May 18, 2017

Capital Trading Group Daily Newsletter 5-18-2017

Washington rocks Wall Street as volatility surges surrounding president Trump's recent firing of FBI director James Comey and links to Russia.

From what I understand and what's being reported by the media, Trump asked recently-fired FBI Director James Comey to shut down an investigation into Michael Flynn, the former national security advisor that Trump asked to resign in February. The White House maintains that Trump never asked Comey or anyone else to end any investigation.Comey has been invited to testify before the House Oversight Committee next week, though the former FBI Director has yet to officially accept any such invites.

The CBOE’s volatility index, commonly referred to as the VIX, spiked more than 20% yesterday, coming off levels that have been extraordinarily low the last few months. As I mentioned late last week, with very little or limited economic data scheduled for release the media and headline trading crowd would be forced to turn their attention back towards the drama being stirred in Washington. Specifically more talk of stalling tax-reform, stalling infrastructure spending and perhaps mid-term elections bringing even more uncertainty to U.S. leadership, especially if the market starts to believe the Republicans could lose either the House or Senate. In fact the "far left" has gone as far as throwing around the word "impeachment" in regard to the president.

Keep,in mind however this is nothing more extreme than those who to the "far right" were tossing around the same words during the Obama presidency. For what it's worth, the Nasdaq experienced its worst down day yesterday since "Brexit" headlines hit the market last summer. Personally I see it as a temporary speed bump for some of the larger stocks. In other words I don't think people are going to stop buying items from Amazon, stop watching Netflix, or stop searching the web on Google because of drama in Washington. Yes, we could see some large money-mangers and investors look to move money to the sideline while the media runs with the current headlines, but I don't see this as a major game changer.

Energy prices are affordable, housing seems stable and the labor market is much more improved. I am a bit concerned about the slowdown in larger construction projects in parts of the country, and I'm keeping a close eye on the situation. As a longer-term investor, I only have about a 30% allocation in the equity market at this time. I've been banking some profits on the run higher and will stay patient for the moment, thinking I might see better buying opportunities in the days ahead.

From a technical perspective the S&P 500 has currently pulled back by only about -2% from its all-time high. Many of the big money-managers seem to be thinking the market could easily pullback by -5%, simply based on the extent of the recent rally and run to the upside. In fact many believe a -5% to -10% pullback would be good for the longer-term health of the market. A -5% pullback would put the S&P 500 closer to 2280, while a -10% pullback puts it down to around 2160.

As for commodities, the bulls are talking about the U.S. dollar being under fairly heavy pressure as of late and providing a nearby tailwind for the overall commodity asset class. I'm personally a bit hesitant in betting longer-term against the U.S. dollar. In fact the recent pullback has me intrigued and wondering if this isn't signaling a buying opportunity. Today is again a very slow day in regard to economic data being released. The only reports due
out are Weekly Jobless Claims, the Philadelphia Fed Business Outlook Survey and Leading Indicators. The earnings highlights of the day will be Alibaba and WalMart. Stay tuned and pay extremely close attention to the headlines and noise coming out of Washington.

Finally, we will decidedly end our notes with our reaffirmation of the growing need for alternative strategies. We would like to think that our alternative view on markets is consistent with our preference for alternative risk and alpha driven strategies. Alternatives offer the investor a unique opportunity at non correlated returns and overall risk diversification. We believe combining traditional strategies with an alternative solution gives an investor a well-rounded approach to managing their long term portfolio.

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With the growing concentration of risk involved in passive index funds, with newly created artificial intelligence led investing and overall market illiquidity in times of market stress, alternatives can offset some of these risks.

It is our goal to keep you abreast of all the growing market risks as well as keep you aligned with potential alternative strategies to combat such risks. We hope you stay the course with us, ask more questions and become accustomed to looking at the markets from the same scope we do. Feel free to point out any inconsistencies, any questions that relate to the topics we talk about or even suggest certain markets that you may want more color upon.
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