The end of election uncertainty turned into a wild and crazy, risk on market.
Investors had been de-risking for the prior two weeks on worries over the election uncertainty. The conventional wisdom called for a Clinton victory, a gridlocked government, and a market rally. As Trump rose in the polls there was worry about a potential Trump win that would cause even more uncertainty over protectionism and extreme trade law changes.
Apparently investors were in shock when it appeared he was going to win and the Dow futures declined over 800 points. When portfolio managers actually thought about the possibility of significantly lower taxes, repatriation of more than $2 trillion dollars and another $1 trillion infrastructure program, they rushed to buy the dip. The Dow went positive shortly after the open and the rest is history with the Dow closing at a new high for the last two sessions.
Analysts believe portfolio managers were under invested because of the uncertainty. Once the market began to move higher they were forced to chase prices as they tried to put cash back to work. Some feel this could continue for weeks because of the sector rotation required to move from dividend paying safety stocks to industrial growth stocks.
The sectors benefitting from the influx of cash include energy, banks, aerospace, defense, materials and mining. Sectors benefitting from the lack of a Clinton presidency include healthcare, drugs, biotechs and again banks. This rebound in these areas powered the markets on huge volume.
The volume on the four days before the election averaged about 7.1 billion shares a day. On the two days after the election, the average was 12.2 billion shares each. Friday calmed slightly with "only" 9.6 billion shares. Those were the highest volume days this year and probably last year as well with the exception of the 15.1 billion share market crash the day after Brexit where the markets lost -3.14%.
The biggest gains were in the small cap stocks. The Russell 2000 gained 10.2% for the week and the S&P-600 gained 10.5%. Banks rose 12.7%, biotechs 17%, and the brokers gained +14.7%.
The Russell has yet to make a new high but it is very close. However, it may be difficult because many small cap stocks rallied even more than the index with 15% to 30% individual gains. Those will have to be consolidated before the index can move significantly higher.
The Biotech Index has significant resistance at 3,475 and after the 17% gain last week that resistance is likely to hold when tested. The sector dodged a bullet with the Trump victory but that does not make them bullet proof.
One of the charts I have tracked here in the past has been the relationship between the High Yield ETF and the S&P-500. The S&P typically follows the HYG and that ETF declined almost 5% over the last two weeks. Obviously, strong buying in the big cap industrials can offset that correlation temporarily but the HYG decline will eventually weigh on the S&P.
The big cap tech stocks were crushed on Thursday in a monster sell program that may have been launched to raise cash for the sector rotation move. The FANG stocks were all weak but some of the techs did rally on Friday. The semiconductor sector rebounded +4% from Thursday's crash and the $SOX is close to a new high. A new high by the $SOX would drag the Nasdaq higher. The $SOX is the head of the Nasdaq snake. Wherever the $SOX goes the Nasdaq will follow. That assumes the biotech sector is not moving in the opposite direction. In recent years the biotechs have assumed a larger roll on the Nasdaq because of their proliferation.
The market rebound lifted many stocks back over their 50-day averages. The percentage of S&P stocks over their average rose from 27% to $53.8% in only three days.
The commodity sector was the only real loser last week as the dollar soared to a ten-month high. If there really is going to be a major infrastructure rebuild program that will help commodities but we are a couple years or more away from seeing that process begin.
I am not going to spend a lot of time in this section this weekend because I covered a lot of charts in the Option Investor commentary. The main point remains, Trump was elected and the market exploded higher. The gains may not be over because of the sector rotation concept as well as the selloff in the bond market. The "great rotation" may have finally begun and bonds/treasuries could continue to decline for the foreseeable future with that money flowing back into equities.
I said last Sunday, "This means Wednesday is more than likely going to be a massively directional day... If Trump wins, we could see the equivalent of a Brexit dip but I believe it would be bought just like we saw in June. That makes a Trump victory a sell the news event but managers will be quick to buy that dip once the smoke clears." I never expected the dip buying to begin at 1:AM Wednesday morning but I am definitely not complaining.
Enter passively and exit aggressively!
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