For the past few months this has been holding strong, but there's something underway that may change it.
Here's what to look for…
Here's What's Driving Stocks Now
The current narrative is this: Markets have been optimistic that the Republican-led White House and Congress can reduce taxes, increase infrastructure spending, and reduce regulation.
Any news that supports this narrative moves the market up, and any news that doesn't moves the market down. That kind of news has been scarce lately, of course.
The fact that the down moves have been miniscule and the up moves have been significant shows that this narrative is still the dominant market force.
Let's look at this on the chart:
This is a strong verification of the narrative. The current tone is that a failure of the healthcare reform vote will show a Republican White House-congressional combo that is not as "can do" as hoped.
And that's how every snippet of news that relates to healthcare legislation came to be parsed word by word.
How the Narrative Could Change
If the House of Representatives votes against the healthcare reform bill and more infighting flares up in the Republican Party, the market will drop strongly and the narrative of optimism about pro-business legislative changes could fade away.
But – and this is a big but – we have to look at how the market has reacted so far. When the healthcare reform bill vote was postponed on Thursday, the market only dropped 0.5% peak-to-trough.
That's not a market that is throwing away the narrative just yet.
I considered putting out a "hedging" trade today that would profit if the markets drop significantly over the weekend due to the healthcare vote. But my analysis shows that the reward-to-risk ratio is not in our favor for that type of trade.
The reason is this: Even if the healthcare bill is defeated, the Republican majority is likely to pivot to the real issue, as far as markets are concerned – and that's tax reform. Pass or not pass, I believe the market's reaction will be fairly muted, and that doesn't justify paying the added risk premium on this market now.
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About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.