Here's the million dollar question that comes to mind when watching the markets this week: Are we seeing a healthy dip, or is this the moment when the Trump rally gets derailed. Either way, it's essential for investors to be aware of the sectors that saw the biggest inflows since President Trump won the election. These sectors, including energy, financials, industrials and health care, have been the most heavily influenced. And they are going to present the biggest opportunities, whichever way the market moves.
The S&P 500 Financial sector was one of the biggest beneficiaries of the Trump trade because investors were hoping that the U.S. president and his administration would be able to relax regulations. The index is still handsomely above the 200-day and 100-day moving averages. Nevertheless weakness has started as it has broken the 50-day moving average. With the Federal Reserve not being too hawkish and taking a very methodological approach to interest rates hikes, the index could easily give up another 13 percent from its current price, bringing it in line with its 200 day moving average. This is the point where institutional money is always interested in buying.
Investors trading the energy sector were very optimistic when Trump was elected because this gave them hope that Trump was going to bring fossil fuel back. Although he has repeatedly called coal "clean and beautiful" and he has made a major headway with North Dakota pipeline, the index performance has been vile. This is in large part due to the tug war between OPEC and U.S. shale producers and is a major concern for investors. Until and unless we see the demand side picking up, I think extra supply is going to hurt the market. The price of the S&P 500 Energy sector is trading below the 50, 100 and 200 day moving average which tells us that the trend is strongly towards the downside. Moreover, we have given up all those gains which started with Trump winning the elections. If shorting (selling the stock to buy at a lower price) is not your thing, then perhaps stay on the side lines.
Healthcare and pharmaceuticals
The S&P 500 Health Care sector made a tremendous move when Trump won the election as he was going to repeal Obamacare and replace it with something new. Passage of the replacement bill in Congress is uncertain at best. Trump has also said that he will reduce the trial period of various drug trials. Reducing the drug trials can bring some new innovation to the market at a much faster pace and this could be beneficial for the healthcare sector.
The sector is holding well so far, though some signs of weakness are surfacing. The price is well above all those three important averages and we are nearly 8.86 percent higher since Trump won the election. Still, the pessimism around Trump's capabilities to repeal and replace could push the index lower and cause disappointment. Hence, the trade may be to wait for price to come down to a level which makes it more attractive.
The S&P 500 Industrial sector is the most talked about sector since Trump won the election and we are up more than 12 percent from that day. The question investors are asking now is will Congress be able to pass all those mammoth plans which Donald Trump has talked about. Traders considered Trump's victory as food from manna and are heavily invested in this sector.
But things are changing as we have not heard anything material on this topic lately. Trump has delayed his plans to give any clearance on infrastructure action and in this scenario, time is money. The more the delay, the worse the performance of the sector could be. Thus, I think we could see the price of the S&P 500 Industrials dropping all the way to $520. It is essential to keep in mind that the price has already broken the 50-day moving average-the blood is there!
The Brazilian bond market is representing a good opportunity once again. When Trump was elected, and we saw this massive rally in the U.S., and emerging markets, especially the fixed income market, were not a favourable place for investors to park their funds. However, if you are an investor who is more excited by the fixed income market and wants to have exposure in emerging markets, then you don't need to look any further than Brazil. The Brazilian bonds show what pessimism can deliver. At first they jumped on optimism with Brazil's new government and were subsequently pushed lower when Trump won the election, though the trade reversed quickly. Failure to deliver on Trump's promises may push this rally further. Therefore, it represents a possible opportunity to join this rally.
Opportunities in commodities
When Trump took office there was so much optimism around the infrastructure spending in the U.S. This inflated the price of copper as it is an essential ingredient of infrastructure. Now there are some serious doubts about whether his one trillion dollar infrastructure spending plan will get approval and this is evaporating the gains in copper. I am expecting this rally to fade further as Trump is failing to convince the market.
The price of copper has retraced -37.9 percent from its high (when normalised as of 8th of November 2016). This is also impacting on the firms which are part of the S&P500 index and the index has also retraced -15.05 percent from its high (normalised as of 8th of November). If the copper price continues to drop, it will take more steam out of the S&P500 index. This is purely because a number of firms are involved in building infrastructure.