Stocks rallied on Friday after another obstacle to the Senate Tax Bill was removed. The Dow gained 143-points (+0.58) with gains near, or above, 1% in many of the other indices. It was a high volume rally on an expiration Friday (futures and options) so emotions were a bit higher than usual as investors jockey for position in front of the normally strong holiday season.[TABLE="align: center"]
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The S&P 500 was flat for the week before Friday's rally, and the S-fund, which was down moderately going into Friday, erased all of those losses ending the week with a 0.32% gain so these tax bill rallies are still the main story.
So far the market has not had much of its typical mid-December dip, which tends to manifest before the so called "Santa Claus" rally, and that may be because investors are more concerned about the tax bill. Fear of missing out on the tax bill rally has led to multiple rallies, seemingly on the same news.
The question going forward is whether we will see yet another rally once the bill is signed, which could happen this week, or if we get a sell the news reaction.
I decided to pull up the chart (weekly chart) of the S&P 500 for 1986 - 1987. The Tax Reform Act of 1986, the last major tax reform, was signed in late October of that year. While stocks rallied for several months afterward, the ride wasn't without some volatility and of course the rally ended with quite a thud a year later in October of 1987.
Unlike our current market environment where volatility remains remarkably absent, there were sharp pullbacks before the 1986 bill was signed, and later more of a what looks like a profit taking correction after a big rally to start 1987. But those three red arrow pullbacks before and after the bill passed were not minor dips like we've been having. Those are 5 - 10% corrections. We haven't had a 10% correction for years, and there have been no 5% pullbacks in 2017.
Are markets just more efficient today and priced better, or is this another euphoric rally that is doomed to a similar outcome that we had in 1987? I don't know the answer to that, although we all have our theories, but it certainly is different today with much better access to information, plus faster and cheaper trading. But, except for the computer trading, we are still humans and fear and greed are still a big part of moving markets and extremes do eventually get corrected.
If the market is looking for an excuse to rally or pullback this week, getting the bill signed will be up against the budget negotiations. Remember, as of this writing, the deadline to get a budget passed and avoid a government shutdown is this coming Friday.
I don't know how much technical analysis is playing a part in this market because it is such an emotional time for stocks with Washington D.C. and the holidays playing just as big of a factor, but let's look at the charts.
The SPY (S&P 500 / C-fund) rallied on the tax bill news again on Friday. It was an expiration day where options and futures contracts were expiring, and that tends to mean higher volume trading and pushing prices around to hit certain strike prices by the bigger money. The week after expiration week can come with a bit of a hangover. That didn't happen in November, but the action in September and October is typical. It may have been the tax bill that helped November buck that trend, and perhaps that could be the case this month as well.
The small caps / S-fund had a big day gaining over 1%, but even with those gains on Friday, the pattern of closing off the highs continued. Whether that has any message for us, I don't know, but it's a bit unusual.
The Dow Transportation Index rallied nicely, but it basically just got back Thursday's losses.
The EAFE Index (I-fund) was down, and the strong dollar had a lot to do with that, but we could see some fair value added to Monday's price.
The dollar rallied 0.41% and that was a direct hit to the I-fund.
The AGG (bonds / F-fund) rallied on Friday and we seem to have a new trend and trading channel, but it is testing that rising support now.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
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The S&P 500 was flat for the week before Friday's rally, and the S-fund, which was down moderately going into Friday, erased all of those losses ending the week with a 0.32% gain so these tax bill rallies are still the main story.
So far the market has not had much of its typical mid-December dip, which tends to manifest before the so called "Santa Claus" rally, and that may be because investors are more concerned about the tax bill. Fear of missing out on the tax bill rally has led to multiple rallies, seemingly on the same news.
The question going forward is whether we will see yet another rally once the bill is signed, which could happen this week, or if we get a sell the news reaction.
I decided to pull up the chart (weekly chart) of the S&P 500 for 1986 - 1987. The Tax Reform Act of 1986, the last major tax reform, was signed in late October of that year. While stocks rallied for several months afterward, the ride wasn't without some volatility and of course the rally ended with quite a thud a year later in October of 1987.
Unlike our current market environment where volatility remains remarkably absent, there were sharp pullbacks before the 1986 bill was signed, and later more of a what looks like a profit taking correction after a big rally to start 1987. But those three red arrow pullbacks before and after the bill passed were not minor dips like we've been having. Those are 5 - 10% corrections. We haven't had a 10% correction for years, and there have been no 5% pullbacks in 2017.
Are markets just more efficient today and priced better, or is this another euphoric rally that is doomed to a similar outcome that we had in 1987? I don't know the answer to that, although we all have our theories, but it certainly is different today with much better access to information, plus faster and cheaper trading. But, except for the computer trading, we are still humans and fear and greed are still a big part of moving markets and extremes do eventually get corrected.
If the market is looking for an excuse to rally or pullback this week, getting the bill signed will be up against the budget negotiations. Remember, as of this writing, the deadline to get a budget passed and avoid a government shutdown is this coming Friday.
I don't know how much technical analysis is playing a part in this market because it is such an emotional time for stocks with Washington D.C. and the holidays playing just as big of a factor, but let's look at the charts.
The SPY (S&P 500 / C-fund) rallied on the tax bill news again on Friday. It was an expiration day where options and futures contracts were expiring, and that tends to mean higher volume trading and pushing prices around to hit certain strike prices by the bigger money. The week after expiration week can come with a bit of a hangover. That didn't happen in November, but the action in September and October is typical. It may have been the tax bill that helped November buck that trend, and perhaps that could be the case this month as well.
The small caps / S-fund had a big day gaining over 1%, but even with those gains on Friday, the pattern of closing off the highs continued. Whether that has any message for us, I don't know, but it's a bit unusual.
The Dow Transportation Index rallied nicely, but it basically just got back Thursday's losses.
The EAFE Index (I-fund) was down, and the strong dollar had a lot to do with that, but we could see some fair value added to Monday's price.
The dollar rallied 0.41% and that was a direct hit to the I-fund.
The AGG (bonds / F-fund) rallied on Friday and we seem to have a new trend and trading channel, but it is testing that rising support now.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
