Major averages shot higher yesterday after opening down with the NASDAQ Composite closing just above its 50-day moving average. The market has switched back to a risk-on stance as the Russell 2000 was up a whopping +3.1%. Volume was at levels normally seen on quadruple witching days suggesting institutions were in favor of the Trump victory.
Most, if not all, of the big price action was centered in financials, materials, bio-techs, and defense names. Big-stock NASDAQ names rallied off of their intraday lows but did not participate in the big upside move as the tech sector lagged.
Financials rallied on the potential for higher interest rates if Trump says to the Fed, "You're fired!" as well as the abolishing of Dodd-Frank, which Trump has promised. Materials rallied on Trump's plans for infrastructure development and building a "great wall" on the southern border. Included in the materials sector rally were coal stocks which will also benefit from Trump's energy policies with respect to reviving the previously persecuted coal industry. Bio-techs rallied on the removal of Hillary Clinton's threats to impose price controls on the industry, which a Trump victory now negates. Finally, defense stocks rallied on Trump's promise to re-build the military.
The Market Direction Model switched out of its SELL signal, took small gains, first switching to CASH then to a BUY signal later in the day. The VIX Volatility Model switched to a BUY signal.
Longer bond yields continued to spike while financials as shown by ETF XLF broke out. Markets are forward looking so are pricing in a December rate hike. Markets are also potentially pricing in a Trump victory as good for shoring up the seriously ailing banking system.
The long end of the curve continues to under perform. This is another way of saying the yield curve is steepening as inflation is showing more signs of life as well as rate hike expectations in December. This drives up the yields on longer-dated issues. The yield on the 2-yr note has been heading mildly higher compared to the 10- and 20-yr notes which have been spiking higher.
Steepening yield curves are generally bullish for the stock market as it anticipates a stronger economy. The market appears to be casting a bullish vote for President elect Donald J. Trump.
If the "Trump Rally" is for real, we would expect to see more pocket pivots and other actionable buy situations emerge in this market. As of yet this is still developing as we see how things play out from here.