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posted on 03 December 2017

Christmas Almost Came Early

Written by , Clarity Financial

Market Review

What the "heck" was that?

This past week seemed to be the story of Christmas coming early. Earlier this week the markets surged higher on hopes that "Ole' St. Tax Cuts" would soon be here. But that dream seemed to be short-lived on Friday, at least at the open, as General Mike Flynn seems to embody the "Grinch" trying to steal Christmas.

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But at the end of it all, not much actually changed. Well, except for the fact that volatility not only made an appearance as stock prices swung wildly in both directions, but also in Treasury rates. As expectations of tax reform grew, rates spiked higher but then sank just as quickly as fears of turmoil in the Administration sent money into the safety of bonds.

As shown above, despite all of the "sound of fury" the S&P advanced 1.53% for the week while rates, not surprisingly as money rotated from "safety" to "risk," ticked up from 2.3% to 2.4%. However, while volatility finished week only up mildly, intra-week we saw volatility jump to nearly 15 before settling back at 11.

The sharp advance, as the market went all "bitcoin," pushed well into 3-standard deviation territory above the longer-term moving average with overbought conditions pushing extremes. While the backdrop remains decidedly bullish, the sharp moved higher has all the earmarks of an exhaustion move which suggests some profit-taking cool things off over the next couple of weeks.

While the market is extremely overbought, the bullish trends remain intact. Furthermore, the month of December tends to bullish for equities which keeps portfolios allocated towards equity risk currently.

With the tax bill now out of the Senate, the real work begins as the House bill and Senate bill will go to conference to work out the rather substantial differences between the two bills. With neither bill even remotely approaching a "fiscally conservative" that will actually lead to stronger economic or reduced debts and deficits, it is a huge windfall for corporations.

This, of course, raises the question as to how much of the "tax cuts" are already priced into the markets.

One thing to be cautious of is the possibility this could well be a "buy the rumor, sell the news" event as we move into the New Year. As I stated last week, I see two potential outcomes:

  1. A tax bill clears Congress reducing taxes which leads to tax-related selling by money manager to lock in gains at a lower tax rate that will not have to be paid until 2019, or;
  2. The tax bill fails, a still likely scenario, which leads to tax-related selling by money manager to lock in gains on which taxes will not have to be paid until 2019,

Let me repeat from the last newsletter:

"As I see how December plays out, I will be seriously looking at adding a short-hedge to portfolios before year end. I will keep you apprised."

This weekend, I am traveling to Florida to give a presentation on the markets and will be joined by some of my friends like Chris Martenson and Nomi Prins. It promises to be fun and I will fill you in on any great insights next week.

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