Mr Trump’s victory produced sharp weakness in the dollar and in stocks worldwide that was short-lived. Those markets have recovered all their losses and more and have now move far enough in the opposite direction to start producing extensions. Let’s start with bonds, which briefly rallied on the news and then fell:
The $ dropped sharply as the shock spread across the newswires. The $ index fell to some predictable support at old compressions before bouncing back higher than it had been before the news emerged. There has been no extension yet (nor in any other $ currency pair), so there will probably be further gains to come from this immediate move.
Stocks had the most dramatic moves. The only bottom extension in any national index was in Australia, where the market closed after the first drop but before the worldwide bounce took place – this luck of timing meant the numbers could line up in the ‘right’ way in that market without interference from the subsequent rally.
Elsewhere, the equity markets tested support from old compressions that were about 5% below the price level just before the election. This support level was last mentioned in the October 25th edition and is shown by the blue bars here:
The rally has now started to produce a few top extensions in sector indices in the US but not yet in any main index in or outside the United States. These few sector tops should not be taken to mean that the rally is soon to end as this is probably just more of the ‘rotation’ that has been such a feature of the US market for a year and a half:
To conclude – the dollar will probably go higher and small dips should be bought. The US bond market will probably recover some (or maybe all) of its losses since the highs of July and may be bought hereabouts – this does not yet apply to European bond markets and it may be prudent to wait for some signs of reversal before buying the US too. Stocks will probably continue the rally and small dips should be bought. There may be significant further gains- we will comment further as the story unfolds and this becomes clearer.
It seems unlikely that there will be another large dip in equity markets like yesterday’s. This is more like the situation best described in the Welsh proverb – “The archer must draw his bowstring back before the arrow can leap forward”. The way is clear for further gains and perhaps the final ascent into a bull market high point that we have been expecting all year. Sometimes a range can only break when there has been a violent shake and this was exactly that.
Signals are generated by software provided by Parallax Financial Research www.pfr.com
