No! I am not talking about President Trump but rather the crash in both Technology stocks, and Oil prices, which are obstructing the continuation of the “bull market.” 

As I discussed this past Tuesday, the mini “flash crash” in Technology certainly woke investors up.

“While there is certainly damage being wrought in the Technology and Discretionary sectors, the rotation to Financials, Energy, Small and Mid-Capitalization areas are offsetting the correctionary process. As shown below, the markets remain confined to the bullish trend currently while the overbought condition is being reduced.”

As shown in the updated chart below, despite all of the “angst” there has been relatively little price deterioration to date.

(Click on image to enlarge)

While the Nasdaq has primarily been under pressure from the unwinding of the excess in the main FANMAG (FB, AAPL, NFLX, MSFT, AMZN & GOOG) stocks, as shown below, some performance pickup by small and mid-capitalization stocks, as well as emerging markets, limited portfolio damage over the last few days.

(Click on image to enlarge)

As money rotates wildly between sectors and markets, in a clear attempt to stay invested, the risk of a decoupling has risen in recent weeks. This is particularly the case if it either becomes clear Trump’s legislative agenda is not going to progress OR earnings begin to disappoint.

I believe BOTH of those outcomes are highly likely. 

First, with Trump embroiled in investigations, allegations, and general revolt, the ability to progress on legislative agendas has become markedly more difficult. However, the bigger issue is the potential disappointment in earnings expectations as sliding oil prices feed through in the next quarter. With the recent break below $45/bbl, there is a real possibility that a test of $40 is coming. 

(Click on image to enlarge)

With revenue’s and CapEx already suppressed, the negative feedback into earnings, expectations, and outlooks is increasing. I would expect to start seeing earnings expectations through the end of the year get trimmed back in the next couple of months. The problem, of course, is that makes the current valuation arguments that much more difficult to justify. 

That could weigh on investor’s portfolios sooner rather than later.

In the meantime, here is what I am reading this weekend.

Politics/Fed/Economy

• Housing In America: Movin’ On Up by Danielle Dimartino-Booth via MoneyStrong
• Economic Predictor Moving Towards Recession Sign by Jonathan Garber via BI
• Stockman: Budget Projections A Fantasy by Craig Wilson via Daily Reckoning
• Fed’s Plan To Shrink Balance Sheet May Have A Problem by Pedro Da Costa via BI
• Business Say They’re Confident, Merger Numbers Disagree by Caroline Baum via MarketWatch
• Here Is The Fed’s Plan To Unwind Its Balance Sheet by Bob Bryan via Business Insider
• 93% Of Employment Gains Are “B.S.” by Morninghill Capital via RIA
• Fed Hikes Rates, Yields Drop by James Picerno via Capital Spectator
• If Jobless Rate So Low, Why Do Americans Feel Bad by Alia Dastagir via USA Today
• Fed’s Financial Stability Concerns by Edward Harrison via Credit Writedowns
• End Of Recovery Nearer Than Believed by Robert Johnson via MorningStar
• The Most Dangerous Part Of Killing Dodd-Frank by Matt Egan via CNN Money
• All Uncertainty From D.C. Not Created Equal by Ray Keating via Real Clear Markets
• Infrastructure Won’t Create More Jobs by Jeff Harding via An Independent Mind

Markets

• U.S. Oil Companies Face A Huge Problem by Tsvetana Paraskova via OilPrice.com
• BofA: Gray Days – I Watch But Nothing Moves by Tyler Durden via ZeroHedge
• The S&P Has Only Done This 8-Times by The Heisenberg via Talk Markets
• Ominous Pattern For Big Technology by Nigam Arora via MarketWatch
• Biggest Problems For Investors Today by David Merkel via The Aleph Blog
• Sometimes “Smart Money” Is Dumb Too by Jason Zweig via Intelligent Investor
• Some Indicators Are VERY Overvalued by John Mauldin via Mauldin Economics
• Are FANG Stocks Really Dead by Michael Kahn via Barron’s
• This Market Action Is About Machines by Doug Kass via Real Clear Markets
• Financial Markets Are Increasingly At Risk by Bill Gross via Janus Capital
• 5-Charts On Oil by James Heron via Bloomberg
• Patience Is The Way To Earn Alpha by Anora Mahmudova via MarketWatch
• Equity Valuations: It’s Different This Time by Jeffrey Snider via Alhambra Partners

Research / Interesting Reads

• What Happens When Machines Start Selling by Wolf Richter via Wolf Street
• The Fed Needs A New Theory by Scott Sumner via The Money Illusion
• Why Retirees Shouldn’t Shun Market by Anna-Louise Jackson via USA Today
• GOP Is Shredding Financial Protection by Katrina Vanden Heuvel via The Nation
• The Scariest Chart For Central Bankers by Tyler Durden via ZeroHedge
• Still Crazy After All These Years by Cliff Asness via AQR Capital Management
• The Limiting Qualities Of Black Box Algo’s by Gary Smith via MarketWatch
• Debt Limit Nightmares Coming True? by Brian Beutler via The New Republic
• Don’t Fear Robots, Fear Low Savings & Investment by Nathan Lewis via Forbes
• Fed Will Start Cutting Rates By End Of Year by John Crudele via NY Post
• A Speculation On How This Recovery Ends by Conor Sen via Bloomberg
• Fair Value And Bubbles: 2017 Edition by John Hussman via Hussman Funds
• Tech Panic Quickly Deflating by Dana Lyons via Tumblr
• Is This What A Blow-off Stage Looks Like by Jesse Felder via The Felder Report

“The stock market is the story of cycles and of the human behavior that is responsible
for overreactions in both directions.” – Seth Klarman