Is anyone paying attention?

End of Day Update:

It was an exciting day for politics on both sides of the pond. We started the day with a General Election in the U.K. and capped it off with Comey’s testimony before a Senate committee. These two events were widely anticipated by pundits and news junkies for weeks. But it seems someone forgot to send the memo to the stock market. Given the market’s tepid, almost boring price-action, it looked like any other boring summer trading session.

Luckily for us boring is a good thing. It means traders are calm and not overreacting to headlines. Rather than sell nervously ahead of uncertain events, most traders are confidently assuming everything will blow over and this isn’t worth worrying about.

It’s easy to see why the market shifted to this half-full outlook. Every defensive sell over the last few years was a painful mistake. After getting burned three, four, and five times by prematurely selling a dip, traders learned their lesson and now confidently hold any and every dip because it will bounce like all the others before it. And so far that strategy has worked brilliantly. In fact the lack of defensive selling has gotten to the point that dips are measured in hours and tenths of a percent. Blink and you’ll miss them.

I miss the old volatility. I made a lot of money buying steep discounts from traders overreacting to headlines. People would dump their stocks “before things got worse”, but typically that was as bad as it got and we rebounded when things turned out less-bad than feared. But these days it is hard to find bargains when traders are demanding premium prices for uncertain times.

It was easy and safe to buy a dip when the market overreacted. Risk is a function of height and the lower we went, the less room there was left to fall. Buying at $80 is always less risky than buying at $100. But the opposite is true here. Long gone are the days of buying at $80, or even $100. Instead sellers are demanding $120 for an imperfect product. Good for them if they can sell at $120, but the thing is most are greedily holding for even higher prices. Their confidence is keeping supply tight and propping up prices, but these premium prices mean there is far less margin for error. We’ve gotten to the point where need to hit the ball out of the part just to keep this rally alive.

While this market makes me nervous, the path of least resistance is clearly higher. If we were vulnerable to a crash, it would have happened by now. There have been plenty of excuses for traders to sell defensively. But when no one sells the headlines, they stop mattering. These things rarely end well, but they also last longer and go higher than anyone expects. I don’t trust this market, but it will most likely continue creeping higher for the foreseeable future.

This post-election rally was built on expectations of tax cuts. Nothing else matters. Corporate tax cuts, repatriation of overseas profits, more money in consumers’ pockets. That is what propelled us from the November lows. But expectations are high. Maybe a little too high. What happens if Trump and Republicans fail to deliver on their generous promises? It won’t be pretty. Right now the stock market is giving the benefit of doubt to Trump and the Republicans. But there is a good chance the tax cuts won’t be as impressive as hoped for and we will stumble into a sell-the-news dip. Tax cuts are what got us to these heights and they are also one of the few things that can knock us off this perch. Keep riding these waves higher over the near-term, but bailout as soon doubt about the size of the tax cuts starts to creep in.

Jani

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