Scott and I were having a conversation yesterday about the markets, the new Trump Administration and how all of this might affect our collective portfolios. We both noticed something interesting happened yesterday and came to the same conclusion.
Now I preface my comments when I talk about Trump and his new Administration...love him or hate him, what he does or doesn't do will affect our portfolios, so we need to pay attention.
In my view, yesterday was a particularly telling day for the markets. Trump hosted about 18 top CEO's (Dow, Tesla/SpaceX, Ford, Lockheed Martin etc) at the White House for morning meetings as a group. Some of this was, in typical Trump fashion, televised. Again, like him or hate him, the response from the CEO's exiting the White House was quite unreal. They all stood by a microphone and said that the new Administration was very engaged. Without going into too much detail, it is fair to say that this should have been taken as positive for the market...a bullish sign.
But it wasn't. At 12noon, as these CEO's were standing in front of the microphone going on about how pro-business the new Administration would be, the Dow was close to -100 points. Not a good sign. When a market can't rise on bullish (positive) news, it is not a good sign.
Maybe one reason it didn't seem to rise is a reason we gave last week - Short Interest is too low (IE, everyone is already too long) so there is a lack of shorts that are forced to come in to cover their positions and prompt the market higher, even on seemingly good news. Now it has rallied back up today, to be fair. Maybe it took the market a while to see the positiveness of these CEO's. Regardless, let's look at the Short Interest again in the NYSE stocks:
Hard for a market to go up when participants who were short have covered so much lately. The theory being, who else is willing to buy at this level? It's usually a very positive sign when short interest is high...at some point they are forced buyers as the market moves higher. Absent big shorts, there is one less group of buyers. Look at what happened the past few months...stocks higher and short interest lower...were shorts part of the reason for the rally? Partially, yes. They always are.
And another interesting thing happened yesterday. No, there was not another march by a gazillion women (that I know of). The US Treasury Bond Market actually rallied (bond prices up and yields down). Again, the news coming out of the CEO meeting should have been bad, not good, for bonds (wage inflation, price inflation etc). What gives? 10yr US Treasury Bond were about 7bps lower yesterday - a decent move. To be fair, they are 4bps higher today. Nonetheless, there might be a similar explanation about why bonds did not react they way we thought they would yesterday. How about there is record short interest by speculators (hedge funds) in the US Treasury Bond Market. And when I say "record", I mean RECORD...that chart goes back an awfully long way (to 1992). Have a look:
So if every hedge fund in the world is short government bonds, at an all-time record level, can bond prices really weaken much further? Perhaps but it was interesting that they didn't yesterday.
To conclude, we think equities are a bit overbought at these levels and are due for a retracement to attract new, re-energized buyers (see blog from last week: highrockcapital.ca/pauls-blog/checking-out-the-charts). And, similarly, but opposite in direction, we think the bond market is oversold and due for a correction (rates lower). Both of these are called "Crowded Trades". That is to say, Stocks are crowded on the "long side" (too many people are invested or long stocks for them to go higher) and Bonds are crowded on the "short side" (too many shorts for them to go lower in price or higher in yield).
When a market doesn't respond as we think it should, it tells you it is overbought/oversold and, at a minimum, due for a consolidation, if not a correction.
This and more at 4:15pm on our Weekly Webinar. If you have the log-in details already, hop on and participate, if not, contact Bianca (email@example.com) and she will provide them to you.