As expectations meet reality, the 'Trump portfolio' slumps

A basket of sector ETFs that could have been expected to benefit from Donald Trump's policies has given back all of their gains that did not come immediately on the back of the presidential election.

Put differently, those who made sector-level bets as a result of Trump's electoral triumph have been sorely disappointed.

"We think the market got way out over its skis," Max Wolff, a strategist at 55 Capital, said Monday on CNBC's "Trading Nation."

After Trump's presidential victory, materials stocks, financials and small caps all surged. These moves made sense insofar as Trump was expected to enact pro-manufacturing, anti-regulatory policies that would favor companies that did most of their business inside the U.S. Meanwhile, technology stocks lagged behind and gold tanked.

Since then, this basket — equally long the financials ETF (XLF), materials ETF (XLB) and small-cap Russell 2000 ETF (IWM), and equally short the technology ETF (XLK) and the gold ETF (GLD), such that the portfolio has neither a long nor a short bias — has been on a bit of a roller coaster.

It advanced substantially into December, before suffering a turnabout. And over the past week, the "Trump portfolio" fell to the lowest level since the week of the election.

In fact, this ETF grouping has given back half of its peak post-election gains.

The weakness in this theoretical portfolio comes after Republicans failed to pass a bill repealing the Affordable Care Act. Many have suggested that this does not portend well for the rest of the president's agenda. Consequently, it makes sense that stocks that saw a huge surge following increased expectations after Trump's win would see fit to slip.

"If you price in success before it happens, you're always on the thin ice of the pond," said Wolff.

Still, some say that sectors like the financials and materials are just taking a break in the midst of a broader bull run.

"There's no technical damage that has been done; there's just a lot of digestion going on here, and a little bit of rethinking about how fast some of these agendas are going to get accomplished in Washington," Piper Jaffray technical analyst Craig Johnson said Monday on "Trading Nation."

"All we're seeing is some profit-taking," Johnson added. "I do think the 'Trump trade' will reignite and reassert itself in coming months."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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