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Santoli: DC noise puts the brakes on Trump rally, boosts bonds

The market's throwing a mild version of the tantrum thrown by Veruka Salt, who said of a golden goose at the Wonka factory: "I want it NOW!" A recalibration of some premises behind the "Trump trades" in their purest and most obvious forms, is underway.

Some fingers are pointing to the gears of D.C. policy-making grinding loudly, with hearings on cyber-spying draining energy away from the hoped-for pronto passage of tax cuts, regulatory unwind and maybe even some infrastructure check-writing. The noise from Capitol Hill does seem to coincide with the softening up of stocks this morning. But there are other, more direct relevant excuses for this little spasm of selling: Investor sentiment had reached a rolling boil, switchbacks in global currencies pressured the "reflation" trade, a slight shortfall in ADP jobs numbers helped put a bid in Treasuries, and perhaps the mechanical flow of fresh cash into stocks at the start of the year has been put to work.

Here's what I'm watching heading into the closing bell:

Not a washout

Note that we're going on a month since the indexes flattened out and bond yields stopped going up, and now the dollar has also slid back to levels of four weeks ago. At this point, today's dip looks like just a partial give-back of yesterday's bump. Hardly a washout, with scarcely more than 55 percent of volume in declining stocks right now. Still, it seems the talk of the "Trump Rally" has carried on longer than the main thrust of the rally itself. Banks giving back plenty of their recent gains as yields come in. Pure retailers obviously catching hell after the pervasive bad news about holiday sales, but worth noting that other parts of consumer discretionary (hotels, media) are holding up fine.

Wall Street cools Trump trade

It's interesting to see how Wall Street analysts come out and tell clients to ease back from some favorite post-election Trump stocks. Yesterday it was a downgrade of the refiners, today Travelers (insurers a hot post-election play) and Endo (up 22 percent after the election). Probably not bad to see the sell side striking a sober tone. The strategists at Street firms are collectively huddled in a tight group looking for a slim 2017 gain for the S&P 500 of about 5 percent - sort of the equivalent of the handicappers predicting that the home-team underdogs will cover the spread but lose the game (I'll explain this to you tomorrow, Wilf).

The China effect

No law says the volatility in the Chinese currency - driven by the authorities' exertions to stem capital flight - needs to invade the U.S. stock or corporate-bond markets. But the longer that overnight FX action whips around, the less likely it is that stateside investors will be able to ignore it entirely. I'm not a China alarmist, yet global interbank strains can serve as an easy excuse for risk exposures to be curtailed.

Crowded trade

As noted, the bullish bandwagon has become a bit crowded, based on a handful of indicators. The weekly newsletter poll showed 60 percent bulls and 18 percent bears, a lopsided spread last seen in 2014. The weekly AAII poll is not as extreme, but shows the most bulls since Thanksgiving. Flows into stock and junk-bond ETFs spiked to a short-term extreme. Until today, demand for protective put options has been punk. Taken together, it suggests the market will struggle to make much immediate headway. Maybe just more chopping around, perhaps a marginal new high, can't rule out a further shakeout that punishes the late-arriving rally-chasers. The broader backdrop looks OK, hard to find a great deal of evidence just now that a truly dangerous selloff is in the making. The rally has been nicely broad, for one thing, credit markets look fine and the morning selling wave was absorbed pretty well.

Volatility remains subdued

Some would add the "low" VIX to the list of sentiment indicators implying too much optimism and too little worry. The VIX below 12 and unable to lift despute the red indexes today is optically odd, maybe. But this mainly reflects the extreme calm behavior of the tape lately. Actual, or "realized" volatility is running around 8, so VIX sits at a decent premium to that, and the VIX futures are priced higher still. Sure, options traders aren't braced for something nasty, but unless and until VIX turns higher into a new uptrend, this doesn't top the list of reasons to turn bearish.