Week Ahead: Waiting For The Markets To Signal A Direction
Many of us had hoped that by this week, once the Presidential inauguration was out of the way, the markets could leave the more esoteric political arguments aside and begin to concentrate on earnings, the health of the economy and, based on the early actions of the new President, the prospects for the next few years.
A weekend of arguing about the size of things and offering “alternative facts,” however, has made that a little harder. Still, there have been a few concrete actions with economic consequences, and which of those traders and investors choose to focus on will decide the markets’ direction this week.
As logical beings, we like to think that an analysis of measurable data will always lead to a logical conclusion, but that is not true in all cases. Each time you trade, for example, there is somebody else trading in the exact opposite manner based on the same information. If you think that buying 100 shares in XYZ is a good idea at a certain level and the order gets filled, then somebody else thinks selling them at that level is just as good an idea.
That difference can be down to one or a combination of several factors.
The seller may, for example, be closing or trimming a profitable position, or thinking short term as opposed to your long term outlook. The most common reason for a difference of opinion, however, is that the seller and buyer are seeing the same data and news, but placing their emphasis on different things.
That is what we are likely to see this week, and which things the majority of people focus on will determine the direction of the markets.
You could, in this case, look to what Congress is doing and what President Trump’s stated intentions are and decide that big corporate tax breaks and some serious deregulation are coming. Whatever your view of those things politically, it is hard to see them being anything but supportive of stocks in the foreseeable future. Add in positive economic data and decent Q4 earnings so far and further strength is the only logical conclusion.
On the other hand, you could look at two Presidential Orders signed this week that demand a reworking of NAFTA and pulling out of the TPP and conclude that restricting free trade is more of a priority for this administration than tax reform and deregulation. If that is your focus then taking profit at these levels before global trade begins to contract and the market drops makes perfect sense.
The above chart would suggest that this matters more now than it often would. The jump in stocks once the election was over was the result of a focus on the former, bullish argument. That rally has run out of steam, however, and the S&P 500 has been essentially flat-lining for more than a month, which makes it likely that the next move will be somewhat exaggerated.
The question is will that exaggerated move be up or down?
As a pundit I guess I am supposed to offer an answer to that question, but the only honest answer at this point, as shocking and unfashionable as it may be to say this, is that I don’t know. Valuations and the events of this weekend suggest that a drop is the next logical move, but the market can ignore bad news for an awfully long time at times.
For that reason this is a time to hold off until we see a move beginning to develop and then jump in to follow the momentum. Sometimes, as any experienced trader will tell you, the best trade is no trade at all.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.