Saturday, 25 March 2017

Is the Trump Rally Over?

 A Rally is a Rally By Any Other Name 

Maybe the better question is, "Has the Trump Rally started yet?" The short answer is, kinda, even though none of his pro-growth policies have been implemented yet.

These 3 charts below are plotted on identical time frame, and their trend channels are shown in light purple. Note how identical are the angles of the 3 trends of these so-called judge! Sorry, i mean so-called Trump Rally.

This rally started from the low of 11 Feb 2016, indicated in the SPY chart as the Crude Deflation Low. This was the point when the crude price, equity market, bond yield bottomed. And from there, everything rallied.

These rallies occurred some 9 months before Trump's victory. You can't blame or credit Trump for the rally. Very few thought Trump could get into the office during the campaign. In fact, the evening Trump was declared victory, the market indexes plummeted in pre-market in amazing fashion. For more about what happened on the market on the Election Day, you can read my article Trump Election Victory and the Stock Market's Roller Coaster Ride.

SPY ETF chart showing bullish trend channel as of 25 March 2017
SPY ETF chart showing bullish trend channel as of 25 March 2017

QQQ chart showing bullish trend channel as of 25 March 2017
QQQ chart showing bullish trend channel as of 25 March 2017

IWM Russell 2000 ETF chart showing bullish trend channel
IWM (Russell 2000) ETF chart showing bullish trend channel as of 25 March 2017

 Post Election Elation  (aka Trump Honeymoon) 

Now that i make it clear that the market rally aren't due to Trump, at least, not all of it. Some of it could be attributed to his policies. But to call it Trump Rally is somewhat misleading, even the part of the rally after election. But some of the rally post election could be assigned to pro-growth Trump policy anticipation riding on top of the existing rally that dated from the Crude Deflation Low of Feb 2016.

For example, IWM was far more stronger than SPY or QQQ in the 6 weeks following the election. This is indicated by the prices spending more time above the centre-line in the trend channels than in SPY or QQQ charts. This is because IWM are made up of almost entirely small caps or U.S. domestically focus companies, which the market expected to be most beneficial in an American First policy. But it has fallen towards the centre-line lately. This is market's way of reducing the Trump effect on the rally.

Prices in QQQ do the exact opposite as IWM. For 2 months after election, QQQ spends its time under the centre-line, indicating its under performance to both SPY and QQQ. This is because the CEOs of the big techs were seen to be pro Clinton with their campaign contributions. There was in fact quite a bit of hostilities between candidate Trump and the CEOs of giant techs. It went so far that Trump said something to the effect of, "you people would be in trouble if i get elected". The market obviously took this to heart and stayed away from the big techs since election.

On 14 Dec 2016, Trump met with the big tech CEOs, QQQ rallied immediately after wards. The market clearly read this meeting as a positive development of relationship mending exercise. About 2 weeks later, QQQ prices returned above its centre-line. FAANG (extra 'A' is Apple) is back. In fact, since that meeting, QQQ has outperformed both SPY and IWM. Perhaps, it's playing catch up. Perhaps, while IWM is faded a little bit from Trump Effect, big techs could be benefited by it. Let say during the pre-Trump rally between Feb and Nov 2016, the big techs were market darlings. With Trump part of the Trump rally fades a little, big techs retains its former glories (if Trump leaves them alone. Trump doesn't need yet another group of enemies).

Trump's meeting with big techs CEOs on 14 Dec 2016
Trump's meeting with big techs CEOs on 14 Dec 2016. Don't the big tech heads look tense while Trump and Pence smile?
Jeff Bezos, sit at the end of the table, had a row with Trump on Twitter during Trump's campaign

Except for Brexit and the week leading to the election, when the market spent briefly below the centre-line of the trend. This is due to improving macroeconomic environment, where the rising crude price played the biggest role. Actually, the slow grinding down of the stock market just before election was corresponding to a continuing decline in crude prices, but not surprisingly, the blame went to the uncertainty of election, which probably played a role. But the lead role should go to falling crude prices.

One can't rule out the strong rise after election was propelled at least partly, if not entirely, by rising crude price that was fuelled by the OPEC talk of production cuts, which occurred a few days after election. How convenient! This isn't a mere coincidence with the strong move in November 2016. The Trump victory simply stole the limelight from crude price the way it stole the limelight from the Fed (with the help of the media. It's Trump Trump Trump everyday). Both of this - crude and the Fed - were all the market transfixed before the election. Now they're overshadowed by Trump's presence (we know that the media LOVES Trump, even if Trump HATES them). But the importance of crude and the Fed (less so) remain. If you like, read my article OPEC Vs Central Banks for the Battle of Inflation and Deflation to see how close are the relationship between OPEC and the Fed (much like the love-hate relationship between president Trump and the media).

I think the rally will continue after election with or without Trump. But Trump is the icing on the cake. It certainly has more impact on the sentiment than substance. But sentiment can add fuel to the rally. And entice more retail investors into the stock market.

In summary, since the majority of the 13.2 month long (so far) rally occurred on the back of improving macroeconomics (Trump only shows up in less than 40% of that entire rally). As long as that's happening, the rally will continue. There's no reason to think that the macroeconomic landscape is turning sour anytime soon. For one thing, several major economies in the world are also improving this year.

In short, i say that the Trump Rally is 20% due to Trump and 80% due to improving economic fundamentals (i won't argue with you with you if you say 30% or even 40%). It just feel like it's 100% Trump due to the the attention he gets from the media. Since they call it Trump Rally, how can it be anything else, right?

Even if there's something in the next few weeks or months that rattles the market (e.g. crude price dropped below $45), i think equity prices will spend briefly below the centre-lines of these existing uptrend channels. But it will quickly rebound from it as it have done so several times before.

 Trump Bump Stumbles Over A Speed Hump 

It's not just the media who called this rally Trump Rally, even Trump and his administration wants to own it. Weeks before election, Trump warned his supporters the dangerous lofty height that stock market was in, on several occasions. Here's one:

After the election, the stock market went up much higher. And as Dow reached 20,000, in a typical Trump's fashion, he said the rally was due to him, and it's going higher (again, on several occasions). This video shows one example. Go straight to 2:46 of this BBC video if you don't want to watch the whole video.

Well, the bullish market rally is too irresistible not to own it.

Another good example is how this Trump Rally isn't entirely due to Trump because the failure of the health care plan vote haven't accompanied by a large drop (anything > 8%). No big drop implies no big discounting of Trump policies in the 1st place.

If we have a bigger drop in the coming weeks, is it a coincidence once again that we will say that this is due to Trump's failure to repeal the health care plan that happened at the same time as crude price going south. Deja vu ! I think this is because the so-called Trump Reflation Trade, or Trumpflation looks a lot like the Long Crude Trade.

 The Silver Lining 

So with IWM and along with commodities, which fuelled by Trump's pro-growth fiscal policies, are fading while the tech stocks are advancing, this suggests that even the 20% of Trump's factor is being removed from the "Trump" Rally. At this point in time (late March 2017) the Trump Rally is in name only.

This repricing is a good thing. Because if little or zero of Trump's pro-growth polices are being priced into a rallying market, then when they're actually implemented, it will put extra fuel into the stock market. In other words, we have this strong rally in Trump's name only, and when the actual Trump Rally starts - i.e. when his policies are being implemented - it's quite a sight to be behold. But of course, Trump policies don't exist in a vacuum. We need to curb our enthusiasm for the development, however. The Fed, for example, may act in a counterproductive way. It may raise rate to kill wage rise pressure, and kill any rally. This could be 2 or 3 years away. Will have to wait and see how all this plays out.

If Trump couldn't deliver on any of this pro-growth policies (which is highly unlikely. He should able to deliver at least a small part of his plans), it's ok because the rally has started without him, and got a boost when he got into the office, and then being repriced once again when his health care bill failed. The Trump Honeymoon is over. We're now pretty much back to pre-Trump rally mode. Anything Trump can deliver on his promise in the future is an icing on the cake. If not, that's okay. Just eat the cake, it's less fattening.

In summary, if prices stay inside the purple channels, the rally is intact (that doesn't mean that we're going into a bear market when prices fall below these channels. We'll just have to reevaluate the whole bullishness of the rally). But i think it's unlikely.

For the next few weeks, the market may traverse further below the centre-line. It may even visit the bottom of the channel to test 200d MA. Maybe. I'll likely do some company shopping all the way down to the bottom channel. 3 weeks ago, my cash level was 20%, today, its 55%. I've been saving for a market rainy days like the coming weeks. There will be plenty of high quality companies to pick up at the discount bin. "Bring your truck, bring your wife, and save!"

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