WASHINGTON. We’ve noted numerous times in these columns that what by now must be acknowledged as the Great Trump Rally tends to sputter out for a bit before reviving with renewed vigor.
Whither the Great Trump Rally? Withering?
This week, market averages continue to hit new, higher and ever higher highs as we transit from September to October. But something feels wrong. This current leg of the Great Trump Rally is beginning to look a little weird. Tired. Weary. Maybe even a bit green in the gills. Just running out of steam.
If you pay careful attention to that man behind the curtain – something retail traders don’t often do – you have to see that individual stocks in most sectors have begun to crumble. More and more each day. Right, that’s not unusual during the generally treacherous September-early-October period. But it’s sneaky and nerve-wracking if you look just beyond the widely followed averages that keep hitting those historic highs.
Evidence that the Great Trump Rally might be failing? Or at least running out of steam as has been its periodic custom?Look for the signs.
Why is the brand new, tech-loaded Communications Services Sector Index so boring?
Let’s take, for example, the newly revised S&P / Dow Jones Communications Services sector, the once boring sector index formerly known as Telecommunications.
To test out this new and possibly exciting index – which, among other issues, has added Netflix (symbol: NFLX), Google (GOOGL), Facebook (FB) and Disney (DIS) – we’ve made a couple of short investment trips in and out of two ETFs that track the new index. Currently, we’re still slightly down in these ETFs, which, at least short term, are behaving like the dogs we hope they aren’t.
The first and newest of these indexes is the Communications Services Select Sector SPDR Fund (XLC). The second is the Vanguard Communications Services ETF (VOX).
With the addition of the aforementioned higher-priced, more volatile stocks, and a host of others you wouldn’t associate with those old line telcos, you’d think the former Telecommunications sector index – which was pretty much down to AT&T (T) and Verizon (VZ) – would get a positive jolt. Particularly during the current phase of the Great Trump Rally. But as yet, that hasn’t happened at all. We’ve attempted to average down on these shares as we build positions in each. But little by little, these new and newish ETFs – which reflect the stocks held in this new index – keep dribbling down.
How to handle a hot new sector if it’s not so hot
What this seems to mean, at least in the short term, is that this newly beefed up sector is limping just about as badly as it was before the alleged tech excitement arrived at the party. Which means, in turn, that many of the underlying investments are limping as well. That doesn’t augur well for the next batch of quarterly numbers we’ll begin to see come the first 2 weeks of November, when the next “earnings season gets underway.” Bottom line: the Great Trump Rally seems to be passing these puppies by. For now, well keep averaging down and see what happens.
Allergan: The myth of Sisyphus
Second case: The frustrating gyrations of our (unfortunately) biggest holding, the major pharmaceutical company currently known as Allergan (AGN). Like a lot of Allergan holders, we got completely hosed in the autumn of 2017.
It all happened last August-October when that company’s clever ploy to sell its imminently expiring patents on its proprietary Restatis dry-eye drops to a New York Mohawk Indian Tribe utterly failed. Theoretically, ownership by the tribe would insulate the patents from normal Federal guidelines and enforcement, allowing Allergan to keep one of its biggest moneymaking drugs away from generic competitors until approximately 2022.
But, like the loudmouthed host on a typical TV quiz show might say, “BZZT! I’m sorry! That’s the wrong answer!” Allergan shares immediately imploded. Big time. Within a week, these expensive shares were down at least 10 percent. Within a few weeks more, they were trying to bottom, having lost some 30 percent at their worst point.
Lately, things have been looking better. Much better. AGN shares are back on several brokerage company’s “Buy” or “Outperform” lists. And the shares themselves have responded nicely, regaining, by our estimate, at least 20 percent of last year’s average losses.
But lately, every $2-4 rally in these shares pauses, then gets whittled away by relentless selling. Once the bout of selling gets exhausted, the shares try to climb the mountain again. And once again, they get slammed back. It’s a bit like the myth of Sisyphus. Except it happens on paper. Even the Great Trump Rally can’t seem to get these shares to mount a final breakout effort.
A loss of faith. And it’s not only Allergan shares
What’s going on with these shares is pretty clear. At least to us. When exasperated Allergan holders – their annual returns smithereened by the stock’s lousy yearlong performance – close in on their former breakeven price, they’re dumping their entire positions. Despite the company’s dramatically improving situation, and despite the fact that the expected generic competition for Restasis has yet to appear, faith has been lost, and investors are dumping them just to get out a breakeven. They’re not willing to hold on, even though AGN shares could become as profitable as they once were.
We’re seeing this lack of faith elsewhere in the market, as more and more shares are experiencing similar action. They try to move higher. But they’re losing traction. Buyers are slowly disappearing, at least at current prices. You can also see this phenomenon clearly each trading day, when more and more reported trade imbalances near the closing bell are due to big “sell” orders.
So, what’s Mr. Market doing behind that curtain? Should we pay no attention?
We’ve looked at the negatives nipping at these markets before. Tariff issues aside, traders and investors still love Trump’s policies. But they hate Trump. They know decision time is near and they hate to have to make a crucial choice. Rationally, they need to go with Trump and the GOP and keep the winning going. But this has become a religious war. As a result, any of these traders and investors – particularly wealthy, die-hard coastal liberals – can’t bring themselves to do the right thing for their portfolios. It’s a truly bizarre situation.
So will voters pull the lever for the guys supporting the Great Trump Rally and remove much of the current, murderous uncertainty? Or will voters put the increasingly vicious, increasingly Stalinist Democrats in charge of Washington and the economy while impeaching anyone that’s not them. The chaos resulting from that choice should have become obvious during the shameful Kavanaugh hearings.
Election 2018 vs American Civil War Part II: Preparing to head for the exits?
Politically, we may already be in the early innings of the American Civil War Part II. That’s nerve-wracking for anyone with a lot of money invested in stocks and bonds.
We suspect that traders and investors are taking both profits and losses earlier than usual this year rather than riding out whatever happens in the voting booths come November. Everyone saw what happened the last time, during that electrifying Election 2016. For that reason, most rational investors, at least, regard 2018 as equally unpredictable. Markets, like life insurance companies, hate unknown risks. Hence, the markets’ recent subterranean churning.
We live in strange times. Investors don’t like strange times. So, while the widely-followed market averages keep soaring – supported as they are by being heavily weighted in big company stocks – those bellwether smaller stocks in the Russell 2000 have, one by one, been fizzling out, even as similar stocks remain invisible inside the larger averages.
If this sneaky selling begins to engulf the bigger stocks on the block, however, we’re going to be in a peck of trouble. And an extemely adverse election event could pull the trigger.
We’ll have more on this later. But we’ve begun to peel our own positions back little by little. Our ongoing shift from individual shares to representative ETFs has improved our positions this year. But even some of those ETFs, like those representing small caps, might be in for a profitable trimming over the next couple of weeks as Election 2018 approaches. Better safe than sorry. We like this market in general. But, short term, it’s getting scary.
— Headline image: Cartoon by Branco. Reproduced with permission and by arrangement with Legal Insurrection.