What a difference a week can make…
Last week, global stock markets looked set for a 10–15% stock market correction.
Trump’s election promises — which drove the latest stock market rally — were running out of steam.
Paul Ryan, current Speaker of the US House of Representatives, said lawmakers wouldn’t repeal and replace Obamacare until March or April.
That’s a pity…
Obamacare, which has doubled healthcare costs for many US citizens, is a terribly flawed policy. Getting rid of it would put more dollars in the Average Joe’s pocket, which should stimulate the US’ consumer driven economy.
Trump also announced a US$1 trillion infrastructure program to rebuild America and ‘make it great again’. That sent commodities — namely copper and iron ore — through the roof. Unfortunately, Paul Ryan said lawmakers wouldn’t discuss infrastructure until the US spring (autumn in Australia).
Healthcare is the main priority…and we know that’s delayed.
Finally, Trump announced his plans to cut corporate taxes from 35% to 15%. That’s great news for corporate earnings. Stocks rocketed when Trump made it into the White House. Unfortunately, discussing the potential policy delays, Reuters reported on 28 January:
‘When it comes to tax reform, senior congressional aides said the spring of 2018 might be a more likely time than this year for the passage of legislation.’
Indeed, with the trifecta of election promises running out of steam, the investment thesis of ‘buy stocks because everything is great’ was coming undone. A 10–15% stock market correction was looming, which I’d expect to start this week.
That outlook has changed. On Thursday night, Donald Trump saved the day for stocks…at least temporarily.
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Buy the rumour…
First, we question: Is ‘The Donald’ reading The Daily Reckoning?!
OK, we joke. But, as markets were showing signs of technical weakness — trading volumes not corresponding to price movements — it seems a coincidence that his ‘election promises’ were running out of steam…exactly when a new a policy was floated on Thursday night.
CNBC reported on 9 February (my emphasis added):
‘President Donald Trump, facing doubts about the speed of his promised tax reform, said Thursday he will announce a plan in a few weeks.
‘In a meeting with U.S. airline executives, Trump spoke again on removing regulations for American businesses.
‘“Lowering the overall tax burden on American business is big league…that’s coming along very well. We’re way ahead of schedule, I believe. And we’re going to announce something I would say over the next two or three weeks that will be phenomenal in terms of tax,” Trump said.
‘In a press briefing on Thursday, White House spokesman Sean Spicer told reporters that Trump realizes middle-class Americans need tax relief and that the U.S. needs “fundamental comprehensive tax reform.”
‘The president also wants to create a tax plan that keeps jobs here, and incentivize companies to grow and come here, Spicer said.’
As soon as the news broke, we knew that stocks would fly higher. That’s precisely what happened. Have a look at the Dow Jones chart below:
Source: Tradingview.com; Resource Speculator
[Click to enlarge]
Interestingly, the top blue uptrend line picked the market high on Friday. It broke out above that level last night to retest the pink projection line, closing at 20,412 points. The lower blue line is the exact parallel, and should act as support in the future. Support simply refers to a ‘sticky point’ level at which the market find it difficult to move below. A closing below the 19,950 zone on a daily basis may suggest a correction.
The top black uptrend line has acted as resistance for most of the ‘Trump rally’. Similar to support levels, resistance levels refer to the point level at which the market finds it difficult to move above.
The Dow Jones broke through this technical resistance on Friday. The lower black line is the exact parallel, and has acted as the main support in the past. The Dow Jones bounced off this support on 19 January, before moving back to the top of the channel. Looking ahead, the 19,800-point level shows important support. A daily closing below that level should confirm a correction.
The pink line is the projection of the current rally. The Dow Jones is still eyeing off the 20,500–20,600-point level. That could get hit this week…or in the fortnight ahead. Remember, Trump said: ‘We’re going to announce something I would say over the next two or three weeks that will be phenomenal in terms of tax.’
Don’t ignore that statement.
The US stock market could rally into the next couple of weeks in anticipation of exceptional news. That’s exactly what happened following the US election. If that happens, the Aussie market is likely to follow, moving higher.
Don’t get carried away with the trend
Of course, while Trump’s words may engineer another rally, this is just a rumour at the end of the day.
And all rumours eventually fizzle out. That’s why traders ‘buy the rumour and sell the news’.
CNBC reported on 10 February (my emphasis added):
‘Americans will likely have to file their taxes before they see President Donald Trump’s tax plan passed.
‘Trump on Thursday told airline executives he will announce something “over the next two or three weeks that will be phenomenal in terms of tax.” The statement helped to boost stocks because the prospect of lower taxes has fuelled hopes for rising corporate profits. Optimism about tax reform had waned in the early days of his presidency as Trump focused on other actions like immigration.
‘Still, those hoping for tax reform will likely have to wait months, at least, for it to get done. Due to the congressional budget process and political realities, Trump may not sign tax policy into law until late this year or even next year, experts said.’
The reality is that a 10–15% stock market correction — both in the US and here in Australia — still looms in the short term, as a result of the inevitability of delays to Trump’s proposed policies. So, while there are a few bucks left in this trade, the big money should still be made either:
- On the short side during the next correction (i.e. punting on the market falling)
- Buying the best stocks during the next correction
Trump has merely kicked the can down the road for a few weeks. In other words, the potential of a stock market correction looks high in March.
In the meantime, as stocks continue rallying, expect gold to pull back. Remember, there’s no reason to buy gold when punters are confident about economic conditions.
Gold and stocks are likely to do the opposite during the next couple of weeks…and during March. In that case, if gold pulls back in the fortnight ahead, you may want to look to buy gold explorers with the most near-term potential. When stocks start to pull back, investors are likely to back the stocks with the most potential.
However, despite an impending correction, the stock bull market isn’t close to being over. Remember, corrections are a healthy part of bull markets, and they provide tremendous buying opportunities.
Editor, The Daily Reckoning