All Good things come to an end some day. The big question: Can we say the same about S&P500 rally post-Trump Victory? Well, to be honest, I have no idea. But let us look at the chart to uncover what market is trying to say.
This is how market rallied post Trump Victory (Nov 07-March 09)
First, you have to understand why the market rallied like crazy post-Trump Victory. The market made following assumption:
The Market always does that. It visualizes a scenario and then prices it quickly.
1. Normalization of Interest rates on back of strong economy (High-Interest rates = Good for Large cap Financials)
2. Reflation Trade thanks to proposed Fiscal stimulus (Infra Spending)
3. Dramatic Tax Cuts that can boost EPS of S&P500 by $10-12
It was a one-way move first to 2270-2280 and then around end Jan from 2270-2280 to 2400 by end Feb.
The market moved purely on back of HOPE that things will happen as visualized. Once a market makes a move like this - it then moves to this phase
Trump trade moves from "Trust Me" to "Show Me"
— Ivan the K™ (@IvanTheK) March 27, 2017
Now Show me Phase has started very badly with the first bill (Healthcare reform) collapsing in the House and now it raises serious question about the whole Trump agenda. No wonder market has pulled back. In a Bull market - traders buy the dips and yesterday -pullback to 50 dma was seen as one such opportunity
But the question - you need to ask - Is such a big disappointment will end with such a mild pullback? I doubt that. What about the rally that happened post Trump taking office on Jan 20 2017. Because all that move from 2270-2400 happened on back of quick implementation of big bang reforms. Hence a more likely scenario now - The market giving up all that gains and pulling back to 2270-2280 from where it all happened post Trump taking office.
It's quite fascinating that 2270-2280 also coincides with 100 dma. The pullback to that level will make market healthy and attractive again to price in future again because remember US economy and Global economy just doing fine and there is little case one can make for dramatic panic as of now. Will S&P500 pullback to 2270-2280? I have no idea but I will not be surprised if that happens
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Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers