On Tuesday, I discussed the issuance of the “weekly sell” signal and the implications for the markets over the intermediate term. However, I also stated the markets could well have a reflexive, oversold, bounce in the short-term with two potential outcomes. To wit:
By the time weekly signals are issued on an intermediate-term basis, the market is generally oversold, with ‘bearish’ sentiment increasing, on a short-term (daily) basis. Given those short-term conditions, it is quite likely the markets will rally next week.”
Chart updated through Thursday.
Of course, it is the success or failure of that rally attempt that will dictate what happens next but with the markets currently oversold, I fully expect the markets to rally in the short-term given even the most modest of positive news. For example, as what drove the spike yesterday as news filtered into the market a deal on the ACA repeal may be forming. Via HuffPo:
“GOP moderates and conservatives are nearing a deal on health care that in theory could get the Republican alternative to the Affordable Care Act out of the House and over to the Senate.”
And Steve Mnuchin’s comments on CNBC about the potential of tax reform.
“The Trump administration is close to bringing forward major tax reform, and will unveil a plan very soon.”
While the markets continue to buy into the “jawboning” for now, the economic and political realities are becoming a real risk for the markets. Furthermore, the potential for successful tax reform will be much more difficult than most are currently expecting.
Then there is the “debt ceiling” debate.
When Congress resumes next week, they will immediately pass a “One-Week Continuing Resolution” in order to buy time needed to negotiate a “CR” for the rest of the 2017 fiscal year through August. However, this negotiation will likely come at a “cost” of funding previous ACA requirements and “Planned Parenthood” which many Congressional Republicans strongly oppose.
Again, this is going to further delay “tax reform and cuts” which is what has been the driver of the market rally since last November. Therefore, the question remains:
“How much time does the Administration have to make good on its promises?”
While I do suspect there is a reasonable opportunity for the market rally to continue in the short-term, even potentially setting new highs, there are numerous issues stacking up which could lead to a market stumble this summer.
Which, historically speaking, is likely what the “weekly sell signal” in the markets is currently predicting.
As I stated last week: Pay attention….things are getting interesting.
In the meantime, here is what I am reading this weekend.
Research / Interesting Reads
“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” – Seth Klarman