Politics, Banks Lead to Big Stock Drop

Politics, Banks Lead to Big Stock Drop

The S&P 500 dropped more than one percent for the first time since October 11, with bank stocks hit the hardest. Crude oil continued its downtrend, dropping below $48 a barrel as the House majority worked to get enough votes for a critical healthcare bill. 

Seal of the Federal Bureau of Investigation |
Seal of the Federal Bureau of Investigation | Getty Images

The Trump rally hit a bump on Tuesday after a day of political challenges and ongoing debate about the Republican bill to repeal Obamacare. House GOP leaders warned that failure to pass the long-promised healthcare bill would jeopardize their other major goal: cutting taxes on corporations and some individuals to stimulate economic growth, while simultaneously increasing military spending. At the same time, Pres. Trump met with conservative House members to warn that failure to pass the bill could cost them seats in the 2018 elections. 

The main logic behind the so-called Trump rally in the stock markets since November has been the idea that, whatever the long-term effects of the new policies, they would increase corporate profits in 2017 and 2018. That made buying stocks now seem like a smart move. Now, some of the key sectors driving that rally are faltering. Bank stocks fell sharply today and crude oil dropped below $48 a barrel, pulling down energies and manufacturing. 

This faltering has led more investors to think that stocks—especially in certain sectors—might finally be priced more than they are currently worth. The new administration is now two months old. A Bank of America Merrill Lynch survey of fund managers found that 34% of them say stocks are "overvalued." 

34% is the largest overvalued consensus the survey has had in its 17-year history. Even more definite: 80% of the 165 fund managers polled rated the US as the most overvalued region in the world. With sentiment shifting like that, political setbacks can have a chilling effect on investors. 

On Monday, the directors of the FBI and NSA, in sworn testimony before Congress, said they knew of "no evidence" for the president's accusation that his predecessor violated the law, with the help of the British spy service, to tap his phone. The FBI director also said that members of the campaign were under investigation for possible collusion with Russia. The political situation forms a less-than-ideal backdrop for the rollout of the first major piece of legislation for the new Congress and president. That leads some to worry that if the healthcare bill fails, the tax cut bill might also fail.

With so much uncertainty on the political side, it can help to focus on the facts, or in this case, on the charts. On a long-term chart, the drop in stocks fell cleanly within technical parameters, with the S&P 500 (Nadex US 500) falling to a support trendline stretching back 11 months, just above the 61.8% Fibonacci retracement of the rally since January 1. 

With so much drama in Washington and on Wall Street, a nice, well-behaved chart can be refreshing and clarifying. It can also be a useful source of perspective when you're trying to decide if a one-percent drop is just a blip or a harbinger of more drops to come. 

Long-term charts, in stock indexes, crude oil, gold, and other markets can help you in your short-term trading. How so? If you know that the dominant trend of the last three weeks has been upward, for example, then you can know that any selling you do is against the trend and you want to avoid staying in for too long. And if you're long, in the direction of the larger trend, you know to wait for dips and pullbacks. 

News-based traders looking to be cheered up were hopeful about a usually reliable source: Apple, which announced new products for the upcoming quarter. What they got, however, was a cheaper 9.7-inch iPad and...wait for it, a red iPhone. The color is because a portion of profits will go to the excellent (RED) campaign to fight HIV and AIDS. Apple is the world's largest corporate donor and it will add to the $130 million they've already given over a decade. Apple shares hit a new high, but then dropped along with the rest of the market. 

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