As I expected, the markets took us through two very typical responses last week...
First, we had a relief rally after the French presidential vote generated a positive surprise.
Then we caught a classic "sell the news" response to the Trump tax plan.
The French presidential election is still a big deal because of its implication for the continued health of the European Union (EU).
As we discussed last week, had the two anti-EU candidates won, the markets would have had a severe sell-off.
I recommended we refrain from trying to "handicap" the result ahead of time - a potentially costly move - and take a position once the result became clear.
That was absolutely the right way to play it.
Now, I mention this not to look backwards or gloat, but because the confluence of circumstances has contributed to a technical setup I'm looking at that's going to continue to influence the opportunities ahead.
There will be a way to play what's coming next, too...
The French Election Had Two Small Surprises
The markets got the result they were expecting, which means, surprisingly, the pollsters finally got an election right.
After a pretty dismal run that included misses in the U.S. presidential election, Brexit, Scotland, Greece, Israel, and even a big miss going back to the 2014 U.S. mid-term congressional elections, it was becoming easy to second-guess or even dismiss poll results outright.
I'm not yet convinced that pollsters have figured things out yet. Until further notice, I'll chalk this up to the fact that even a blind squirrel finds a nut every now and then...
The more important surprise was that Marine Le Pen's vote tally came in slightly below polling figures.
And if anyone is wondering why the world isn't concerned about the runoff election on May 7 - this graphic showing the major polls on the two remaining candidates published by British newspaper The Independent should clear that right up...
Yes - Emmanuel Macron is ahead by 21% to 30% in every major poll.
So Le Pen keeps her loyalists, those who voted for her in the preliminary, and not much else, while Macron will pick up voters from almost every other candidate.
As we can see on the chart below, the election results had a broad reach on the markets - fueling a rally in European, U.S., and French exchanges...
[mmpazkzone name="end-story-hostage" network="9794" site="307044" id="138536" type="4"]
And then markets swung the other way.
U.S. Investors Sell the Trump Tax Plan News
The markets have had an optimistic tone - the "narrative" I've been talking about - since the November presidential election based on three planks of Trump's campaign platform: regulatory reform, increased spending on infrastructure and, most importantly, tax cuts.
In classic market fashion, after "buying the rumor" of tax cuts since November, traders "sold the news" as an outline of the actual plan was announced Wednesday late in the trading day...
This has all "conspired" to put us right back in familiar territory: near the very top of our trading box, just shy of all-time highs (as usual), as shown in this chart I drew up on April 28.
Now, there was of course no market-shaking news over the weekend, and on Monday, Trump's talk of breaking up the big banks meant traders had only a little trouble keeping us near the top of the box.
I'm expecting at least one more blow-off move to the upside as the narrative of optimism continues to hold. For the near term, I'm looking for the markets to be pushed around by political and geopolitical news more than by fundamentals and technicals. A classic "good news is good news" mindset among traders and investors means the markets should respond well to anything that smooths the waters.
So for now, the best strategy is to stay nimble and follow sectors that are coming under pressure for quick downside moves in otherwise good companies. Lockheed Martin Corp. (NYSE: LMT), for instance, routinely takes hits when markets move lower, despite excellent fundamentals. It can be very profitable to trade it that way - it makes for a good "buy and hold" stock, too. Apple Inc. (Nasdaq: AAPL) is another example of a solid (to put it mildly) company that drops when traders' nerves get the better of them, not because of any real weakness.
Precious metals and other traditional sources of "safety" make good sense, too. Buy them and ride them back up. I still think there's lots more room for this rally to run.
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About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.