Saturday, 25 March 2017

Is the Trump Rally Over?

Maybe the better question is, "Has the Trump Rally started yet?" The short answer is, kinda.

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. In fact, 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

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 during the campaign trail. 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. About 2 weeks later, QQQ prices returned above its centre-line. 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.
Jeff Bezos, sit at the end of the table, had a row with Trump at 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 in November, the election month. 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 30% due to Trump and 70% due to improving economic fundamentals (i won't argue with you if you say 40-60% as long as it's not 100% Trump). 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 $40), 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. Not that this will happen, definitely.

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 !  Crude prices and market both go down, but we are told it's because of election uncertainty.  Crude prices and market both go up, but we are told it's because Trump wins election votes! Crude and market both goes down, but we are told it's because Trump loses health care votes! Could all these just be coincidences with crude prices?

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 rally). But i think it's unlikely.

For the next few weeks, IWM 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 then.