The stock market has tracked my forward looking weekly cyclical fundamental indicator very well
this year. This index has flattened out since Sep. and is in line with the recent toppy action in the
market. Interestingly the economy and corporate profits have seriously under performed the
indicator so that the market has been running well ahead of on-the-ground fundamentals. The latest
rally primarily reflects players buying well on the come in expectation of a Trump / GOP Congress
fiscal stimulus plan presumably to be unveiled early in 2017.
The Fed continues to hint that short rates will be raised soon. A classical cyclical case for a rate
increase is not yet in place, and the Fed has also taken to hinting that rates may be raised to keep
markets from getting too effervescent. With inflation already accelerating and a Trump fiscal
goose to the economy now widely anticipated, the bond market is folding its tents and has shifted
some funds into equities from fixed incomes. With bond yields trending sharply higher near term,
it will be interesting to see if the Fed feels compelled to raise the Fed Funds rate in Dec.
So far, stock players have yet pause to see if there are further assurances from the Trump camp
on stimulus and, if the Congress is willing to go along with the large deficit financing that will
be entailed. GOP conservatives like the tax cut proposals but are indifferent to the infrastructure
plans while the Dems are thumbs down on tax cuts for the wealthy, but like the spending plans.
Equities players will have to watch all this carefully because the industrial side of the economy,
where most of the earnings leverage is, continues to perform poorly. Not only that, but wage
pressure is starting to run well ahead of pricing power, which crimps profit margins. As well,
what if stimulus programs are dinky?
Pauses and / or corrective action in the Trump rally should come as no surprise until matters
are further ironed out.
For the current uptrend in the SPX to be of substance, the market needs to take out the previous
highs of the past summer in a convincing fashion or else the SPX will face a possibly troublesome
'secondary top.' SPX Weekly
It is not easy from a technical perspective to have high hopes for the current rally as it comes off
a rather shallow oversold.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!