In my view the averages are vastly over bought predicated upon speculation of a roll back of some onerous regulation—more specifically Dodd Frank which has crushed capital formation for the smaller companies, capital which is the lifeblood of capitalism and growth—and greater infrastructure spending.
Currently only comments have been made with no concrete proposals much less policy. There is a lag time between words and policy, which suggests the markets have fallen prone to the proverbial “buy on rumor and sell on fact” scenario.
While I am championing the above possible policy changes, I think the expectations and speculation have risen too far and fast.
And then there are interest rates. FRB Yellen strongly inferred that the inevitable December rate hike is “not one and done.” In my view such an environment has not been discounted.
I think the averages will be choppy to down for the next several weeks with tax loss selling becoming a driving narratives. I do believe however, the small caps and value issues will continue to outperform for a myriad of well-known reasons including lack of ownership and valuation.
And then there is Italy. As noted last week, December 4 is the Italian referendum on expanding the power of the Prime Minister. As with Brexit and the election, polls are close, with the prime minister vowing to resign if he loses. As was the case in Brexit and the US, the populists are surging in power, believing today’s multipolority/globalism has benefited only a few.
If the populists are victorious, the odds of Italexit rise exponentially. In my view such has not been remotely discussed much less discounted.
Commenting upon possible market activity this week, if history is of any guide, the markets may be lower today and tomorrow with some strength returning Wednesday in anticipation of the four day Thanksgiving holiday.
Markets will be open Friday for an abbreviated session but trading is expected to be subdued.
Last night the foreign markets were up. London was up 0.45%, Paris up 0.51% and Frankfurt up 0.29%. China was up 0.77%, Japan up 0.77%and Hang Sang up 0.06%.
The Dow should open nominally higher as crude is up on OPEC optimism. The 10-year is up 10/32 to yield 2.32%.
