Goldilocks Is on Steroids

The week started with the market expectation that Donald Trump would squeeze out a narrow victory. That was viewed as a positive, and the market was trading stronger.

There was some worry that it would be so close that there wouldn’t be a winner declared for days, and that would be a problem. Very few folks had a "red wave" on their bingo cards, but by late on Tuesday night, it became clear that it would be a very lopsided victory for Trump and the Republicans.

The market exploded higher on the news. The S&P 500 has traded higher each day following the election with a gain of about 5%, but it was the Russell 2000 small-cap index IWM that was the big winner with a gain of more than 8%. While the indexes have had significant percentage gains, breadth has been a bit weak and was just 5,300 gainers to 4,150 decliners on Friday.

What is most interesting about the action is that there don’t seem to be any real concerns that a spike in growth will trigger renewed inflationary pressures. The market barely reacted to the Fed’s quarter-point cut on Thursday, and Jerome Powell seemed unconcerned about the recent rise in interest rates.

The action has been euphoric, but there hasn’t been any news flow to slow it down. The bulls have embraced a Goldilocks economic narrative that is on steroids, and Trump’s economic policies won’t even start to be tested for two months.

Things are extended, but typically when the action is this strong, it creates a huge crowd of underinvested bulls that are champing at the bit to buy a dip. It would be highly unusual to see a sudden downside reversal unless some highly unusual news was to hit. Strong markets tend to stay sticky to the upside. 

It doesn’t hurt that positive seasonality is now developing. The mood is very positive, and there should be some exceptional stock picking in the next couple of months.

Have a great weekend. I’ll see you on Monday.

At the time of publication, Rev Shark had no positions in any securities mentioned.