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The Trump Market: Chaos and Butterflies

The current market is a reflection of President-elect Donald Trump: the personification of Chaos Theory. That means it’s unpredictable, and it’s likely to change radically based on some small event (maybe a tweet?), a phenomenon known as the butterfly effect.

Given that, with full confidence I can say this market could show some further technical improvement in the next few weeks that may turn into a rally lasting much longer than anyone expects, or it could crash and burn tomorrow.  That should give investors butterflies in their stomachs.

I’ve been following the CNN Greed Index for the past few issues, noting that as the market has rallied, the index has climbed ever higher, which is a scary development. The most recent reading of 84 is just 16 points below its maximum level and only two points off its recent high reading of 86.  The higher the Greed Index, the lower the odds of a rally.  The current level is just plain frightening.

Don’t get me wrong. Despite some scary sentiment numbers, this market has been delivering the goods in many ways.  For example, the S&P 500 remains in an uptrend, having delivered a series of all time highs over the past three weeks and remaining above its 20, 50, and 200 day moving averages. 



But the new highs have limped across the finish line as the same nagging problems related to volume and momentum of the past few weeks remain in place.  While On Balance Volume (OBV, upper box, bottom panel) is moving up some, the Money Flow Index (MFI, lower box, bottom panel) is falling.  This suggests that the market is vulnerable and illiquid as more money is moving into stocks than money going into the market. The MACD and MACD Histogram (lower box, middle panel) are also concerning.  The former (black and red line) suggests that the fair upward momentum of late is running out of gas. The latter (blue bars) are confirming a loss of momentum because the most recent set of bars topped out below the previous set of bars.

Rising Market Breadth

To make matters more interesting, the NYSE Advance Decline Line (NYAD) has finally made a new high confirming the new highs in the major indexes. This is a bullish development and may serve as a counter to the bearish argument.  The Dow Jones Industrial Average (INDU) and the Nasdaq 100 Index (NDX) among other market indexes have also made new highs making it hard to refute the bullish action in prices, despite the somewhat soft nature of money flowing into the market.





So far, this market is all about where you put your money. As the chart shows, though, the industrial stocks (Dow and S&P) have outperformed the Nasdaq 100 (NDX), the home of the large technology stocks.

This market is not for the fainthearted.  The post-election rally has been going on for over a month. And although the flow of money into stocks has been tepid, and sentiment is off the charts screaming danger, this market can still go higher, at least in the short term.  That’s because the last two weeks of the year and the first week of a new year are seasonally bullish for stocks.  Second, the poor flow of money into stocks shows that lots of money managers have missed the boat. They make money based on how much their portfolio is worth, and thus may play catch up over the next few weeks.

The bottom line is that greed can grow and that there is plenty of money on the sidelines, which suggests that prices could still go higher barring something extraordinary happening over the next few weeks.

But after that, beware the butterflies.

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