Bulls Panic Buying
It’s not easy for a long-term bear to abruptly change stripes and become a raging bull.
How could this happen?
The election results Tuesday were not factored in to any forecasts. Specifically, no one I’m aware of expected Trump to win along with both houses of the U.S. congress.
Abruptly flipped from stocks flipped from extreme losses the night of, to extreme gains in just a few days.
Stocks entered this week with YTD gains of only 2% in the S&P 500 Index to gains of nearly 7% which we had seen extreme oversold conditions to extreme short-term overbought. Such was the power of this reversal.
Given the political outcome the way ahead seems to resemble a Reagan-like agenda—pro-growth and, no matter what you think of it, trickle-down economics. The sector beneficiaries would be defense and financials while the losers would be bonds and so forth. The latter means higher interest rates, which if anything, means a normalization of monetary policies thanks to the bond vigilantes. Tech fell as investors fretted that Trump trade policies would hurt their overseas manufacturing business.
For me, being a bear over the past 10 years, changing to a bull is a tough task. It reminds me of the interest rate policy change in 1982 that led to the major bull market which lasted nearly 20 years. And, while it remains to be seen how Trump’s policies will mirror Reagan’s it seems more likely than not this will be the case.
Lastly, and no differently than the Reagan experience, the long-term road ahead will be uneven. So, let’s understand many investors, large and small, are improperly positioned for economic and political policies ahead.
Now, are we at least short-term overbought? Absolutely! But this is the notoriously the best investment season for bulls and they’ve seized the momentum.
Below is the heat map from Finviz reflecting those ETF market sectors moving higher (green) and falling (red).
Dependent on the day (green) may mean leveraged inverse or leveraged short (red).
Volume continues to expand as the short-squeeze and scramble to get invested continues. Breadth per the WSJ remains positive.