Politics vs Economics and Good Trump vs Bad Trump

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BY PINCHAS COHEN 27 FEBRUARY 2017
The Market Brief
MAX MARKET MIN. TIME
MARKET NARRATIVE
Politics vs Economics and Good Trump vs Bad Trump
EQUITIES
On Friday, the S&P 500 jumped 6 points in under 30 minutes, closing with a 0.1% advance, marking it
the 5th consecutive weekly gain. The same happened on the previous Friday. The Dow Jones Industrial
AverageIndexclosedhigherforan11thdayinarow,itslongeststreakofrecordclosessincethebeginning
of 1987. Past performance is not indicative of future performance, but on the following October, the
Dow experienced its worst crash by percentage to date, 22.61%, forever to be known as “Black Monday.”
Investors used to fear remaining exposed to negative news over a weekend. Since Trump, they fear
missingoutonpositivenews.Thequestioniswhetherthissupportsthecaseofabullishmarketsentiment
or of irrational exuberance.
While the averages have closed another higher week, they have done so with the smallest gain in
weeks and with an even smaller volume, suggesting that bull money is running out. Gold’s consolidation
upwards breakout indicates that an argument for an equity decline is increasing.
The Russel 2000 Index, small-cap shares, had a first decline, 0.4%, in 6 weeks. Small caps tend to fall
before the blue chips. Just saying.
But the leaders of the Trump rally have shifted from the energy and banks to utilities and consumer
staples maker. The energy and banks were leading the initial post-election rally. Energy led on Trump’s
pro energy policies; banks led on Trump’s rhetoric re tax-and-regs cuts and spending, seen to kick-start
inflation, which would provoke the Fed to raise rates – banks’ profits would rise on all counts: tax cuts,
regulation cuts and obviously, interest rates rising, which is the banks’ bread-and-butter. The rallies
shifted from being led by economic growth stocks to economic contraction stocks. Just saying.
Mexico assumes an offensive posture, as Ildefonso Guajardo, its economy minister said, “The moment
they say, ‘We’re going to put a 20% tariff on cars,” I get up from the table.”
Trump’s speech before Congress may have a decisive impact on the Trump rally, one way or another, as
the so called “reflation trade” is slowing down. Will Trump have something new to say about his fiscal
policies, or will he use this stage to attack the media and his political opponents? One thing for sure, it
won’t be boring, not the speech and not the market.
Bottom Line: While it can go either way, the trend is still up, and I hate to go against it. Learned my lesson
last year.

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CURRENCIES
USD
The dollar fell one-third of a percent last week, as uncertainty over Trump’s policies persisted and after
Mnuchin said on Thursday the impact of fiscal stimulus this year on the economy may be limited.
EUR
While the euro just had its worst month since 2015, some analysts argue that all the good news on the
dollar – economic data and Fed hawkish comments -are already priced in, and the dollar therefore has
peaked.
The Technicals
The Bloomberg Index Dollar has been trading in an uptrend line since August. Since the start of February,
the pair has been consolidating with an upwards bias, within a continuation bearish pattern. This
consolidation was taking place, as buyers and sellers were adding to their positions. It has complete the
pattern with a downside breakout on February 16, demonstrating that the sellers had a better position.
Then, another struggle between supply-and-demand took place on the line-in-the-sand of demand, the
uptrend line since August. On February 23rd, the bears’ pushed the bulls behind their line. Meanwhile,
the price failed to cross over the 50 day moving average (dma) (purple) and even crossed below the 100
dma (green), suggesting that the recent price is lower than both averages. The next test will be the 200
dma (yellow), at 1212.73.
BBDXY Daily Chart
The same thinking claims that the euro has shown resilience in the face of considerable political risk –
Trump protectionism, French and Dutch election risk and Brexit uncertainty. The fact that the euro is
back on the rise, up to 1.0599, 1/3 of a percent, supports that claim.
I,ontheotherhand,seethiseuroriseasacorrectionwithinadowntrend.Thereisconsiderableresistance
above the price. (1) it’s unable to overcome the 1.0600, round psychological number, (2) it reaches the
down trend line since the start of the month, (3) on Friday, it produced a “shooting star,” a bearish
candle, suggesting that the bears showed their hand, but the bulls won the hand, and (4) resistance of
the 50 dma (purple). Also, the primary trend is down. Therefore, I see it as far more likely that the euro
retest the 1.0500 price level.

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EUR/USD Daily Chart
A similar picture is shown on the Euro Bloomberg Index Chart, which tracks the performance of the EUR
vs a basket of leading global currencies, with the exception that the 50 dma is higher up. Also, note that
on the 22nd the price reached a low of 831.34 and bounced back, the lowest since the index has been
constructed, December 31 2004. In the December and January it came close and bounced back up 2.75%.
This low may prove a support, where investors consider it very cheap and provide a lot of demand.
Alternatively, the support may be broken, in which case it may turn into a resistance, as the market
psychology would reverse.
GBP
The Times reported that UK PM Theresa May is preparing for Scotland to call for an independence
referendum, so that they may remain in the EU. Sterling investors took the news badly, as they
traded it down to the lowest since February 15, to 1.2384, as it fell the most in 36 hours, 1.37%, since
the start of the month.
This decline in the pound is even though Scotland voted 55% to 45% to stay in the UK. In other
words, the pound is declining, even though the majority wished to say in the UK, which suggests,
that should the vote go the other way this time, it is most certainly not priced in, and the pound
should have a further decline. Having said that, there are 2 crucial differences between the previous
referendum and a potential new one: (1) The former one was on September 18 2014, before Brexit
and (2) all EU and Commonwealth citizens resident in Scotland could vote; in the previous vote that
amounted to 4.3 million people. (1) Would Scottish citizens vote the same, now that the UK won’t
be part of the EU? (2) Would Commonwealth and EU citizens get a vote, as they did before, and if so
how would those millions of Commonwealth and EU citizens vote this time
COMMODITIES
Oil
Hedge Funds VS US Oil Producers
Oil has been trading within the tightest range in more than a decade, but that hasn’t stopped money
managers to up their bets on West Texas Intermediate to a record high. Why? OPEC and other producers
are complying with their promises, as 86% of cuts have already been done.
On the other hand, US oil producers – who have been increasing their production – have been upping
their hedges against price declines for the next 2 years.
So, who’s right? Who knows oil better, the trader or producer?

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Terms & Disclaimer
No part of this document is to be reproduced, emailed or shared without written permission.
This market brief was written by Pinchas Cohen, who does not hold an investment advice license.
The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for
information purposes only. Pinchas Cohen does not assume any liability for any direct, indirect or consequential
loss that may result from the reliance by any person upon any such information or opinions. Any expressions of
opinions are subject to change without notice. This document does not constitute an offer or an invitation to trade
or invest. No party should treat any of the contents herein as advice. Not written for retail investor.
The Technicals
On Thursday, the price of oil achieved the highest price since July 2015, at $54.45. Right now the price is
at $54.38, bouncing back after a Friday decline. The price pattern also completed a continuation pattern,
which suggest a price target of $57.
Oil Daily Chart
Gold – The “Safe Haven” Commodity
After gold had its best run since 2011, it had completed a continuation pattern on Thursday, suggesting a
$60 rise to $1,300, but right now it needs to contend with the 200 dma yellow).
Gold Daily Chart
Epilogue
Although I have given up on my bearish posture on equities of last year, I am still wary of running with the
bulls. I think the currency and commodity markets are easier to trade now.