Either the stock market’s action has become irrational or the financial press has made an error with describing the market’s action on Thursday. The headline is that a two-week-old video where James Comey said Trump didn’t obstruct the FBI’s investigations caused the rally. I’m not making a comment on the political implications of this, but it would be bizarre for the market to react to old news. This plays into my theory that the market sold off because the action had been too quiet and the economic data has weakened. That theory says that stocks are rallying Thursday because the selloff was too sharp.
Whether the rally was a minor reversal of the prior day’s selloff because it went too far or caused by political rumors, it doesn’t change the fact that the S&P 500 rebounded 0.37% and the VIX fell 5.97%. The one day selloff can be construed as a positive by the bulls because now the ominous lack of volatility phase has ended. As long as the GOP’s economic agenda is unencumbered, the rally can continue.
As a reminder, saying that the rally can continue is not me buying into the bullish thesis. It’s merely my acknowledgement that the latest bullish narrative hasn’t been tarnished. Bullish investors are basing their thesis on the fact that earnings were strong in Q1 and that GDP will rebound in Q2. Given the positive industrial production report form April and the low bar Q2 GDP must jump over, this thesis looks to be unaffected by the political drama.
As I mentioned in a previous post, the long Nasdaq trade is considered to be the most crowded by fund managers. The chart below is consistent with the survey about the Nasdaq. As you can see, the net percentage of fund managers who think the equity market is overvalued has reached the level not seen since the early 2000s during the height of the tech bubble. This chart makes sense because the Shiller PE is at the highest level since the dot com bubble. It is surprising though because you would think if enough fund managers thought stocks were overvalued, they would sell them, causing a correction.
