Why This Catchy Commercial Reminds Me of Our Market Narrative

There's a great TV commercial out right now that reminded me so much of the market narrative that I have to share it with you.

The scene opens with a group of people in a living room playing a game that requires guessing.

The couple shouts out, "It's a small finger - a worm, a dagger..."

The camera cuts to the reason for the guesses. A chart pad is in the front of the room with a teammate drawing as part of a game of Pictionary.

Only the teammate is a sloth hanging on the chart pad easel drawing a line straight down from the top of the pad, oh so s-l-o-w-l-y.

The guessing continues, "Tiny sword? A breadstick? A matchstick?"

The camera cuts to the opposing team who smile and look knowingly at each other, certain that their challengers won't guess in time.

More guessing: "A lamp post? Coin slot!"

Cut to the sloth turning its head slowly to look at its teammates as if to say, "Not even close..."

The guessers say, "No?" and the timekeeper announces, "Ten seconds!"

The final furious cavalcade of guesses, "A walking stick! The Eiffel Tower! Mount Kilimanjaro!"

Then a bell dings and time is up. The guessers grimace and growl in frustration.

The timekeeper announces the right answer - tandem bicycle - to screams of "what?!" as the camera pans to show the sloth still having completed only the short, straight line.

The voice-over comes in and says, "As long as sloths are slow, you can count on GEICO to save you money on car insurance."

But how does any of this relate back to The 10-Minute Millionaire?

Much like the glacial pace of the sloth featured in this commercial, our market narrative is changing.

But very s-l-o-w-l-y.

Let's look at some reasons why the Trump growth narrative has stuck around for so long...

Our Sloth-Like Narrative

When we talk about the market narrative, we are looking at the overarching concept that is helping to drive the markets.

Since the U.S. presidential election, that narrative has been the Trump growth agenda based on three pillars: lower taxes, less regulation, and more infrastructure spending.

Any news supportive of this agenda has sent the markets hurtling up. And very tellingly, any news that has been counter to this agenda, or the Trump administration itself, has sent the market down, but only by small amounts and for short periods.

This has been a very strong narrative, and it persists to this day.

The new narrative that is competing for attention and market reaction is, with apologies to Pete Townsend, the same as the old narrative (the one before the Trump growth narrative), and it again centers on the Fed.

The major narrative before the November 2016 election focused on anything that might encourage or discourage the Federal Reserve from raising interest rates.

The up-and-coming Fed narrative is what I have called the "Great Unwind" - in Fedspeak, it is called normalizing the balance sheet. This new narrative is starting to exert influence - and though it hasn't overtaken the Trump growth narrative, it is growing in importance every day.

Here's the new narrative in brief: As the Great Recession was winding down in 2009, the Fed started adding massive amounts of liquidity (new money) to the market by buying U.S. government bonds and mortgage-backed securities (MBS).

Over many years, this swelled the Fed balance sheet by an amazing $3.5 trillion dollars. That's trillion with a "T."

The Fed will start "normalizing" its balance sheet - which means shrinking it toward the pre-crisis levels. In future updates, I'll dig into how it proposes to do this, but since this action is still some time off, let's focus on how this narrative is starting to exert itself.

A Blended Narrative

Right now, we're seeing something in the markets we haven't seen in a few years - a blended narrative - a major narrative giving way to a sub-narrative that will eventually take over.

Here's where a Venn diagram will help us understand what's happening with the narrative:

evolving-market-narrative-diagram

As you can see, I expect the narrative to change over time until the Great Unwind is all that matters to the market.

The narrative shift is just moving at a glacial pace toward the Great Unwind. It could take many more months to get there...

While we're in this "in-between" state, let's look at the two key mileposts that will tell us which narrative is exerting the most influence.

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  • How does the market digest important economic news? In the Trump growth narrative, good economic news sends the market higher, while bad news will send the market lower. In the Great Unwind narrative, the opposite is true. Good economic news will be bad for the market (because traders and investors will fear quicker or bigger action by the Fed), and bad economic news is good because market participants will anticipate this will push Fed tightening actions further back.
  • How does the market react to news about the Trump administration or Congress? In the Trump growth narrative, any news about lack of efficacy in the White House or on Capitol Hill will push the market down. News that makes the president look more "presidential" or that is supportive of key staff members will push markets up. In the Great Unwind narrative, news about the Trump administration will have little to moderate effect on the market.

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Today, Nov. 3, we will get another key data point. The U.S. Bureau of Labor Statistics will announce the monthly employment numbers.

After last month's disappointing employment numbers, this announcement will be very critical.

If we get a number that is better than expected, I anticipate that the market will react favorably. That will give further confirmation that the Trump growth narrative is still in place.

A Complacent Market That Just Wants to Go Up

One of the keys that shows our "old" narrative is still in place is how the market continues to grind higher. When the Great Unwind narrative becomes the dominant theme, we will see the volatility or jumpiness of the markets go up considerably.

For now, the opposite is happening. We are in one of the lowest volatility markets of all time. In fact, we're currently in a streak of low volatility that is unprecedented in 87 years of market data.

The Dow has not had an intraday move of 1% (high-low of each day has been less than 1%) for 53 days. The chart below (from Pension Partners) was current as of Monday:

dow-trading-chart

Amazingly, the previous record of 50 straight days of less than 1% movement was set earlier this year.

dow-longest-chart

What's going on?

Low volatility means a quiet market. Investors like what's going on. Analysts call this a highly complacent market.

And as long as there is growing strength in the U.S. and global economies, this bull market party can grind on for a while longer.

For our weekender video, I'll give you some more insight into a key U.S. economic indicator called gross domestic product, or GDP, and how its forecast just took a very positive turn. We'll also look at how to find one of the most useful ways to track GDP.

Until then, our trading strategy will be to keep buying pullbacks and riding the momentum higher until the market price tells us that the narrative is changing.

And that could be a very sloth-like transition.

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The post Why This Catchy Commercial Reminds Me of Our Market Narrative appeared first on 10-Minute Millionaire.

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.

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