Market Briefing For Thursday, Dec. 7
Ttake the market's 'main force' down, and you risk sinking the overall S&P. This notably better-handled preparation for attack by today's money managers, occurred because they tried rotating from sector-to-sector, and hoped that would 'mask' the rotational distribution, hence create a better defense against a 'raid' on the cross-section of stocks.
This tactic was successful for several months in forestalling overt reversals by the Senior Averages, and allowing Funds (and other pools) to diversify a bit into 'relatively' defensive stocks that hadn't soared to absurd levels. That placed the funds in a better survivable stance, should a 'swan attack' occur.
Realizing that their view of 'modern portfolio theory' has them 'in' the market 'fully' at all times (something I vehemently disagree with, but understand the investment policy committees at many funds actually compel that approach) ... even those managers that reasonably grasp the prospects of 'correction' of the overall S&P.. will have moved into someone reduced vulnerability.
That takes us to the 'rollover' of recent days, which hasn't been very brutal, despite the moaning. If it was, the Index primary trends would be broken as well as the VIX being in the 'teens', rather than oscillating between 9 to 12, with only an occasional spike higher. But it is a warning sign. Here they are selling-off the FANG and similar stocks, and moving into telecom and less excessively priced stocks (they call them value stocks, but they're not exactly bargains either).
What happened in the last couple weeks, which we spotted well in advance, as well as the periodic firming moves by VIX, telegraphed a possibility of an attack on the market sooner-rather-than-later, and not conveniently waiting until (say next Spring) for some sort of almanac-style topping process. One thing that's amusing is that most of such a process is behind not ahead.
In sum: the pattern can vary; and is mostly worried about the bond market, as a catalyst to signal when the 'main body' of enemy swans will attack. Of course the swans may come out of left field, and not when everyone really is prepared for them to swoop-down.
Now, we have a little 'swan' that few are thinking about, but matters. That is whether or not the 'reconciliation' of the Tax Bill going on right now, retains a very controversial feature, which is demanding FIFO (first-in, first-out) sales starting in 2018. This would impact technology stocks with big gains (FANG for sure) more; whereas sales made this year let the investor 'designate' the lot being sold. That's huge if you think about it.
For instance, an investor can actually have lower taxes (though due in 2018 rather than payment deferred until 2019 by selling in a new tax year) by just designating a 'higher-cost lot' of a given stock to be sold. That enable both a lower tax being paid, while retaining a 'core' position from early entry of any stock, which many investors (myself included) have no intention of selling at all; much less being compelled to show gains on those years-ago entries.
Conclusion: this can become fairly wild. If Congress 'reverses' the phrase in the Bill requiring FIFO (which is opposed by many Congressmen), then it will be a huge relief for the market near-term, and akin to intercepting swans attacking (for the moment). It would moderate the sale of high-level portions of holdings in the biggest winners of the past year. On the other-hand if they retain that provision, it would enhance the odds of further near-term selling.
All this differs from conventional wisdom about how Decembers work, very much inline with our warning of the ongoing volatility this month. FIFO and allowing property tax deductions are very big issues. How you pay the costs of tax cuts without offsetting revenue-raising moves is not the point of note in this discussion; rather this is about what the market will like or dislike and how it is going to impact the near-term behavior of FANG's and the S&P.
Disclosure: None.