Investors Buy the Dips, Market Continues to Extend The Trump Rally
$DIA, $SPY, $QQQ, $VXX
- Strategy: In an uptrend, when markets fall, buy.
2 weeks ago stocks encountered headwinds and a wide range of risk assets came under pressure in the week ended 18 November, and some market observers again declared the end of what has been an impressive rally YTD.
But rather than decline further, the market bounced back.
Both the S&P 500 and the NAS Comp ended last Friday at record highs; and the DJIA almost finished the Thanksgiving Holiday-shortened week at a record, too.
Yet there was plenty of news last week that could have amplified the initial move South.
In China, stocks were buffeted amid doubts about the government’s ability to maintain economic growth and deal with high debt and pockets of excessive leverage. The selloff in the country’s bond market added to the nervousness.
In Europe, the mins of the European Central Bank (ECB) policy meeting suggested a wider range of views on the Governing Council than initially believed, especially when it comes to the advisability of maintaining the large-scale asset purchases program.
This added to the uncertainty associated with the collapse of talks on forming a coalition government in Germany under the fragile leadership of Chancellor Angela Merkel.
And in the US the Fed mins did more than support the view that the central bank would hike rates in December.
They also seemed to contain an implicit warning from central bankers on the policy committee that “in light of elevated asset valuations and low financial market volatility” some members “worried that a sharp reversal in asset prices could have damaging effects on the economy.” The market ignored the announcement.
Stocks resumed their movement North bringing the YTD gains to almost 20% for the DJIA, and almost 30% for the NAS Comp, and driving the S&P to a record 55 closing highs this year.
Again, investors bought the dip.
Despite the recognition of elevated asset prices, low financial volatility and a continuing gap between financial and economic risk-taking, only a big and durable shock can shake the confidence of investors and traders in what remains a very profitable strategy of taking advantage of market declines to add risk exposures.
This confidence is supported by pro-growth policy hopes and a deep market belief that central bank policies will continue to repress volatility and remain supportive of asset prices.
To maintain the uptick in growth the US needs to implement measures that reverse persistent downward pressures on potential, that is, the ability of the economy to grow today and into the future.
This then requires progress in Congress on the Trump tax reform plan, as well as congressional support for The Trump Administration’s infrastructure initiative and steps to enhance labor productivity and improve the benefit-to-cost ratio of technological innovation.
By buying every dip, traders and investors have brought forward future economic growth and financial returns.
They are betting that a comprehensive pro-growth policy response in the US and other developed countries will validate what some say are fragile markets.
|HeffX-LTN Analysis for DIA:||Overall||Short||Intermediate||Long|
|Very Bullish (0.59)||Bullish (0.37)||Very Bullish (0.73)||Very Bullish (0.67)|
|HeffX-LTN Analysis for SPY:||Overall||Short||Intermediate||Long|
|Very Bullish (0.51)||Bullish (0.31)||Very Bullish (0.54)||Very Bullish (0.67)|
|HeffX-LTN Analysis for QQQ:||Overall||Short||Intermediate||Long|
|Very Bullish (0.67)||Very Bullish (0.58)||Very Bullish (0.85)||Very Bullish (0.56)|
|HeffX-LTN Analysis for VXX:||Overall||Short||Intermediate||Long|
|Bearish (-0.37)||Neutral (-0.21)||Very Bearish (-0.62)||Bearish (-0.29)|