The ‘risk-off rally’ flops

It may be more so on style than substance that President Donald Trump’s dismissal of FBI Director James Comey fails very badly. Yet, in spite of what were broadly accepted reasons for the dismissal, the disquieting manner in which so many aspects of it were handled became the "substance" in terms of the lower standing of the President even within his own party; and needless to say the not-so-loyal opposition from the Democratic Party.

The lack of class in this instance from an individual who keeps telling everyone whatever his administration does will ultimately be ‘beautiful’ is disconcerting. And it could significantly interfere with his otherwise enlightened legislative agenda if too many Republicans lose confidence in him.

Yet, the U.S. equities rallied Monday morning into Tuesday in spite of the administration’s clear ability to "snatch defeat from the jaws of victory." (Last week’s Comey Affair followed the previous success of House passage of the American Health Care Act.) The equities strength seemed to be for specific technical reasons related to the weekend outbreak of the WannaCry computer virus rather than any return of confidence in the administration. 

A bit bizarre

And that was also bit bizarre from a logical standpoint, as such a broad range of companies and institutions having their computer systems hijacked by hackers demanding ransom might have reasonably had a far more negative impact. Yet the equities interpretation seemed to lean toward well-positioned tech companies anticipating all of the computers and especially updated software that affected entities are going to need to buy to protect against future incursions from ransom-demanding hackers.

And to be realistic about it, that is a major investment. There are many companies and various institutions which are running "legacy" (i.e. historic) software across major installations that are not easy to upgrade. That is often because the extended software (either for accounting, contact tracking, appointments, industrial processes, etc.) is not necessarily easily changed, and is dependent on the legacy operating systems.

However, those legacy operating systems are no longer actively supported and updated by their providers. It may make sense for a company to hire custom programmers to keep legacy operating systems running. The cost of upgrading large organizations’ software (including the additional staff retraining hours) can indeed seem prohibitive. Still, the ostensible savings can quickly evaporate when the lack of any ongoing updates to plug security vulnerabilities result in attacks like last weekend’s WannaCry stickup.

Hits just keep on coming

And by Wednesday morning it made sense for the seemingly "Teflon" equities to weaken in the wake of the "risk-off rally" getting hit with additional negative news. That was after the WannaCry global ransomware attack and Trump’s sharing of classified intelligence with the Russians. The next shoe to fall was Tuesday afternoon’s leaked information regarding a memo dismissed FBI Director Comey wrote after a February meeting with President Trump.

This brings to mind the old cliché, “And the hits just keep on coming.” As most of you are likely already aware, the leak alleges that Comey made notes on a Trump request during that meeting that Director Comey ‘drop’ the Michael Flynn investigation. The operative consideration is whether he actually requested full abandonment of the FBI inquiry, or something well short of that… like a softer approach due to Flynn being a “good guy.” And it is now out that Comey only agreed with Flynn being a good guy.

Impeachment?

Yet the coverage in the (self-admitted Left-leaning) mainstream press immediately went to consideration of "obstruction of justice: and Trump administration abuse of power. And that has led to calls for Trump impeachment that has been a theme of the mainstream press and Trump’s Congressional opponents ever since Clinton shockingly lost last November.

However, even House Minority Leader Nancy Pelosi (certainly no friend of Trump) was out Tuesday evening warning the Left that impeachment does not proceed on sentiment and innuendo. In her own words, “It requires facts,” which are definitely in short supply on so many of the accusations being based on “undisclosed sources.” What the Trump administration has is less of a policy problem than leaks and public relations failures.

Self-inflicted problems

And much of that is directly due to the highly vociferous and quite often less than well-grounded expressions by the man at the top. Even a commentator as conservative as regular Fox News Channel panelist Meghan McCain (Republican Senator John McCain’s daughter) recently quipped, “I’d like to have a President that didn’t need a psychologist or his staff to come out after he speaks to explain what he really meant.”

Here here. And as we have noted since the Comey Affair showed more stubborn news cycle resilience than usual into late last week, it is less policy than ‘style’ which plagues the Trump administration. However as noted in the opening of this post, the disquieting manner in which many aspects of the Comey dismissal (and many other areas) have been handled become the ‘substance’ in terms of the lower standing of the President even within his own party, and of course with the not-so-loyal opposition from the Democratic Party.

And the concept of U.S. equities strength Monday into Tuesday being a "risk-off rally" relates to fragility of those markets (along with the U.S. dollar and the strength of the govvies) due to their being priced so richly. That is in anticipation of Trump administration reform success. From that follows the degree to which they are vulnerable when that becomes doubtful.

Market Response

Yet instead of reacting to the likely major investment that most companies running legacy operating systems and software will need to make (i.e. lower retained profits), the equities seemed to focus on the benefit to the already buoyant technology sector. After all, even as the S&P 500 still struggles in the vicinity of the major March 1st high, the Nasdaq 100 has been blithely ticking up to serial new highs since late last month.

As the ultimately necessary technology investments are a pure cost for the rest of businesses vulnerable to ransomware attacks, this can only be a drag on corporate earnings once they are approved by those various companies’ managements. No wonder the Nasdaq has been outpacing the S&P 500. And in general there has been some significant weakening of the U.S. economic data. This is a good reason why the Trump reform agenda is so important to relatively pricey U.S. equities.

Market Quick Take

That said, the June S&P 500 future was up to 2,402.25 earlier this week. That is just short of last week’s 2,403.75 marginal new front month S&P 500 future all-time high trading above the March 1st 2,401.00 high. Yet, the trading history indicates how it will need to push quite a bit above that area to encourage further indications of sustained strength. And a bit of history is important to understand how well this market has held on downside reactions of late, with the question being whether those levels will hold again if retested.

Due to sustained increases in weekly MA-41, June S&P 500 future extended weekly Oscillator levels are still moving up roughly $5 each week in spite of the selloff since March 1st. Most important was the extended weekly Oscillator threshold above the 2,300 area rising to 2,369-74 in mid-March.

After it failed below the 2,370 area and interim 2,350 congestion in mid-March, those were resistance. Yet 2,370-75 was exceeded again by late April, and only testing the top of it several times at the beginning of May leaves it as support. And both weekly MA-9 and MA-13 are up into the 2,365 area this week. And considering the extended support for any selloff, while previous slippage below 2,350 area congestion eroded that as support, it is also worth watching once again as it is now reinforced by another weekly Oscillator threshold.

And while only testing the bottom of 2,390-2,401 congestion previous, it was pushing up into it again prior to Wednesday’s sharp weakness; as it did after House American Health Care Act passage. Yet it still faces hurdles around the previous front month futures 2,401 all-time high from March 1, which is also weekly Oscillator resistance with next levels up to 2,415-20 this week.

Thanks for your interest.
 

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