The stock market is all about hope and fear. Buying and Selling. Certainty and uncertainty.
As an election approaches, you always have the potential that an administration can change. This creates uncertainty. Uncertainty creates pause.
In the case of the Trump election, there was certainty that he wasn’t going to win. There was certainty that the party would remain in office and the only change would be new representation from that party.
Then along comes a Black Swan.
A Black Swan is when something happens that no one sees coming that has a great impact on our lives and that in hindsight, people tend to say they say it coming. A Black Swan can be good or bad. It can be as big as the Internet, or as dark as the housing collapse. Point is, Donald Trump, the dictator of the Celebrity Apprentice, winning the presidency, is a Black Swan. And we’re yet to see the full impact of his bring president, but it’s beginning to unfold in front of us. So stay tuned. This market will never be the same.
Where are we now?
Sentiment is about as bullish as we at www.stockbarometer.com have seen in some time. If you watch financial news, the interpretation of his presidency is SO bullish, that it’s hard to find a negative news story. That’s concerning.
The best way to show this is through a sentiment indicator.
As the market corrected going into the election, especially as Trump gained in the polls, you saw a traditional shift of certainty to uncertainty. Then when the election results were in, and the world was shocked, the investors took over. The net impact to the stock market was bullish because of the sectors that had been beat down over the past 8 years were now going to improve. And the net impact of them improving will be good for the whole economy.
The next two weeks will be critical. We have an options expiration, which tends to align with reversals and we also have an inauguration. There is a ‘sell the inauguration’ trade theme developing. And it may stick, given the level of hope and complacency we’re seeing. Remember the Investor Psychology Cycle, and let me ask you – where do you think we are…
I’d say we’re somewhere between excitement and greed/euphoria. Extrapolate this indicator over the Citibank indicator, and you get a pretty good idea why.
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