How To Trade A Taxing Market

Last week investors were whipsawed with financially and emotionally taxing news and price action.

Yes, I'm referring to the news of President Biden proposing a doubling of the capital gains tax.

The market reaction was swift, decisive, and ugly, but as you'll read below, there was a silver lining.

And the capital gains tax news was just the beginning…

  • Goldman Sachs released a note saying the "reopening trade has peaked." Some areas of the market seem to agree, but others do not.
  • Bitcoin certainly "peaked" with the biggest reversal and selloff since it was trading around $5,000, but there are indications that it may be time to get bullish.
  • According to Factset, 25% of S&P 500 have reported earnings with 84% beating their earnings estimates and 77% beating their revenue estimates. While this sounds like good news, it may not be. We'll find out soon as this coming week is one of the busiest of earnings season.
  • The market's rebound from the capital gains tax hike news led to an interesting division between the assets and indexes that recovered and those that didn't.
  • And there's more!

The SPY, QQQ and IWM didn't close substantially higher or lower, but…

If you're listening to the message of the market, last week's price action has an important message that may reveal what to expect in the coming weeks.

And… If you were listening to Mish's MMM Premium trade alerts last week, you were handed a beautiful trade in TAN that was as easy as gently scooping a goldfish out of its one-quart bowl when nobody's looking!

Mish jumped on TAN early in the week, and by Friday it had rallied so much that it found itself on our "Biggest 5-day Movers" scan.  As a result, the trade already has a 10% gain in a week, which TAN closed up 6%.

The trade is worth reviewing, and it looks like it has the potential for more upside, so we'll take a look at that too.

As you can see, there's a lot to unpack this week.

The New Normal - Rotation

Trading and investing are easier when everything is going up. That certainly wasn't the case last week.

The market is in a phase of rotation. This can be bullish for the long-term, but it requires patience, active management, a focus on "expectations," and good risk management in the short term.

The biggest rotation theme has been and will continue to be one of "growth versus value." I prefer to frame it as growth versus cyclicals because it's the economic recovery that's driving this rotation.

More importantly, it's the expectation of the economic recovery that's driving this rotation.

The idea of trading or investing based on expectations can be confusing to traders and investors, but this is what you need to do, or you'll always be one step behind the market action.

The Recovery Trade Has Peaked

An example of trading based on expectations this week is Goldman Sachs' pronouncement that the "recovery trade has peaked."

What? All we hear in the media is that economy is about to experience the highest GDP growth in decades! The economy isn't even fully open, and it's opening up more and more every week.

How could we have peaked?

As you can see by the chart below, it's Goldman's expectation that peak growth will be reported in Q2 2021, and then there will be a steady declaration.

Goldman's note included the following chart.

The media and unknowing investors are more focused on Q2 than what's expected to happen next.

Goldman's explanation in their research was as follows,

"Decelerating economic growth is also typically accompanied by sector rotations within the equity market," Goldman strategists including Ben Snider and David Kostin wrote in a note this week.

"Cyclical industries tend to lead the market in environments of positive and accelerating economic growth, but as growth peaks and decelerates more defensive industries typically outperform."

So Goldman expects that the growth rate has peaked and is therefore saying that it's time to trade based on slowing growth rather than accelerating growth.

Of course, this is easier said than done. The market's actual shift or rotation is not always smooth or easy to see starting and stopping.

This is why we're always watching what the market is doing relative to the news, and letting the trends and changes inter-market relationships tell us what the market is focused on.

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Disclaimer: The information provided by us is for educational and informational purposes. This information is based on our trading experience and beliefs. The information on this website is not ...

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