Is President Trump Really A Friend To U.S. Stock Investors?

Since Donald Trump was elected President in November 2016, the U.S. stock market has posted a remarkable upside performance. From the intra-day lows posted on November 4, 2016, the S&P 500 Index has gained 22.5%. The Russell 2000 Index is up 30.0% and the Nasdaq Composite Index is up 31.2%!

In more than a dozen tweets this year, President Trump himself has taken full credit for this stock market advance (even though his administration has yet to pass a single piece of major legislation). When asked about the incredible stock market performance over the past year, Wall Street pundits almost universally point to the perception that the Trump Administration is "good for business" as a result of deregulation (through Executive Orders) and potential corporate tax cuts immediately ahead. And maybe there is some truth to this argument, but are we close to a potential inflection point where smart-money investors reconsider their love affair with "all things Trump" and begin to realize that valuations matter, results matter, buying power matters, leverage matters, and central bank monetary policies matter!

The S&P 500 Index, the Nasdaq Composite Index, and the Dow Jones Industrial Average ALL closed at record highs this past Friday, October 13th. However, almost every major U.S. stock market index ended yesterday very near their intra-day lows! And several key benchmarks actually finished DOWN on the day (i.e. Russell 2000 Index, Dow Jones Transportation Average, Dow Jones Utility Average)!!

Six months from now, when most major U.S. stock market averages are down more than 20% from yesterday's record highs, will we all look back at October 13th, 2017 as THE inflection point when investors finally woke up to the fact that President Trump is actually the Pied Piper of Wall Street leading all of us over the proverbial cliff into the abyss?

Here is the first piece of evidence that President Trump is NOT good for stock investors:

Tweet from President Donald Trump, Saturday, October 14, 2017 at 4:18 AM

"Health Insurance stocks, which have gone through the roof during the ObamaCare years, plunged yesterday after I ended their Dems windfall!"

President Trump seemed to take great satisfaction this morning (Saturday) when he tweeted about the recent collapse of health insurance stocks. The President's attack on the Affordable Care Act with his latest Executive Action was definitely a contributing factor to the broadly based weakness in healthcare insurance stocks last week. And President Trump has obviously taken full credit here for those stock losses, and the tone of his tweet seems almost like a boast! 

Here are the top five health insurance stocks and their investment performance this past week:

United Healthcare (UNH)      -2.80%

Anthem (ANTH)                    -4.86%

Aetna (AET)                           -5.10%

Cigna (CI)                               -2.51%

Humana (HUM)                     -3.71%

Investors lost about $15 billion last week in just these five stocks listed above. And if all the stocks in this sector are included, investor losses probably topped more than $20 billion last week!

One of the arguments for continuation of the great "Trump" rally is so-called "bullish rotation", where certain sectors lead the market for a while, then trade sideways as other sectors regain strength and lead the overall market higher. Bullish sector rotation is definitely a major key to the staying power of any bull market, but at what point do you decide that the "music" is about to stop and there are "no more chairs"!

The Technology sector, led by the so-called FAANG stocks, was clearly among the key market leaders last week.

FaceBook (FB)     +0.88%

Amazon (AMZN) +1.35%

Apple (AAPL)     +1.09%

NetFlix (NFLX)   +0.74%

Google (GOOG)  +1.10%

But media companies were smashed last week:

AMC                     -9.54%

Dish Network        -9.28%

ATT (Direct TV)   -7.49%

Comcast                -5.26%

Viacom                  -4.24%

And bank stocks were severely injured:

Citicorp                 -4.67%

Wells Fargo           -3.40%

Goldman Sachs     -3.04%

Morgan Stanley     -2.93%

Bank America       -1.45%

JP Morgan             -1.09%

So which is it? Will positive sector rotation continue to support this bull market? Or has the tipping point been witnessed when sellers begin to overwhelm buyers?

In my computer trading system, the follow daily chart sell signals were triggered at Friday's close, October 13th:

DJTA, HGX, BA, BMY, COP CSX, CTB, FDX, GD, IYT, JBHT, KBH, LLL, NSC, PAYX, SBUX, UNP, UPS, UTX, XLU, XTN, among others!

Quite frankly, with all-time record highs posted in the S&P 500 Index and the Nasdaq Composite on Friday, I would never have expected so many daily chart sell signals in so many closely watched key stocks!

As very interesting contrary indicators, here are two measures of investor sentiment taken directly from the latest University of Michigan Consumer Sentiment Survey as released late last week:

Investors who were surveyed have NEVER been more confident of rising stock prices over the next twelve months (never, ever)! Simply incredible!! In the latest weekly edition of Barron's Magazine, the P/E ratio for the Russell 2000 Index is now 108.56 as calculated by Birinyi Associates using the trailing 12-month earnings for each component stock. While consumer confidence and investor sentiment are extremely positive and near record all-time highs, why is confidence among Chief Financial Officers waning? In the latest quarterly survey of CFO's, as published by Deloitte in late September, "Net Optimism" in their own companies plunged to 29% in the 3rd quarter from 44% in the 2nd quarter. In the key manufacturing sector, the decline was even steeper, falling from 52% to 22%. And in the energy sector, net optimism among CFO's collapsed to just 19% in the 3rd quarter from 48% in the 2nd quarter.

Food for thought! What could possibly go wrong? Nothing to worry about here!

Bottom line: October 13th, 2017 will be remembered as THE INFLECTION POINT in the great bull market in U.S. stocks that lasted from March 6, 2009 through October 13, 2017. The northbound Trump Train is at its terminus, and the southbound express is about to leave the station! When the inevitable collapse in stock prices gets underway, investors should not be surprised when President Trump blames Congress for this latest tragedy under his watch.

Dow Jones Transportation Average with Computer-generated Buy & Sell Signals

Melt Up? Or The Calm Before The Storm?

It was announced this week that Richard Thaler won this year's Nobel Prize in Economics. Thaler, 72 and a professor at the University of Chicago, is one of the founders of the controversial field of behavioral economics. He won this year's Nobel for his research on how human weaknesses such as a lack of rationality and self-control can impact financial asset prices.

In a wide ranging interview with Bloomberg today, when asked about the U.S. Stock Market, Mr. Thaler said the following: 

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping,” Thaler said, speaking by phone on Bloomberg TV. “I admit to not understanding it.” 

Thaler continued, “I don’t know about you, but I’m nervous, and it seems like when investors are nervous, they’re prone to being spooked.” However, Thaler said, “Nothing seems to spook the market” and if the recent gains are based on tax-reform expectations, “surely investors should have lost confidence that that was going to happen.” Thaler added that he didn’t know “where anyone would get confidence” that tax reform is going to happen. “The Republican leadership does not seem to be interested in anything remotely bipartisan, and they need unanimity within their caucus, which they don’t have.” 

Bottom line: The foremost authority on behavioral economics is "nervous" about the U.S. stock market in this, the riskiest moment in our lives!

A daily chart sell signal was triggered in my computer trading system for the Russell 2000 Small-cap ETF (symbol IWM) at yesterday's close, October 9th. Please see chart below.

Russell 2000 Index ETF (symbol IWM) with Computer-generated Buy & Sell Signals 

While most major indexes have posted record highs this week, volatility, as measured by the VIX at the CBOE, posted record lows. There is a calm, almost eerie feeling about this latest stock market advance. Some Wall Street pundits are now suggesting that we are in a "melt up" phase bolstered by positive talk about tax reform (tax cuts, no real reform) and strong corporate earnings reports expected immediately ahead. In mid-October 1987, U.S. stock prices started to retreat. The Federal Reserve had been raising interest rates for several quarters (just like now), and valuations were considered "stretched" after advancing for more than 5 years (just like now). Corporate earnings were robust (like now) and "Main Street" America was relatively comfortable (like now) after 5 years of economic growth which followed the 1982 recession. No one could have imagined the carnage which would take place on October 19th, 1987 when the Dow Jones Industrial Average lost 23% of it value in a single day. Was their a catalyst that triggered the Crash of 1987? Even though I was a trader in the popular OEX contract at the CBOE at that time, I still can't say for sure what caused that unprecedented Crash. On Friday, October 16, 1987, the trading day before the crash, there were reports that Iranian gunboats fired upon U.S. warships in the Persian Gulf. Maybe this was the spark that triggered Monday's deluge of selling. Most reports of the day and subsequent analysis point to a trading strategy at the time called "portfolio insurance" (basically, everyone was long, without fear!). Today's popular "risk parity" strategies have the look and feel of the "portfolio insurance" scheme of 1987. And later this week, President Trump is expected to refuse to re-certify the Iran Nuclear Deal (Iran again, just like in 1987)! 

Some say that a 1987-type Crash can't happen today or ever again given the precautions now in place by the exchanges. More importantly, most believe that the Federal Reserve and other global central banks will just step in as "buyers of last resort" if there is any significant downturn in stock prices. And maybe that's so, but how far down will prices have to go before central banks begin their "plunge protection" efforts? We live in interesting times, for sure! Is that a black swan I see on the horizon?