Are markets still setting a course towards escalating risk appetite? The S&P 500 and Dow charged higher yet again this past session, but that tax news-led drive was not consistent with the performance of risk trends in other asset classes. Perhaps the markets share more characteristics with Bitcoin.
Talking Points:
- Despite soft sentiment trends generally, US equities charged higher on news that a key Senator would support the US tax bill
- The S&P 500 has gapped higher 8 straight days, has advanced 8 straight months and seen its correlation to VIX flip
- Bitcoin's surge has still but volatility remains, Dollar is not joining the Dow and Oil found little lift in OPEC's agreement
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Given our concentrated focus on outperforming assets, it may have seemed that the past session was a roaring example of risk appetite. In fact, most risk-oriented assets were easing off through Thursday's session. In fact, most of the major equity indices around the world had suffered some degree of retreat - some significant. The exception of course is the region and indices that earn the bulk of the headlines: US benchmarks. The statistics were not subtle. The S&P 500 and Dow Jones Industrial Average closed out November strong to each earn an eighth consecutive monthly advance. Such an consistent extension is rare for both, but for the Dow it matches the longest run in at least half a century (my data on hand ran out). More gradual and recent, we find the S&P 500 has gapped up on the open with each of the past eight trading days with a fresh record intraday high set in the past six. The extremes keep building up and so should our caution.
Is it possible for risk trends to keep advancing over time despite the lackluster pace for economic growth, revenue growth and rates of return? Yes, though it is difficult to sustain. Is it possible for US equities to continue to pace this difficult course? Yes, though that is truly pushing the bounds to the point of hope rather than reasonable risk-reward evaluations. The outperformance for the US markets was clearly inspired by the progress made on US tax reform with reports that Arizona Senator John McCain - who arguably played the critical vote in the failure of multiple healthcare reform efforts - would support the bill that is being discussed. It seems that this important, business-friendly campaign promise from the 2016 election cycle will finally be met. The question is how much fulfillment there will be in realization when we have already seen such significant gains in the past 12 months in mere anticipation of a robust program - so robust it already pushed the S&P 500 more than 20 percent higher. What's more, this is far from an ideal plan. As with any program, this will require a certain degree of organic growth and stability; and even with that, there will be an increase in the deficit. This is perhaps why the Dollar is not inspired by these same headlines as the major rating agencies all have the United States on credit watch negative and have warned about the implications of raising the debt further.
Outside the headlines of US politics and markets, Wednesday's top billing - Bitcoin - was significantly lower on the popularity totem. The cryptocurrencies extreme volatility (a daily range equivalent to 20 percent of its value) has left speculators unnerved. It is still holding up, but the heavy participation of speculators - particularly those with limited investment experience and/or no intention of running with good risk management - has left the markets somewhat shell-shocked. To traders, Bitcoin's historical $10,000 break was a classic 'blow off top' - not necessarily the end to the long-term trend but the pinnacle of speculative fever. To some extent, that may be the same state for the S&P 500 - particularly when we consider its activity relative to the VIX volatility ('fear') index.
Ahead, the Dollar will likely continue to struggle for its clear bearings; but we should keep tabs on how markets respond to tax headlines, the ISM manufacturing report and the last run of Fed speak for the week. More productive has been - and likely will continue to be - is the British Pound. The currency has marked critical technical breaks among pairs like GBP/USD, GBP/JPY, GBP/AUD and perhaps soon EUR/GBP. The technicals are there but the conditions for follow through are not, so we need to find where our conviction would come from. Despite its lowered profile, it is worth watching the Canadian Dollar Friday as the combo of employment and 3Q GDP statistics are pretty consistent volatility fodder. And, from commodities, perhaps we should watch metals rather than energy. Oil had news of an extended OPEC production cut through end of 2018 but did nothing to extend its trend. Gold and silver on the other hand had a weak Dollar but still sunk. We discuss all of this and more in today's Trading Video.
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