Market Wrap (recording & summary)

Did President Trump just warn us of the rally’s top?

Here’s his tweet from this morning:

Stock market hits new high with longest winning streak in decades. Great level of confidence and optimism – even before tax plan rollout!

I bolded the last fragment for emphasis, “even before tax plan rollout“. The six-day old breakout of this rally was triggered in part by remarks promoting a “tremendous” tax plan. Wednesday morning’s opening dip was rescued by an off-the-cuff remark reminding us of the “massive” tax plan in the works.

Clearly, a tax plan can be wholly imagined and have quite an effect on prices. The rally is sparked by market participants believing a tax plan is coming, and that it will be tremendous and/or massive, having a future positive impact for companies and for their stock prices.As the President said tweeted this morning, even before tax plan rollout!

So, this hasn’t actually been the tax cut rally. It is the anticipation for tax cuts rally.

Several other potentially bullish inputs are also helping to push prices higher. But at some point, potential future developments become priced into stocks. There’s always a discount for risk, and for the time value of money. Or, there should be a discount. Occasionally even that discount is overtaken when a move becomes so high-profile that it attracts many non-professionals.

Non-professionals don’t buy the earliest stage of a move because they’re not yet convinced. Inversely, the more convincing a move becomes, the more non-professional buyers it attracts. Therefore, no price is too high to non-professionals that only now are buying into what is a very convincing move — the more convincing, the more that it’s worth.

It’s a wonder how rallies ever stop. Oh, right. Meanwhile, professionals are focused on those disappearing discounts. They stop buying. Then they start selling.

Now, my own work on this rally continues to suggest it has some more room to advance. The broad base that launched the rally rarely produces only one-legged breakouts. And this first upleg’s degree and duration is usually followed by a second.

But between those first and second uplegs is a correction. A correction can begin in this pattern at almost any time, albeit much more credibly after this weekend than before it. Immediately preceding the first upleg’s corrective drop tends to be wide agreement of the story behind the rally.

Not necessarily the entire story. Non-professionals don’t understand the impact of this week’s Yellen testimony, and expiration, and seasonal bullishness ahead of the three-day holiday. So they also don’t understand that these influences are all within hours of disappearing. And non-professionals also didn’t notice the past 2-3 sessions have ended with short-squeezes. Contrarians did.

Regardless of whether this week’s bullish WedEX signal is fulfilled going into the weekend and coming out of it, another upleg remains likely. But this first upleg is exhibiting characteristics that suggests it reflects a tremendous, massive tax plan, which isn’t even close to being rolled out.

Details and other markets coverage are discussed in the post-market Wrap recording here.

Monitor overnight Globex trading in the chaRTroom here.