Mid-week market update: Investors have seen this movie before in the recent past. A market moving event breaks over the weekend. The market freaks out at the open. The market calms soon after and life goes on.
The last time this happened, the news was an investigation of Fed Chair Powell. This time, it’s the possible annexation of Greenland. Even though the S&P 500 remains in a trading range, but the equal-weighted S&P 500, the Russell 2000, and the MSCI All-Country World Ex-US Index have regained most if not all of their losses from the fright over Greenland.
What’s Greenlandic for TACO?
I have been of the opinion that the only thing that restrains Trump is the market response. The U.S. president had been emboldened by the Venezuelan adventure. The markets were calm, as measured by the VIX and MOVE Indices. It was time to try his luck with Greenland.
The blowback from allies and Republican members of Congress was considerable. Moreover, volatility spiked, and the 10-year yield soared, though it was partly influenced by the surge in Japanesse yields.
How do Greenladers say TACO (Trump Always Chickens Out)? As it turns out, a face-saving compromise solution with unknown details has been found, and the TACO trade has reappeared. Moreover, the market responded with the Sell America trade. Non-U.S. sovereign bonds are outperforming the 10-year Treasury in USD, the USD is weakening, and non-U.S. stocks are outperforming the S&P 500.
How long the Sell America trade persists is another question. It has reverted in the past once risk perceptions have diminished.
Carry On and Rally
In the meantime, market breadth continues to broaden. The Mag 7 has violated a relative support zone and become the Lag 7. The equal-weighed S&P 500 is in a well-defined relative uptrend.
The rotation into cyclical stocks continue. More importantly, cyclicals have staged a relative breakout against the equal-weighed S&P 500, which is less influenced by the megacap technology stocks (bottom panel).
The pre-Greenland market trends are continuing. Carry on and rally.
All is good with the TACO trade, unless you’re Maduro (who bet that holding out was a better idea than accepting the various offers of exile he had).
TACO is also based on the hope that Trump is not Nero, or that Trump doesn’t get senile. In other words, it’s gonna be an interesting ride.
Mr. TACO can Ginnie up the stock market with his emperor like proclamations. The key to watch now is the dollar and long term bonds to see where the trends are. Those markets are deep and with many foreign institutions participating. They have more vested in their long term out look than the American investors who have been taken over by the “buy the deep” mantra!