Original Drawing – James P Mulligan
This week the 4 key US equities ushered in the new president with a net neutral overall response. The Nasdaq 100, the lead index over the past month, continued its trek higher with the IWM lagging after a blistering post-election rally.
The bull market, although still intact seems, appears to be dancing on a pinhead.There is a big disconnect between market action and reaction to our new president.
Depending upon who you talk to, either the world is entering a most dangerous phase or it’s on a new path to huge growth not seen since the post WWII. If uncertainty is at a peak, as Soros believes, it’s certainly not priced into the market.
I surmise that Soros’s believes his market theory of Reflexivity is currently operative and at a turning point. That means that the big market players see the current bull trend and believe it will continue because it has done so for so long. Furthermore, those players believe it will persist, driven by big economic growth derived by new economic policy.
That is one huge feedback loop that can be broken if uncertainty takes hold or if it becomes clear Trump can’t deliver. Once the perception changes, the feedback loop will unwind. Of course, if Trump delivers the growth as promised then all is ok as there is a solid foundation.
Until proven otherwise, the current positive feedback loop could persist for a long time and even cause the market to accelerate to the upside.
Sentiment indicators such as the volatility index (XIV) are quite low but not quite at extremes that would indicate irrational exuberance. Market sectors demonstrated more divergence by the end of the week with the retail sector slipping into a distribution phase. (click here for more on sectors.)
Market internals are showing mixed indications but leaning to slightly negative. Even more important is that the market has compressed over the last month which would give energy to a breakout either way. The imminent market action will tell us whether the bull continues to dance or not.
