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Buy the Election, Sell Inauguration?

January 25, 2017, 11:21 am

With the inauguration behind us, the focus now is on Trump’s first 100 days in office. Wall Street is most interested in what happens with regulations, taxes and infrastructure spending. I expect U.S. corporations will get an incentive to repatriate the roughly $2 trillion in cash they’re currently parking overseas. Even if that money is taxed at 10% as proposed, that’s a windfall of roughly two full years of profits for the S&P 500 coming out of the deep freeze and getting back to work.

A full-fledged corporate tax cut may take a little longer – and I don’t know how big the cut will end up being – but the impact could be huge. It would be a one-time growth accelerant for every profitable company on Wall Street, and nobody wants to be trapped on the sidelines when the “profit” side of the P/E calculation could jump 30% overnight.

There will be ups and downs along the way – which is fine because investors need both – but I continue to like the overall market environment. The good news is that earnings look constructive over the next few weeks. I’ve been tracking the trend every Friday, and the numbers keep getting better. We’re now on pace for 3.4% growth this season, which is nicely above what Wall Street was tentatively hoping to see. If the pattern holds up, this could be the best quarter in years. That’s great for trend trading and how the results impact the charts.

I’ve been asked a lot recently whether the election rally will reverse now that Trump has been sworn in and his administration is getting to work. I’ve also heard it talked about on the Street. Instead of “buy the rumor, sell the news” it has turned into “buy the election, sell the inauguration.” But everything I see indicates that it’s more talk than conviction at this point.

First, if big money was preparing to dump stocks once the transfer of power was complete, there would have been at least a few crucial “tells” – such as rising short interest and declining buy volume. After all, big money is complicated. It takes days if not weeks to shift massive portfolios, and during that time fund managers would be busy setting up new hedges and interim positions to make money if they really expected a downswing ahead. Those defensive positions have not materialized. Short interest on the S&P 500 as a whole has actually dropped 17% since the year started.

Granted, the big benchmarks have traded in a tight range the last few weeks, but some consolidation is natural after a 9%–10% surge. Even in this sideways cycle, the day-to-day action reveals that the sellers are actually at a disadvantage. So far this month, over 200 million more shares of the iShares SPDR (SPY) – one of the biggest exchange-traded funds on the planet, tracking the S&P 500 as a whole – have been bought than sold. Things may have quieted down after the initial post-election surge, but the bulls are still backing up their conviction with money and enthusiasm, increasing the odds of a fresh breakout to the upside.

I expect to see a lot of churn in the next few weeks, so stay on your toes if you expect to keep up as the market adapts to this new administration.

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