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Here's why Trump's inauguration could mark a near-term top for stocks
MARKETWATCH 12:34 PM ET 1/9/2017
Deteriorating market breadth belies latest round of all-time highs

It could be a classic "sell the fact" moment for the stock market.

A postelection rally that carried the Dow Jones Industrial Average within a whisker of a round-number milestone (http: //www.marketwatch.com/story/all-of-the-important-dow-milestones-in-one-chart-2016-12-28) and took other major indexes to all-time highs might be losing steam, leading some analysts to anticipate a near-term top that could roughly coincide with the inauguration of Donald Trump on Jan. 20.

Expectations that the president-elect's administration will follow through on pledges to slash regulation, cut corporate taxes and boost infrastructure spending have contributed to the "Trump trade," boosting stocks and triggering a sharp rotation into sectors expected to draw outsize benefit from those policies. Government bonds, like the 10-year Treasury note, sold off sharply on expectations for bigger deficits, stronger growth and higher inflation.

But there are signs the Trump trade is losing some of its mojo.

See:Here's the right way for stock-market investors to trade Trump in 2017 (http://www.marketwatch.com/story/heres- the-right-way-for-stock-market-investors-to-trade-trump-in-2017-2017-01-06)

Bonds have partially rebounded, pulling yields down somewhat. Stocks pulled back modestly (http://www.marketwatch.com/ story/dow-industrials-keep-20000-in-sight-with-fed-speakers-ahead-2017-01-09) on Monday. The S&P 500 finished last week up more than 6% from its Election Day close, while the Dow on Friday topped out just 0.37 point short of the technically insignificant but possibly emotionally relevant 20,000 level.

Read:What Dow 20,000 means for stock-market investors (http://www.marketwatch.com/story/what-dow-20000-means-for- stock-market-investors-2016-12-14)

Moreover, analysts pointed to weakening stock-market breadth, with declining stocks outnumbering advancing stocks, at the end of last week even as the S&P 500 index notched a record:

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The last time $SPX closed at an all-time high with more ⬇️than ⬆️stocks & volume and < 4% at 52-week highs was March 24, 2000.

— SentimenTrader (@sentimentrader) January 6, 2017

)

Also:

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This would be the fewest new 52-week highs on a day the $SPX closed at ATH since May 2015, Sep/Nov 2014 and Mar 2000.

— SentimenTrader (@sentimentrader) January 6, 2017

)

Andrew Adams, analyst at Raymond James, also noted that while the S&P 500, which is weighted by market capitalization, notched a record, the same index didn't follow suit when all its components are given an equal rating (see chart below). Also, small-cap stocks, which led the postelection charge, have lost some of their fizz.

All in all, market breadth "does seem to be slumping a bit, which is often a preamble to weakness in the major averages, and we could start to see traders position themselves for [a] short-term trading top coinciding with the inauguration," Adams said, in a note.

That means investors looking to take profits and reduce equity exposure might have a good opportunity to do so this week, he said.

The anticipated weakness shouldn't have any significant impact for more long-term investors, and those who missed out on the postelection rally might finally have a chance to buy in, but "it is cause to remain vigilant," Adams said.

He noted that he still sees a "big test" for the S&P 500 at the 2,280-to-2,285 area, arguing that failure to rise above that resistance area could make for limited upside in the near term.

A top near inauguration day would be a textbook illustration of the old investment adage: buy the rumor, sell the fact. The saying reflects the notion that by the time an anticipated event occurs, investors have already factored it into prices.

Indeed, that's largely the argument made by Morgan Stanley analysts (http://www.marketwatch.com/story/trump-rally- could-end-when-president-elect-takes-office-morgan-stanley-says-2017-01-04) last week. "What increasingly optimistic news are going to start embedding in our earnings outlook post-inauguration that hasn't already been contemplated," analysts led by Adam Parker said in a note.

There is also the concern that Trump-inspired gains have factored in all the policy positives while ignoring the potential pitfalls that could accompany rising trade tensions with China and others.

And skeptics question whether the perceived positives are as bullish as investors assume.

"You can't sit on the sidelines as the Trump rally continues, but you have good reason to question its durability," wrote analysts at Montreal-based Pavilion, in a Monday note. "The president-elect's tax plan will do little to boost growth, and will largely benefit high earners, crimping consumption and dramatically eroding fiscal balances."

So far, the S&P 500 is on track to post its largest Election Day-to-Inauguration Day rise since Bill Clinton's 1996 re-election victory, which saw an 8.8% rally.

See:How stocks have performed between Election Day and inauguration since 1928 (http://www.marketwatch.com/story/ heres-how-the-stock-market-performs-from-election-day-through-inauguration-day-2016-11-08)

Trump-inspired bulls are confident that the incoming president's policies will boost business confidence and unleash animal spirits, clearing the way for further upside.

"I think President Trump is going to downsize government, cut out many of our 'free lunch' programs and provide growth through the decrease in corporate and personal taxes and the closing of many tax loopholes," said Mark Grant, chief strategist at Hilltop Securities, in a Monday note. " I also believe that we will be exporting oil and natural gas in short order and that those revenues will help close the funding gap as new infrastructure projects are initiated."

Kirk Spano:The Trump trade and why oil might soon reach $100 again (http://www.marketwatch.com/story/the-trump-oil- trade-and-why-oil-might-soon-reach-100-again-2017-01-09)

-William Watts; 415-439-6400; [e-mail]


(END) Dow Jones Newswires
01-09-171234ET
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