The trend of higher prices is likely to continue until the Trump administration releases its economic plans
Buy the rumor. Sell the news.
Since just before the U.S. presidential election, investors and traders have bought the rumor of the new administration cutting taxes, boosting infrastructure spending and reducing regulation. At some point it seems logical that the actual news of these things happening will generate a sell-the-news reaction.
Unless you are fortunate enough to own a crystal ball, there is no telling when this might occur or what the extent of the selling could be. The good news is that a crystal ball is not necessary. Understanding the price-volume behavior of the major averages and the action of the leading stocks is enough to keep you on the right side of the stock market.
This also means that you can’t see a top or a bottom until after the fact. This is the essence of trend-following. A trend is followed until it is over. This means it will reverse direction a certain amount until a new trend is confirmed. As trend followers, the best that we can do is respect the trend and not fight it.
Along these lines, this column has been positive on equities for some time. This will likely continue until higher-volume selling comes into the averages or leading stocks come undone technically.
Words to the wise: If you are holding one or more of the current cycle's leaders, you should realize that a correction in the averages will often see the leaders absorb pullbacks two to three times or more than that of the indices. So a 3%-5% decline in the averages may produce 10%-15% retracements, if not more, in some leaders.
It is also possible that even if some sectors whose fortunes have been hitched to administration policies falter, e.g. transportation IYT, -0.48% and industrial XLI, -0.43% the averages may remain buoyant. This is because the two largest industry segments, technology and financial, exert undue influence on the indices.
Also, behind the spotlight on Trump stocks, the economy hums right along and corporate earnings improve. Interest rates remain quite low historically. It remains to be seen how many central bank rate hikes will be needed to capsize this bull market. "Three steps and a stumble," the Edson Gould indicator, referring to three rate hikes and a bear market, may not apply this time around in light of the central bank's interest-rate campaign starting from an exceptionally low base.
Once again, for those of us without a crystal ball, the market's own behavior will be the best indicator of all.
What, then, is the market's behavior saying?
What with up days in price mostly occurring on higher volume and down days coming on lesser turnover, the averages are not providing any hints of weakness.
Ditto for the leading stocks. Enough said.
Among the names, Sina SINA, +4.80% has had an uneven earnings record for the past several years. Stock of the Chinese web portal, however, has performed well over the past year due to Wall Street expectations for a 49% improvement in 2016 net and a 69% jump in 2017.
Technically, the shares are close to the top of a three-month sideways consolidation area, or base, as shown in the chart below. It is constructive to see up days on higher volume as a stock forms the right side of a base. This is accumulation. It is noticeable on Sina's base when price bottomed seven weeks ago.
Aggressive speculators may consider using a takeout of the $80.63 high of this base as an entrance. A risk is the release of its earnings report Wednesday. Indeed, on Thursday the stock fell about 10%.
(As always, a protective stop should be used to mitigate risk, along with a starter position that is half, or less, the normal size. This initial position could be added to if the stock proves itself. In most cases, a position should not be entered when price is extended, i.e. more than 5% past the top of its base for buys.)
Hi-Crush Partners HCLP, -12.17% is a producer of sand used in the fracking process of obtaining oil and gas. This is definitely not a growth stock. Nevertheless, the company is expected to enjoy a turnaround after posting a loss of 95 cents a share in 2016. Most analysts on Wall Street eye 17 cents a share of earnings this year and $1.01 a share in 2018.
After hitting a price high of $71 in 2014, the shares sank to a low of 3 last year. Since then, price has made a gradual recovery to the low-$20s by forming bases and then breaking out of them. On Tuesday, HCLP broke out of its most recent base, a six-week flat pattern, ahead of its earnings release Wednesday.
In light of price pulling back after previous breakouts, aggressive speculators may consider entering on a pullback to the $20-$20.50 area. The stock was down 2.5% Thursday morning.
In sum, the stock market’s three-month rally has largely been predicated on Donald Trump's expected implementation of market-friendly policies on taxes, regulation and fiscal spending. At some point, the market will fully reflect these "rumors," with further announcements about them leading to a potential bout of selling. In the meantime, both the major averages and leading stocks remain stout