For the last few months, there have been ongoing issues surrounding the “Russia Connection” and the underlying, and ongoing, investigations into the potential involvement/interference into the Presidential elections.
The market hasn’t cared. Until Wednesday.
As suspected, it did end with a bang on Wednesday as markets dropped sharply on the news of a “leaked” memo to the New York Times. James Comey, former head of the FBI, will now be questioned by Congress next week and asked to provide that memo, but in the mean time the Justice Department has now appointed a special prosecutor to investigate the “Russia Connection.”
While the Washington intrigue is certainly interesting, the question is “why after all these months did it matter to the markets now?”
The answer is simple. It potentially stalls all the legislative actions the markets have been banking on for the “Trumpflation” trade from tax cuts to infrastructure spending. A look at the bond market gives you a clearer picture of the “fading” hopes on an inflation-driven economic boom.
Importantly, as shown in the chart of the S&P 500 above, the markets broke below the 50-dma on Wednesday and triggered a short-term “sell signal” as shown in the lower part of the chart. Importantly, these signals when previously triggered have denoted periods of increased volatility and corrective actions until they are complete. Despite the rally on Thursday, I suspect the “shot across the bow” on Wednesday was just that, a warning shot to investors which suggest reflexive rallies should be used to rebalance and de-risk portfolios for now.
We need to see what happens over the next week to see if the markets can regain their footing. However, for now, holding a little dry powder continues to make some sense.
In the meantime, here is what I am reading this weekend.
Research / Interesting Reads
“The Market Will Always Tell You When You Are Wrong.” – Jesse Livermore