question how long the strength will last. Despite existing momentum, many stocks are, at this stage of the game, becoming stretched on a technical basis and therefore, it’s hard to find alluring entry points. Those looking for optimal entry points need to dig very deep to find reasonable places where they can put new moneys to work.
When the bullish movement is so clear, you can count on those traders down on the market to perk up, announcing that the market has peaked, casting doubt on market movement and wailing against the market’s complacency – or saying that the market itself is overstretched. With all of that, and other misgivings, the market’s behaved beautifully. There’s no euphoria here, and markets, i.e. stocks, are not inflated.
Work Plan: From here on in, things are simple. Look for those deals likely to benefit from higher interest rates (shorting bonds and buying financial stocks). After that, you can think about stocks that will spice up your investment portfolio with high yields, something you’re likely to find with growth-leaning small-cap stocks.
Weekly Summary: Wall Street broke out to new highs on all of the indexes. The Dow Jones climbed 1.18% last week. The S&P 500 tacked on 0.95%, the NASDAQ climbing 1.35%.
Have a great trading week!