U.S. stock market on May 17, 2017: thoughts and outlook

*These are our short term thoughts on the market. We invest purely based on our medium-long term model. We’re looking at how the market reacts to news, earnings, and other fundamental themes related to the key individual sectors.

Stock index & news

Read our post on Will Trump’s impeachment or resignation cause the U.S. stock market to fall or crash?
Today’s big news was the Comey memo. With emotions and speculation flying high, let’s “stick to the facts” (as Paul Ryan says). Here are the facts based on what we know. Please contact us if we made any errors.
Fact #1: Comey’s memos of Trump asking him to “let the Flynn investigation go, because Flynn is basically a good guy” is not enough on its own to impeach Trump. As long as Trump isn’t ACTIVELY subverting the investigation, Trump is within his rights to ask such a question because technically, the FBI director works for the president.
Fact # 2: A Republican controlled House is unlikely to impeach Trump unless there is VERY substantial evidence of Trump’s wrongdoing. It is even less likely for the Senate to gain 2/3 of the necessary votes to remove Trump from office.
Fact # 3: The only way Comey’s memo can lead to Trump’s impeachment is if, by asking Comey to “let Flynn go”, Trump was covering up his collusion with Russia. In other words, this will only become a real problem if there’s evidence that Trump did collude with Russia.
The House will not impeach Trump unless there is a “smoking gun”. There isn’t one right now.

So it still boils down to the question “did Trump do anything wrong with Russia during last year’s election.

There’s no point in guessing whether or not the Trump-Russia allegations are real. Who knows. But just for fun, let’s think through the logic.

Trump probably did not collude with Russia.

Comey was fired unexpectedly. He was humiliated because apparently, he found out about his firing on television. Then, Trump threatened Comey with “tapes” regarding their conversations. So perhaps a bitter Comey wants revenge. He is still a human.
Via his memo, it’s pretty clear that Comey wants to hurt Trump. As a politician, either you’re with Trump or against Trump.

If Comey had any real substantive evidence against Trump that could directly lead to Trump’s impeachment, he would have leaked that substantive evidence. Instead, he leaked a weak memo that makes Trump look bad. It appears that after more than half a year of investigating, the FBI has no solid evidence of Trump’s collusion with Russia.

Unlike most presidents, Trump doesn’t really watch his mouth when he speaks. Being the impatient guy that he is, it’s likely that Trump just got annoyed by how long the Flynn investigation was lasting.
How this will impact the U.S. stock market
What we really have is a presidency-in-crisis and not impeachable offences. The key point is that the continued investigation will:

  1. Hang a cloud over the market. The S&P’s current small rally has lasted longer than 91% of all previous rallies since 1950. So from a technical and mean reversion perspective, the S&P is ready to make a 6%+ small correction. Perhaps the Trump-Russia investigation will be the trigger.
  2. From a medium term perspective, this will delay and jeapordize Trump’s proposed pro-growth policies (tax cut and infrastructure programs)

The market faces bearish risks next week
We are not in the business of guessing the stock market’s day-to-day movements. We invest for the medium term. However, there are 3 short term bearish risks next week.

  1. The Judiciary Committee wants all of Comey’s memos of senior White House and Department of Justice communications by May 24.
  2. Comey will testify on May 25 at 9:30 am.
  3. Oil continues to be a danger to the market. OPEC meets on May 25 (next Wednesday) to discuss an extension of its oil cut. Oil has rallied recently and front-run an extension. The odds of oil falling after the news are high, regardless of OPEC’s decision.



The energy sector fell the least today because oil prices went up. We continue to hold our bearish outlook on oil. No matter how much OPEC cuts production, U.S. shale continues to increase production.
One can speculate about the exact break-even price for U.S. shale. Some argue that it’s $37, while others argue that it’s $40, while others argue that it’s $45. Arguing about the exact break-even price is meaningless. Just look at U.S. production. With production rising, it’s clear that U.S. producers are pumping at a price that’s above their break-even price. That’s all you need to know. That’s why U.S. production continues to rise.
*Some bearish investors are scared of rising oil inventories. Based on charts from the EIA, you can see that inventories is a useless indicator. It has no predictive power for oil prices.

The financial sector fell today a little more than the S&P 500. Bank stocks got killed. This is to be expected. Interest rates got crushed because many asset classes are playing a classic short-term “safety haven” theme.

  1. U.S. 10 year Treasury yield fell 4.8%.
  2. Global stocks fell.
  3. Gold and silver surged. Gold surged much more. During “safety haven” themes, gold tends to surge initially and then fade.

Here is XLF’s daily chart and the 10 year yield’s daily chart. (XLF is the finance sector ETF).

Of the S&P 500’s 11 sectors, the tech sector fell the most. There is nothing unexpected about this.
Beginning in January 2017, a lot of big and savvy investors like Warren Buffett piled into tech stocks with large cash hoards (e.g. Apple, Google). Their logic was simple:

“Trump will give a one-time tax break that encourages companies to repatriate their cash hoards from abroad. Apple alone has almost $250 billion in cash overseas. If tech companies bring back their cash, they will issue dividends and buy back more stock. That will push tech stocks higher”.

Tech has rallied over the past 5 months based on this belief. If Trump is finished, then investors can forget about the cash repatriation. This fear caused tech more than any other sector today.

Bottom line

Nothing has changed.

  1. Our model still says that this is a big rally in a bull market. There is no significant correction in sight. But if Trump does become impeached (i.e. they find the “smoking gun”), then a significant correction is highly likely. In that case, our model will fail for the 3rd time in 67 years to catch a significant correction. (We recently improved this model. We went down from 3 failures to 2 failures.)
  2. Even without the Trump-Russia news, the S&P is still poised for a small correction right now.

We have 2 potential bearish themes for this upcoming small correction. (Prior to today we only had 1 bearish theme).

  1. The ongoing Trump-Russia investigation.
  2. Rising oil production (downwards pressure on oil and the energy sector).

In terms of timing, we got lucky when we shifted our entire portfolio into cash on Monday. The logic of our selling was sound, although we did not predict the latest Trump-developments at all. We still plan on buying when the S&P falls 6-7%.

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