Market failure is on the horizon; but can be deferred by what becomes a 'sleeper-like' transition into a greater risk concern. Funds that always show up for retirement funding will provide money managers an ability to deflect headwinds for a while.
No Holiday Boat Paradeis likely to greet the New Year; though we give thanks to the fabulous outgoing year's gains which mark the first time for recent years, that we never suggested a formal trading short-sale. The last time was the five years of consistently bullishness from 2002-2007; which preceded the call for an 'Epic Debacle' (we figured-out a derivatives crisis was at the heart of the Housing and banking problem; not just liquidity).
The outline for early-phase 2018 activity has been provided. It included the suspicion we'd see early tax-selling (mostly for gains) in December's final days, as trades would have a normal settlement in the new 2018 tax year. We got that mostly for the last couple days in momentum stocks; but not in a heavy way for the broad market. That was until the late Friday fade, that accelerated in the very last minutes as the reports of Russian Oil tankers directly selling to North Korea in violation of UN sanctions hit the news. It came in the wake of a story of a Chinese ship doing that as well; however that ship docked in Hong Kong and was seized by 'local' authorities.
What this all shows is the market's sensitivity increasing to news at these levels; perhaps more so than has been the case in much of 2017. Also in Iran protests ramping up and will likely spread this weekend beyond Tehran. The whole Middle East remains tense; the Saudi's seizing more financial assets; beyond the jailed (or now released) Royals known of previously.
In sum,the year past has been terrific and while alert for corrections, the primary trend has been up throughout. Now many who doubted the bullish view from the election forward, are expecting a repetition on the upside.
That has already occurred; and much has been discounted. Hence things should get more skeptical, not more complacent going forward. Conditions for faster adoption of new technologies are present; but won't really speed up due to the tax cut (although they're coming whether in autonomous or semi-autonomous vehicles; sophisticated drones; AR, AI and so on.. they are coming regardless and the speed of development relates to engineers as there is no shortage of capital willing to fund these trends).
As to the market's extended overall move; I realize there's a viewpoint that this is all mid-cycle activity, with things going to get lots stronger. I agree.. for the economy, but not necessarily the credit markets. Ironically the stock market's desire to hold-together in the new year, almost require that capital expenditure or other economic boosts do NOT result in boom times. That would retard the Fed's zeal to firm things; and retain equity attractiveness.
However everyone is singing the 'don't worry be happy' tune; which is part of the reason to be concerned. At the same time a 'booming economy' will embolden the Fed (if not the ECB) to move forward as they've persistently outlined, which some evident frustration that markets have ignored them.
I think if you do get the kind of 'animal spirits' we believe tax reforms have unleashed for the year (or two) ahead; you will get greater satisfaction with consumer and business activity; and robust growth. But it's higher risk with respect to equities, which is another reason to watch credit markets close.
There's a lot of money in 'passive investing'; which makes this era slightly like the 'program trading' activities of 1987; when we were on guard for the Dollar to break; and stocks to tank 'within' the then-ongoing upward super cycle. The year ahead could be somewhat similar in 'risk profile' given the heavy concentration in Index funds and ETF's, which are surely convenient for investors and money managers; but can set up a trap-door effect if' an out-of-the-blue even occurs; or a simple technical correction transpires.
What we're saying about the market's 'newfound' optimism, is that 'hype', (which is what a number of pundits and analysts are giving by high target ranges for 2018 in the S&P or the Dow), currently is running ahead of S&P realities; and the defensive nature of the 'hints' of January selling are also present. However I don't expect expectations to be dashed immediately.
Bottom line:
Market failure is on the horizon; but can be deferred by what becomes a 'sleeper-like' transition into a greater risk concern. To wit; funds that always show up for retirement funding will provide money managers an ability to deflect headwinds for a while but not necessarily right away.
Most such funds flow in between February-April; so that leaves January as an outlier for them; which is why it's possible to have a dip or two ahead. It probably (absent a catalyst) won't turn into any sort of dramatic purge yet; because the money managers know that seasonal capital is forthcoming.
On the other hand; any notable January decline would telegraph what may be an underlying strategy of nailing down gains in a new tax year (payable in 2019). That wouldn't inhibit a later Winter/Spring rally; but could imply a subsequent rougher patch for the market. Obviously a very preliminary as well as 'subject to change' (I'm sure) thought but stay tuned as it suffices for the moment; and indeed we had mixed late December action.
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