Morning Market Thoughts

by DAN Good morning. We’re set for a strong open this morning, with Dow futures up 77 points and set to hit yet another all-time high. We are still in the trading range I discussed over the weekend, which is a good thing. We want to see some sideways trading behavior for a while so that a new “base” can support the next breakout.

Last week Goldman Sachs predicted that the early part of 2017 would be strong, and then drop off as the Fed starts hiking rates more than the market expects. They break it down as being made up of two parts. The first is “hope”. That’ll last for a quarter or two. Then comes “fear”, which takes over the market and all kinds of bad things happen.

That seems plausible, though not particularly unique or insightful. In fact, when it comes to prognosticating about the economy, the Fed, the price of the market, etc., Goldman Sachs has been so wrong for so long that they’ve basically become a trading indicator. Think of it as the GSBS indicator. The stronger the claim, the more you should be skeptical about that claim.

But notwithstanding the GSBS indicator, I do think the first quarter will be a strong one due to the various “market friendly” proposals and headlines. The market reacts to ideas, proposals, plans, legislative activity…and headlines. The market looks ahead to the future when the ideas, proposals, plans and legislative activity actually come to fruition. And because of the time lag between proposal –> enactment –> effect, there will be time for the market to have a little party as investors contemplate the positive impact on their investments that lower corporate taxes, fewer regulations, and less government interference will have. This is the “hope” part of the year.

At some point, the hope needs to morph into reality…the thing hoped for much become fact.

No one really knows what the “hope” phase will lead to. Will it be fear? Or perhaps, if the Dow has advanced beyond 20,000 and the Nasdaq Composite is above 6,000, “complacency” may set in rather than hope. We just don’t know. No one does, including the fine folks at Goldman who purport to know such things. “Hope” is predictable. But as for “fear”,…they’re throwing darts.

So here’s what we do. We don’t focus on hope, fear, complacency, or whether the 49ers are going to win another game this season. We focus on what is happening now, and we work in the current environment. Read the predictive pieces with interest. It’s helpful to know what others are thinking. But as for what you are doing? Seek to find the sectors that are outperforming the broader market, and then look within those sectors for investing possibilities. Or, just stick with the ETFs to allocate the bulk of your portfolio in market-beating areas, and then use a relatively small portion of your account to trade the swings.

As the market continues to run, let’s run with it. Because tops are processes, there is little chance that the market will reverse without warning. We’ll have time to see the progression of topping, and make the appropriate moves to keep the profits and avoid the losses.

Hope to see you in the forum.

–Dan

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