February 4, 2017

February 4, 2017


Financials Lead


Institutional investors always like it when the Financials lead. The implication is that Financials do well when expectations that the economy is about to improve. This was the case off of the Trump bump, but was given additional life on Trump's comments to the economic advisory council. Trump plans to cut "a lot out off Dodd-Frank". In addition to repealing the financial advising rule, that allow's brokers to sell 70 year old widows much needed naked option writing capability, removing the consumer financial protection bureau, and lifting restrictions on leverage. Dodd-Frank was an overreaction to the economic crisis that lead to 2008-2010 recession. It placed a significant regulatory burden on banks, especially smaller regional banks. It want's all bad and unnecessary. It was always assumed that banks would never allow practices that might undermine and destroy their own institution. They were wrong. There are regulations that need to be levied on banks, but many believe that Dodd-Frank went too far. Trump's desire to unwind the law will free up capital restrictions and expand lending, no doubt. What's good for Finanicals is good for the economy.


Last week we said to watch how stocks and the sectors responded to earnings. Apple had good earnings and held onto its gains. Amazon disappointed on some measures and was punished. Facebook did well, but after a good start, ended down. Bear moves end when stocks go up on bad news. Bull moves end when stocks go down on good news. We weren't quite there yet. Facebook did go down on what was generally considered decent news, so we are seeing cracks in the rally's underpinning. I still advocate tightening stops so that we don't miss the start of a typical, seasonal correction of 5% to 7%.


On the economic front, last week saw much good news. The Fed left rates steady, as anticipated. The nonfarm payrolls were up 227,000, better than expected. ISM manufacturing was strong. Consumer confidence, home prices, consumer spending, and factory orders were all solid positive numbers. In general, the economy is on solid footing and earnings are decent.


Our caution stems from the market seeing all the positive steps that should lead to better economic growth. An infrastructure spending plan should also be viewed as a significant boost. Civil discourse doesn't immediately play into economic expectations. T-shirt and hat sales are way up, as is poster-board sales. We don't see the market reacting to that news. However, "expectations vs. reality" is where we should become concerned. It's not that Congress isn't going to pass Trump's plans, it just might take longer than is currently being discounted. When overbought, time can become an enemy.


Technically, new highs are great, but there is no way that they are getting a confirming tick in the momentum indicators. This will eventually set up an negative divergence that traders will look back at and say "that was obvious". It doesn't mean that the bull market ends, but it does mean that one should be prepared to position for the 5% to 7% pullback at the first sign of a breakdown. The economic calendar next week is very light. There are still significant earnings releases next week. We should anticipate more volatility. However, volume is starting to temper, and that means news can have an impact at the start of each day. A better opportunity to enter the market should happen by March.



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