The Stock Market: Proceeding with Caution

It has been in the past that the end of the Presidency of one term typically signals a downtrend or a steep correction. However, one of the legacies of the Obama Administration was an unprecedented 8 year history of new highs and a general uptrend market after the stock market crash of 2008. President Obama implemented many financial regulations to prevent the unravelling of the financial markets, one of which was the Dodd-Frank Act and Consumer Protection Act in 2010. However, as we enter a new era, it is possible that the events leading up to 2008 might again be set in motion as it has been reported that President Trump would repeal sections of the Dodd-Frank Act but possibly separate commercial banks from investment banks to reinstate the Glass-Steagall Act, in which sections 20 and 32 prohibit any member bank of the Federal Reserve System from being affiliated with a company that has engaged principally in the issue and underwriting and distribution of securities. What that means is that these sections had been initially implemented (until being repealed in 1999) to prevent banks from selling their customers high risk securities in which they had a clear conflict of interest. The repeal of these sections has often been attributed to one of the key causes of the 2007-2008 financial crisis.

However, many critics believe that President Trump will simply repeal Dodd-Frank and not implement Glass-Steagall and might not have the support to back this legislation. (As a note, members of Congress did not vote to re-instate sections 20 and 32 of the Glass-Steagall Act to be part of the newer Dodd-Frank Act when it passed in 2010).

If there is a continuation of the deregulation of financial institutions, what most likely will transpire is that we will potentially see an initial uptrend into new highs in the stock market, especially in regards to the banking sector, with an inevitable cliffhanger that might also potentially have larger ramifications than the 2007-2008 financial crisis. This is obviously not something anyone would want - as any major movements in the U.S. stock market have global, economic repercussions that will negatively affect both Asia and Europe.
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Last year in March, I extrapolated a surge into new highs in the SPY, and yesterday it finally met its target area of 235.43. If we were to continue on the path that the Obama Administration set out, confidence in the markets would surmise a steady bull trend into new highs after a period of correction.
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​My extrapolation in March 2016 that the SPY would reach new highs by Dec-2016-Feb 2017 from the buy zone of 184-191.
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Target met. SPY reached 235.43 yesterday on Tuesday, Feb 21, 2017.

However, if we look at the pattern occurring in the stock market, financial institutions are on a rapid, almost desperate surge that is quickly reaching the resistance without a period of correction. A correction area is generally considered a good sign because it allows for a period of consolidation in which there is a slow and steady rise to new highs, but because the period of consolidation did not really take shape this time around, it signals a race to the top, with a possible, steeper correction that could be representative of a downtrend in the future. Warren Buffett has a popular quote attributed to him: Be fearful when others are greedy and be greedy when others are fearful. This simply means don't buy the top, buy the bottom.
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Goldman Sachs (GS) is moving closer to the key resistance area of 257.29, in which a possible correction might occur.
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​JP Morgan (JPM) is also potentially moving into its key resistance area at 101.46 by this fall.

We have to remember that much of the financial crisis of 2007-2008 did not happen overnight. Beginning with the Reagan administration in the 1980s, there has been a continual deregulation of financial institutions, exacerbated with an increasing pay gap between workers and corporations and a continual lowering of corporate taxes. This lead to a growth in poverty, inflation of the dollar, and people generally living on credit cards and not being able to afford basic necessities. It has been reported in the media that 63% of Americans would not be able to pay a $500 emergency bill.
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Examining different sectors, there seems to a general trend of reaching new highs by Aug-Oct 2017. However, this is the point in which a new pattern might emerge, and one that could be very different from the one we had been accustomed to in the last eight years.

Alphabet (GOOG) is also potentially set to reach its key resistance area of 894.48 by this fall/winter.
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FTSE 100 (FTSE) held the 100% fibonacci retracement level at 6741.65 and further moved upwards without a period of consolidation, which could potentially mean that it might potentially hit its key resistance by this fall.
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​EURGBP hit its target area of 0.86-0.88 before making a correction in the extrapolated correction area between 0.83-0.87. Next few weeks will determine it is able to hold onto the 50% fibonacci retracement area of 0.835.

Even if all targets have been hit for now, I think a cautious outlook would be more fitting until President Trump and his team make it clear that their intention is not to revert back to Reagan Era of financial deregulation.


​By Sierra Choi

Disclaimer: This post is not intended for any stock market, investment nor financial advice and for educational purposes only.