Post-Election Market Dynamics
Market Sectors are Recalibrating Post-Election
What we’re witnessing in the markets post-election has been a remarkable recalibration of market sectors. There are 9 broad sectors that our overall economy is divided into. Most of the time, they tend to move together with the overall direction of the market. But right now, that’s not the story. There are major divergences between the winners and losers.
The sectors that have seen the most dramatic gains are Financials, Industrials, Health Care, and Materials. The ones that have fallen hard include Consumer Staples, Utilities, and Technology. Both Energy and Consumer Discretionary have been somewhere in-between, about average. Also, worth noting is the big jump in interest rates. More on that later.
The backdrop of a Trump presidency makes these price moves understandable. Let’s take them one by one:
Industrials: Trump has promised to increase spending on the Military and to use the proceeds from taxes on repatriated corporate cash (that’s brought back from overseas) to fund the rebuilding of national infrastructure (roads, bridges, hospitals, airports, etc.). This bodes well for both the Defense & Aerospace element of this sector and the more general Industrial Equipment and Machinery elements. In addition, the states that truly carried him to victory were the “Rust Belt” states of Pennsylvania, Michigan, and Wisconsin, which more often vote democrat. If Trump maintains his promise to revitalize manufacturing, which is likely what brought these states over to his camp, then that will also be positive for Industrials.
Health Care: From 2012 through mid-2015, Biotech was arguably the hottest sector in the market by a wide margin. In September 2015 and August 2016, Hillary made statements about the prices of pharmaceuticals that suggested she might impose price controls onto the industry. Ever since […]
Fibonacci Extensions 2017
Back in 2015 I wrote about the potential resistance from the first major Fibonacci extension from the 2007 peak. See here:
Fibonacci extension is a method that uses ratios that tend to repeat themselves in financial markets as a way to determine when a market peak or valley is more likely to occur (read previous article for more examples). The extension level from 2015 held for over 1 year (Blue lines/arrow), with two significant pullbacks during that year: one in August of 2015, and another in January of 2016.
Since breaking above the 2015 resistance level, the market has been on a great run, but it has just reached the next major Fibonacci extension from the 2007 peak (red lines/arrow). Extensions can be discredited or validated by the peaks and valleys that interact with the three middle Fibonacci lines. Notice on the chart above how the lows from January 2016 and October 2014 line up with the upper-middle red line, and how the 2007 peak lines up with the middle red line, and how the 2011 peak and November 2012 low aligns with the lower-middle red line. This alignment is really strong, and makes me take this extension level very seriously.
There are other factors that warrant caution too. The CAPE ratio is historically high. This ratio compares the earnings of corporations to the price of the stock market, and by this measure the market has only been more expensive in the late 1990s (during the internet bubble), and in 1929 just before the great depression. Additionally, the Volatility Index hit an all-time low last week. This measure is sometimes called the Fear/Greed index. And a low reading would tend to indicate high levels of greed and complacency.
Lastly, […]