Role Reversals Are the New Trend

adamBack on November 1, one week before the presidential election – what now feels like an eternity ago, in political-regime-change time – I wrote to Cycle 9 Alert subscribers about the market’s most dominant trends.

In short…

 

  • U.S. stocks lagged foreign stocks, with all markets showing lack of conviction;
  • The healthcare sector had been whacked down, but showed signs of strength;
  • And an inflationary and/or higher rates trend was taking hold; sending…
    • The U.S. dollar higher;
    • S. Treasury bonds lower;
    • And financial stocks higher.

I explained that with the Election Day result being so pivotal, many of the pre-election market trends I observed were at risk of reversing… with some markets reversing for the better and others for the worse.

Well, with what some might call the surprise of the century (Trump’s election), a careful analysis of pre- and post-election trends is a must-do exercise.

For a number of reasons, it’s wise to let the dust settle just a bit longer before ponying up fresh capital on trends that are just beginning to digest the coming Trump presidency.

Still, a hard look at the winners and losers of Election Day 2016 – (after Week 1, at least) – will point us toward market outperformers in the months ahead.

What follows, below, is a sampling of the type of broad market and sector analysis my Cycle 9 Alert readers receive on a weekly basis.

Let’s dig in…

U.S. Stocks Attract Wave of Risk Capital

I had said a week before the election that… “If this ‘hesitant’ trend reverses after the election, we could see a rather sudden wave of risk-seeking investment – essentially, money pouring into stocks.”

This indeed happened.

Reported inflows into U.S. stocks reached a multi-year record of $31 billion in the week following Trump’s victory.

U.S. small-cap stocks (IWM) surged 11% in the two weeks following Election Day – the strongest performance of any world stock index.

Meanwhile, Chinese (FXI) and emerging-market (EEM) stocks fell 2% and 6%, respectively. The brunt of emerging-market damage hit Brazil (EWZ) and Mexico (EWW), which sank 9% and 17% lower, thanks to Trump’s talk of disrupting trade agreements and norms.

These are complete reversals of pre-election trends. They show that whatever force was keeping investors out of the U.S. stock market has been alleviated. Money is pouring into risk assets… into U.S. stocks… and into small-cap U.S. stocks.

That’s a “risk-on” signal, for sure (for now).

Sector Analysis

The financial sector (XLF) has been the biggest beneficiary of the election result, up 12%. Industrial (XLI) stocks come in #2, up 6%. And the healthcare sector’s initial performance came in at a close third.

Within the healthcare sector, though, biotech stocks absolutely BOOMED after the election!

The SPDR S&P Biotech ETF (NYSE: XBI) jumped a whopping 18% in a week. That’s the absolute best post-election performance of all industry groups (or sub-sectors) that I track in Cycle 9 Alert.

And not so coincidentally, I already had my Cycle 9 Alert subscribers positioned in a bullish (and quite lucrative) biotech play ahead of the election. We locked in a fat, double-digit profit just a week after.

Elsewhere, you can’t ignore the ripping performance of financial stocks. Bank stocks (KBE and KRE) are up 16% to 18%… capital market (KCE) stocks are up more than 13%… and insurance (KIE) stocks have gained 8%.

Financial stocks were outperforming before the election result. So their strong post-election performance is a continuation, not a reversal, of the current trend.

The outperformance of financial stocks may be forecasting high expectations of a December Fed rate hike (higher rates mean fatter margins for banks). Or, it might be reflecting an expectation that Trump will deregulate and let the banks do as they wish (the SEC Commission Chair has just stepped down and some speculate Trump won’t bother replacing the post).

Either way, bank stocks have been and continue to be on fire!

Rates and Dollars

The U.S. dollar was strong heading into the election… it continues to climb post-election.

U.S. Treasury yields were climbing heading into the election… and they’ve continued to climb post-election. [Note: yields are climbing, therefore bond prices are falling.]

This continued strength in the “higher inflation/rates” trend is a must-watch.

For one, it’s a departure from the dominant trend of the last two years. Throughout 2015 and 2016, the U.S. dollar has languished sideways. And since 2014, following the “taper-tantrum” of 2013, 10-year Treasury yields steadily drifted lower, falling from 3% to 1.3%.

Now that the U.S. dollar and Treasury yields are surging higher, nearly all current market trends can be called into question, since the future returns of nearly all financial assets, in one way or another, are dependent on the level and direction of the U.S. dollar and U.S. interest rates.

In this brave new world, I think having a time-tested investment strategy like Cycle 9 Alert is an absolute must,

It’s a brave new world, and only time will tell how these trends will shake out. In the meantime, make sure to tune into your Cycle 9 email each week to see how I’m playing the markets to my advantage.

Adam_Sig

 

 

 

 

Adam O’Dell

P.S. Watch out for an email from me on Friday. I’ll be giving you the details to my brand new research service that allows me to turn $100,000 into $1 million. For a very limited time, I’ll be offering you a year’s subscription to Project V absolutely free. More details to follow.

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About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.