Trump’s First Two Weeks & Key Supports To Watch
After two weeks in office, President Trump has not been idle, to say the least. Just about every campaign promise Trump made, he is in the process of executing. While it is refreshing for an elected official to actually do what he promised in a campaign, we are amazed that markets have not reacted to the potentially negative economic fall-out from Trump’s series of executive orders. Consider, in the space of two weeks, Trump has (1) moved ahead with the building the wall with Mexico, (2) snubbed the Mexican president who cancelled a visit to Washington, (3) threatened a punitive 20% tariff on Mexican import to pay for it, (4) approved the Keystone and Dakota pipelines, (5) cut Federal funding for sanctuary cities, (6) banned travel from seven Muslim countries, (7) killed the Trans-Pacific Partnership (TPP) trade agreement, (8) proposed leveling the playing field with China by slapping import duties on Chinese imports, and (9) this past Friday signed two directives aimed at starting the process of rolling back the regulatory system put in place after the financial crisis, targeting the rules that protect against predatory lenders, forcing brokers to lower fees for retirees, and banning proprietary trading. While admittedly some measures will have near-term benefits for economic activity (building the pipelines, reconstructing infrastructure, tax cuts and deregulation), we have a few concerns with the disconnect between the stock market and the Trump reality. First, many of these changes are bringing uncertainty, a feature markets usually don’t like. While many of Trump’s actions should be applauded, we must nevertheless wonder where we going with labeling China a currency manipulator, banning travel from Muslim countries, and threatening NATO allies. Second, the positive economic measures of spending and deregulation will take time to filter through the economy. The stock market is discounting all the beneficial effects today of measures that will impact GDP growth in 9 to 18 months. Not only is the stock market front-running future economic gains, but in the interim, we are set up for any disappointments. And knowing that Trump’s executive orders will expire and Congress must agree to his deeper reforms and tax cuts, there is reason to be concerned. Finally, the main reason markets feared Trump initially – his trade policies – must now be dealt with. Whatever the S&P 500 is doing now, the index is in no way convincing us that protectionism is now a positive for economic growth. Misallocating resources, killing the Ricardian theory of competitive advantage, and stoking inflation through higher goods prices is a recipe for future economic disaster. So far Trump has backed out of the TPP, is threatening to undo NAFTA, is instigating trade wars with China and Mexico, and is shutting the door on European trade partners. This almost falls into the realm of economic surrealism.
Against a backdrop of political incertitude, the major macroeconomic statistics which kick off the month gave bulls a reason to buy the dip in the Dow below 20,000. The ISM Manufacturing Index rose 1.5 points to 56.0 in January, beating forecasts. The Non-Manufacturing Index stagnated at a still high level of 56.5 on a day when the Non-Farm Payrolls rose 227,000, largely exceeding the consensus estimate of 180,000. Earnings season is once again following the trend in equity prices. As usual, about two-thirds of companies have announced results that marginally nudge over analyst forecasts. Several big names surprised (Apple, Microsoft) while others disappointed (Amazon, Google). As we have seen throughout this bull market, earnings will not prove to be the stumbling block in this equity price bubble. We expect U.S. equity indexes to grind higher through the end of earnings season, as cautious investor continue to wait on pins and needles for the event that will shock markets and bring volatility back to investing.
Technical Support Levels
We remain in a “buy the dip” market… until it’s no longer time to buy the dip. While we viewed the re-break of Dow 20,000 to the downside on January 30 as bearish, markets decided otherwise on employment Friday. This mini-bull trap set-up is essentially annulled and we can envision new record highs again in the coming week. Buying intraday dips above Dow 19,800 makes sense for agile traders. Raise stops for new positions on the Dow to 19,800 on a closing basis. Below this level we see a big support zone formed by the long day on December 7, roughly 19,300 to 19,550. We would remain neutral if the Dow begins falling to this zone. Shorting dips will still prove to be costly until we get momentum indicators rolling over. At the same time, holding longs below 19,800 will cause stress, as the potential downside is considerable.
Dow Jones Industrial Average:
The Nasdaq-100 lagged post U.S. election but has come on strong in 2017. We are watching the internal trend line traced in green in our chart below. Connecting several daily highs since August 2016, the index broke above this level on January 24 and then retested without breaking the line on January 31. We are making this our first bubble burst defense line, at roughly 5,090. Dips will likely be bought until a solid close below 5,000.
The Russell 2000 small cap index has yet to break out to new highs this year. However this index had the strongest post election bounce in 2016 of the U.S. majors. A close below 1350 will cause dip-buyers to hesitate. A close below the December swing low at 1310 (green circle) would increase the odds of retracing the entire Trump bump.
European indexes suffered more technical damage last week than their U.S. counterparts. Only the German Dax continued to close above prior January lows. The CAC 40, Euro Stoxx 50, and FTSE 100 all broke lower before bouncing with continued strength on the U.S. exchanges. The easiest index to read in Europe is the DJ Stoxx 600. We would key off the 360 level for trading European equities. The index closed on this level on January 31 and reversed higher. A close below the January lows would suggest a deeper pull-back before dip-buyer come back in.
The U.S. dollar continued to slide last week after reversing the break-out following the December FOMC meeting (arrow in chart below). The pull-back has extended to the October swing high, which corresponds also to the Fib 38.2% retrace of the move off December lows. We are looking for the dollar to bounce into mid-February towards $102.
Despite political incertitude and the risk of a Trump blunder, markets remain serene. U.S. indexes have experienced no real technical damage since the election and the grind higher remains the path of least resistance. Multi-year lows in the VIX and extremely expensive valuations suggest a disproportionately high level of risk accompanying any further equity gains. For the moment, investors are buying the story of prospective economic growth and overlooking valuations and political risks. While waiting for a trigger event (or a black swan) to refocus investor attention on valuations and risks, we expect more of the same equity sideways trade with occasional bumps higher.
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