Nobody in their right mind would have expected the reaction to the election results.

Not only was Trump not favored to win but the conventional wisdom suggested we could see a 3% to 5% decline after a Trump victory. There was a knee jerk reaction in the futures markets overnight with the Dow futures falling more than 900 points from their highs but the dip was nearly erased by morning. The S&P and Nasdaq futures hit their 5% decline circuit breakers in the wee hours of the morning but immediately began to rebound.

The Dow opened about 75 points lower and the S&P about 14 point but those losses were erased very quickly. The Dow rebounded from a four-month low to new highs on Thursday and Friday to end the week with a 5% gain. The Russell 2000 rallied 10% for the week to close at a new 52-week high and only 13 points from a new historic high.

The shifting paradigm represented by the Trump victory caught portfolio managers leaning the wrong way. They had been de-risking their portfolios for the prior 9 days and that is what produced the longest losing streak for the S&P since 1980 of nine consecutive losses. To say managers were under invested would be an understatement. They had raised cash by exiting sectors that would have seen negative performance under a Clinton presidency. Since nobody expected Trump to win they were simply raising cash and reducing risk.

With the Trump victory all the worry over banks, drugs companies and biotechs evaporated instantly and those sectors soared. Managers realized the paradigm was changing from holding safe dividend stocks and bonds to stocks that would perform well in an economy driven by lower taxes, $2 trillion in repatriated cash, less regulation and a rumored $1 trillion in infrastructure spending. Add to that expected spending on defense and aerospace and suddenly there was not enough cash in manager accounts to invest in all the new opportunities.

This prompted a monster sell program on Thursday morning that crushed the big cap tech stocks. The Nasdaq 100 ($NDX) fell -170 points from its opening high at 4,855 to the intraday low at 4,685. This was sector rotation at its finest.

Managers were rotating out of the big cap techs and raising cash to buy those sectors that would prosper over the next four years. Investors are looking at the change in political and economic outlook and are suddenly bullish again. This may sound strange but they are actually seeing the potential for the economy to accelerate with lower taxes, a replacement of the job killing Obama care and the removal of the 80,000 pages or so (really) of new regulations put in place over the last eight years.

Suddenly a Fed rate hike in December is a sure thing but it is seen as a positive event rather than a market negative.

Bonds were crushed as well as yields on the ten-year treasury rose from 1.77% the prior Friday to 2.12% this Friday. That massive change removed $1.2 trillion from the global bond market according to JP Morgan. With that kind of selling in treasuries, we may have just seen the start of the "Great Rotation" out of bonds and back into equities.

There are so many positives resulting from the election results it would be hard to list them all. It was not about electing a rude and crude individual to be president but about changing the economic policies that created the weakest economic recovery in the nation's history. Trump's policies are just an idea and they will probably change multiple times before they are enacted but as long as he maintains the focus on jobs, infrastructure, taxes, affordable healthcare and a reduction in regulations that have held back U.S. businesses, he will be successful and the economy can grow again.

It is this hope and change that is powering the markets higher. The S&P futures are up another 10 points on Sunday night. The S&P is still 26 points from a new high but we could get there this week.

The challenge is the potential for profit taking. Even with bullishness breaking out all over there are limits to how much an individual stock or index can rally without a decent bout of profit taking.

Right now, we are in the short covering and price-chasing phase. That will eventually end and the market will take a breath and pause for a few days. In the long run, the new paradigm will lift the markets and the economy higher.

Very few experienced investors would buy this chart. This is extremely overbought and if the Dow futures hold at their current +88 tonight, it will be even more overbought at the open on Monday. Be patient, profit taking will appear.

If it were not for the monster rebound in the biotech sector the Nasdaq indexes would have closed significantly lower. The Biotech Index gained 17% for the week after the Clinton threat evaporated. That was major support for the Nasdaq indexes. Unfortunately, we cannot expect another 17% rally in biotechs this week. I do expect big cap techs to find support as individual investors go bargain hunting.

We have a busy economic calendar for next week with 13 Fed speeches and you can bet they will all be suggesting a December rate hike. The Philly fed Manufacturing Survey is the most important report.

The earnings calendar has slowed considerably but there are three Dow components reporting. Home Depot could be the most volatile.

I would expect the market to continue to be volatile as investments are shifted and cash flows into equities. More than $22 billion flowed into U.S. equity funds alone over the last three days. All that sideline cash is going to come racing back into the market and it will accelerate if the S&P makes a new high. Beware of a decent bout of profit taking but I would be a dip buyer.

Jim Brown

Send Jim an email