It is easy to forget, but there was a time when Trump’s victory was predicted to spell disaster for markets. And it’s not like this was an isolated outlier opinion. No, the vast majority of market pundits were warning of an imminent catastrophe if Trump won.
This negativity was the reason behind the S&P 500 future’s limit down move the night of Trump’s win.
Although stocks initially reacted quite poorly, as markets digested Trump’s policies, they realized it might not be quite as bad as first feared. By New York’s open on the day after the election, the S&P 500 future had lifted well off the limit down move, and soon enough, all the weak shorts were chasing their positions higher.
Within hours a new narrative had developed. Not only was Trump not going to usher in the next great economic crash, he was in fact, the saviour the market had been yearning for.
Suddenly all those market pundits who were previously predicting the end of the world, were filled with unbridled optimism.
Shouts of BUY STOCKS filled the air. Orders to SELL GOLD was on everyone’s lips. And most importantly, BUY US DOLLARS and SELL BONDS was quickly the most popular trade out there.
These four trades reflected the new Trump optimism.
In an attempt to measure the Trumphoria, I created my own TRUMP trade basket. It is comprised of:
- long position in the Russell 2000 stock index
- short position in gold
- short position in US 10 Year treasury note futures
- long position in US Dollar index (DXY)
It wouldn’t be fair to equally weight this basket as there are varying volatilities. The Russell 2000 index is considerably more volatile than T-notes. To ensure a more appropriate weighting, I made the RTY index equal to 25% and then volatility weighted the other assets against the Russell.
You can see that there was an initial large move in the weeks after the election. But the period I find most interesting is the first few weeks in December. The Trumphoria rally did not correct even in the slightest for almost a month and a half. The market never gave those dip buyers a chance to get in. Those first few weeks in December saw the TRUMP basket trade up to new highs.
At that point, any skeptics were mauled as the Trump trade seemed unstoppable. In the days before Christmas the Trump optimism hit a crescendo as investors piled into the trade with reckless abandon.
And it’s not like speculators have since stopped putting the Trump trade on.
Have a look at the net spec positioning for the four assets in my TRUMP basket.
The Russell 2000 spec position is through the roof.
And although gold is not nearly as extreme, the liquidation over the past couple of months has been brutal.
The negativity in the bond market is pushing net spec positioning to recent record short levels.
And the only one of my assets not hitting extremes is the US dollar. There has been some increased US dollar long positioning, but it is not nearly as large as previous periods.
But one thing all four charts have in common is that they are showing no signs of correcting. Speculators continue to add to the TRUMP trade.
Yet even though speculators continue to add, the price of the TRUMP basket is not headed their way.
In fact, over the past couple of weeks, the TRUMP trade has been steadily declining.
So let me get this straight. Speculators are leaning heavily “all-in” on the TRUMP trade, yet the price has been moving against them for the past couple of weeks?
If there was ever a recipe for disaster, then this is it. I predict this TRUMP trade will come off in a sickening swoosh. All these late “me too’ers” will puke out their positions in a ugly correction.
The TRUMP trade might work in the long run, but the short run has accident written all over it.
Thanks for reading,