Bullish Consolidation Sets Market Up for New Highs

When it became clear that Donald Trump won the race for the White House, and the GOP won the Senate, the Dow Jones Industrial Average gapped higher by 2,250 points (5.3%), the S&P 500 by 240 points (4.2%), the Nasdaq by 960 points (5.3%) and the Russell 2000 by 180 points (8.0%). To call it the “Trump bump” is an understatement. For Wall Street, the immediate message cast by the victory was pro-business, lower taxes, energy independence and a more favorable regulatory environment.

Money flows poured into equities for four straight sessions, leaving a huge technical air pocket underneath that, true to form, would be filled to a good extent last week amid violent sector rotation. The winners and losers from the forthcoming Trump administration and GOP majority in Congress crystalized as the week unfolded, with the newly created Department of Government Efficiency getting most of the attention.

Co-chaired by Elon Musk and Vivek Ramaswamy, this dynamic duo is initially targeting what has been identified as $500 billion in fraud and cutting $2 trillion in government spending to eliminate waste and streamline government operations. The plan involves slashing excess regulations, and eliminating and restructuring government agencies. “The cost-cutting endeavor could take a look at regulatory agencies that have overlapping jurisdictions as a means of boosting efficiency and controlling costs,” says Gary Cohn, former director of the National Economic Council.

Once this reality check sank in with the markets, there was widespread selling of stocks in the aerospace/defense sector, the government consulting sector, government REIT sector, renewable energy and the big pharma and biotech sectors, where government waste and fraud have been long thought to be a way of life. There was also heavy selling in stocks of companies that depend heavily on their products being made outside the United States — namely in China, and to some extent Mexico. The notion of higher tariffs and duties on imported products sparked fresh concerns that supply chain choke points and higher prices would be passed on to businesses and consumers, which would reignite inflation and force the Fed to wait on further rate cuts.

Hence, the bond market sold down all week with the 10-year briefly hitting 4.5% last Friday before easing back to close out the week at 4.4%. The dollar put in a sizzling rally, as did Bitcoin, while the price of gold and crude oil tumbled. The Magnificent Seven also took a sizable hit, most of which occurred in Friday’s 2.2% decline of the Nasdaq. It was as if traders wanted to sort out portfolios and reposition for what lies ahead as to which sectors will thrive in the Trump era, and which sectors will face major headwinds.

So, what does lie ahead? One can argue that the selling of the past week is the pause that refreshes. Nearly every leading stock that enjoyed a straight-up move higher the week following the election was technically very overbought on a short-term basis. Chasing event-driven momentum is typically a bad strategy, but those that booked profits on the whoosh higher did well. And those that have a lot of cash on hand are in an excellent position to buy great stocks on this volatile market pullback as we enter, what is seasonally, the best time of the year for stock market performance.

The charts of the S&P 500, Nasdaq and Russell 2000 are technically compelling, in that, if the bond market just stabilizes, as it should with last week’s tame Consumer Price Index (CPI) and Produce Price Index (PPI) reports showing inflation running at a 2.6% pace year over year, market participants can refocus on fourth-quarter economic growth that should result in higher sales and earnings. All three charts have pulled back to their 20-day moving averages.

Aside from arming one’s portfolio with the leading artificial intelligence (AI) infrastructure and software stocks, other sectors that are showing signs of benefiting greatly from the next wave higher for the market include financial, specifically private equity and mergers and acquisitions (M&A), energy exploration, industrials with domestic operations, U.S.-based REITs, consumer discretionary, communications services and utilities.

The shakeout of last week provides investors the consolidation needed to buy great stocks at great prices. It is imperative that a firm bid comes back to the bond market, and with the dollar in rally mode, it sends a good signal to those looking at Treasuries that sport higher yields than those sovereigns of other developed nations. Looking across the globe, the yield on the U.S. 10-year Treasury stands out.

Source: www.bloomberg.com.

The good news coming into this week is that cash-rich investors that thought they missed out on the Trump trade and the Congressional red wave on Capitol Hill have a buying opportunity heading into the second half of November that historically kicks off year-end rally conditions. Did Christmas on Wall Street come early? Considering how 2025 is shaping up for the economy — probably so.