After a robust market rise on good turnover after the election, we find ourselves a month later with a market under distribution, wondering what is next.
Many thought a Trump victory was the elixir needed to get the economy and markets moving, and that sentiment was on full display with an immediate bullish response on November 9. Bonds were trashed, an amazing allocation shift that happened swiftly and with bold strokes.
Markets tend to punish complacency when you least expect it. As the volatility was sucked dry, investors and traders were talking about how the new regime was going to flip the economy over on its side and create enormous wealth and prosperity so we’ll all live happily ever after. Well, that notion is certainly gone now, especially for some of the better performing names this year.
Distribution signs have been showing up for a while now, and if markets are not going up? They are likely to head lower. But frankly, some mild selling is not unusual. Perhaps there is a catalyst for buyers to step up, because a fixed income is certainly not the best alternative. When breadth weakens, strong opens are sold off (and heavy selling is a sign of institutional distribution). These bursts of selling occur quite frequently, and with high frequency and algorithmic traders chasing down trends to keep them moving, we tend to see exaggerated moves.
However, we must pay attention to where the big money is flowing. There has been mild distribution the past few weeks, and when volatility doesn’t move, that wreaks havoc on both bullish and bearish plays. Volatility does not have to rise sharply to see distribution nor does a massive selloff have to occur.
I suspect much of the selling is wiping out the froth created post election and creating a safe haven before the Fed meeting in two weeks (when everyone expects the committee to raise the funds rate). No matter what, we’ll pay close attention to the indicators and move with them. Most are lining up bullish in the intermediate term but flattening out in the short term, so we’ll follow their lead.
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