The roughly 3,000 contracts traded so far represent a notional value of only $50 million, tiny compared with established markets such as gold. » Read More
CNBC's Bob Pisani gets insight from traders in the new bitcoin futures. » Read More
The hoopla around futures contracts may not make bitcoin respectable, but it is certainly a first step toward it » Read More
The S&P 500 ETF (SPY) on Tuesday dropped below the early morning low, as well as Monday's low. That is a bad technical indicator. » Read More
We may be testing the limits of how far we can push the "tax cut" trade.
Since early last week, when momentum in Washington really picked up, sectors that would see the biggest earnings boost from tax cuts have been notable outperformers.
But there may be limits to how far investors can push this trade.
Last week, Cannacord, working with Thomson Reuters, published a study on the sectors that would get the biggest boost from a 20 percent corporate tax cut. Four of them — energy, financials, industrials and telecom — would see notable double-digit gains in earnings. One sector, technology, would see almost no boost:
Biggest gainers from 20 percent tax cut
(boost to 2018 earnings)
Energy 21.5 percent
Financials 18.5 percent
Industrials 13.2 percent
Telecom 15.5 percent
Tech 1.5 percent
Source: Cannacord/Thomson Reuters
Not surprisingly, the movement of these sectors in the past week has reflected the prospects for earnings improvement from tax cuts, and, in the case of technology, the lack of such improvement:
Sector gainers and laggards
(since last Tuesday)
Banks up 7.7 percent
Energy up 3.7 percent
Industrials up 3.6 percent
Telecom up 8.4 percent
Technology down 3.9 percent
This also helps explain the recent outperformance of so-called value stocks versus growth stocks. Value stocks (financials, energy, telecom) would simply fare better under tax cuts. Growth (technology) would not.
However, in the middle of the day, bank stocks, which have had huge gains in the past week, began selling off aggressively. Most ended the day positive, but well off their highs, on heavy volume. Other market leaders like industrials and telecom also ended off their highs.
This suggests traders are taking profits on the outsized gains, and we may be approaching the limits to the current rally.
Regardless, the tax cut is healthy because it creates a new base of stocks that can see their earnings boosted. It takes attention away from a small group of technology stocks (semiconductors, FAANG) that have received enormous attention this year.
"It ought to mean a rotation in asset allocation given that equity investors up to now have concentrated their portfolios into a small group of 'super-performers' that benefited from the disinflationary environment," said Sean Darby, chief global strategist for Jefferies.
However, we are not out of the woods yet. The Senate bill would put off corporate tax cuts until 2019, and President Donald Trump hinted over the weekend that the final corporate tax rate may not be 20 percent, but 22 percent. That will lower the expected earnings boost, and this combination could be a significant disappointment to markets.
Beyond the tax bill, traders are split between those who "sell on the news" and those who argue that any correction will be met by more buying in early 2018.
The "sell on the news" crowd has considerable support, arguing that stocks are seeing a final blowoff on the tax cut news and that it is simply unreasonable, and against the weight of history, to see stocks continue to advance.
But that's where the split occurs. Most traders believe some correction is coming, but a surprisingly large group feels that the sell-off will be met by more buying.
Tony Dwyer, chief market strategist for Cannacord, has been in the bull camp, arguing that "in our view, investors are not adjusting expectations up enough to reflect headwinds that have become tailwinds for growth."
Dwyer makes two arguments. First, he argues that the combination of global growth, a weak dollar, improving capital spending and a still-accommodative Fed will continue to help markets, though he admits some short-term correction may occur.
He also goes farther than most strategists by insisting that the S&P 500 can support a rather large multiple of 20 times forward earnings, close to where it is now.
The race to get bitcoin futures is now on. The CBOE announced Monday it would begin trading bitcoin futures on Sunday evening at the start of global trading hours.
The first full day of trading would be on Monday, Dec. 11. That would beat the CME, which has announced it, too, will begin trading bitcoin futures on Dec. 18, a week later, and the Nasdaq, which is also planning to introduce futures trading in the first half of 2018.
Bitcoin enthusiasts are hopeful that a bitcoin ETF might be coming. The SEC denied applications to start bitcoin ETFs earlier in the year on the grounds that the cryptocurrency was "unregulated," but CBOE head Ed Tilly said he plans to reapply with the SEC for a bitcoin ETF.
The argument seems to be a simple one. The presence of a futures market will demonstrate that the cryptocurrency is sufficiently "regulated" to allow ETFs to start.
The argument may be helped by two features that will be a part of the bitcoin futures: price limits and margin rates.
The CBOE and CME will have margin rates of 30 percent and 35 percent, respectively.
In addition to being able to short bitcoin, there's considerable speculation about whether futures will lower or increase the volatility level of bitcoin. The CME, for example, says it will be using price limits that kick in during gains or losses of 7 percent, 13 percent and 20 percent that would slow and in some cases halt trading. In particular, prices will not be allowed to move up or down more than 20 percent from the prior day's close. If that limit is hit, trading can only continue at or within the +/- 20 percent limit for the remainder of the trading session.
There may even be a price war developing for the business. The CBOE made a point in its press release this morning to say trading would be free through December, but doesn't say how much it would be after.
The CME says bitcoin futures will be priced at a premium to standard Equity Index futures, but in line with the pricing conventions of other premium products.
Tax cuts versus potential legal troubles for the president: Which wins out in the markets?
The markets have been focused for months on global economic growth, record earnings and the premium in the market for tax cuts.
But traders have spent almost no time thinking about the risk premium in the market for President Donald Trump's potential legal troubles.
It was an issue earlier in the year. Remember, the Dow dropped more than 300 points on May 17, when reports of a memo from former FBI Director James Comey surfaced, saying Trump asked him to stop the investigation into former National Security Advisor Michael Flynn.
Comey had been fired just the week before.
It's important to remember that the rally in the past year has not been solely based on the global economic expansion and tax cuts, though they are the two most important factors. Another factor, more difficult to quantify, is the belief that this administration and this Congress would be particularly sensitive to business interests, everything from tax cuts to regulations.
"There is a strong sense that the administration is more business-friendly, and we have seen that with rising business sentiment," Joe LaVorgna, chief economist for the Americas at Natixis, told me.
Then there's the issue of Republican control of Congress.
CNBC contributor Larry Kudlow told "Fast Money: Halftime Report" earlier in the day, "If Trump is in trouble, that will damage the Republican Party in certain parts of the country."
Stocks are reflecting that concern.
This could be a big day. With the Senate nearing a vote on its tax bill, corporate tax cuts are getting much more real. Aside from the global economic expansion and the record earnings this expansion is producing, the biggest marginal mover for the stock market has been tax reform.
If you doubt this, note that the S&P 500 moved 15 points in the hour after Sen. John McCain announced he was supporting the tax bill on Thursday.
Stocks were initially lower in Friday's premarket after the Senate announced a last-minute delay to its vote on the tax bill overnight on Thursday.
But fresh momentum was building later Friday as more GOP senators voiced their support for the bill – including Montana Senator Steve Daines and Wisconsin Senator Ron Johnson, two of the last Senate GOP holdouts.
Here is the good news: The market believes tax cuts will help earnings. The market is anticipating earnings gains of about 8 percent next year, but that is without tax reform. Models that incorporate tax reform estimate that earnings could grow 11 percent to 15 percent next year. Without tax cuts, the market forward multiple is a very pricey 18.9. With tax cuts, the multiple can be in the mid-17 level, far more reasonable.
But there is some bad news.
If you buy today, you are buying with the assumption that gains from tax cuts are happening. If you are buying today, you need a tax cut to pass, and it needs to be effective for calendar year 2018. If the rate is only, say, 25 percent rather than 20 percent, it's likely the market will be disappointed.
Even if we get the tax cuts we want, the gains will be tougher, because the market has made such explosive moves. It's getting harder to make a bull case as time goes by, even my bullish friends tell me. I don't disagree. The risk/reward is deteriorating, but the market is showing us there is more upside from tax reform. If there wasn't the market would have sold off on the McCain news.
Maybe the strategy should be to sell on the news when the tax bill is passed. That would be the immediate, knee-jerk reaction. And I wouldn't be surprised if it happened.
But I also wouldn't be surprised that, after a 5 percent to 10 percent decline, the market came back. Because now you are in 2018, and the issue is where you stand on two key issues: what U.S. and global growth will look like in the new year and how aggressive the Fed will be at raising rates.
If you are on the side that says global growth will be more than 3 percent, and that U.S. growth will be around 2.5 percent with no recession, you can certainly make an argument that stocks can continue to go up or at the very least move sideways.
If you believe that the Fed Chair nominee, Jerome Powell, will continue on Janet Yellen's path and that the Fed will raise rates in December and at most twice next year, you can also plausibly argue that the market will be able to digest those gains, assuming the economic expansion continues.
But if you think the economic expansion stalls out and is sub-par, or the Fed steps on the pedal and we get four rate hikes, you can definitely argue the markets will be lower.
It's been a tough week for the FAANG stocks — though a few bounced back today. Facebook, Apple, Amazon, Netflix and Google parent Alphabet are all down for the week, anywhere from roughly 1 percent to 4 percent.
That doesn't sound like much, but when you're dealing with this group, you're in the biggest league of them all in terms of market capitalization. When they move, they move indexes, and they can make, and lose, a lot of money for investors. Apple, Facebook, Google and Amazon were four of the five biggest negative drags on the S&P 500 this week.
Let me show you what I'm talking about. Collectively, the five FAANG stocks had a market capitalization of about $2.8 trillion at the end of last week. The entire value of the U.S. stock market was about $28 trillion, meaning the FAANG stocks were about 10 percent of the market cap of the entire stock market.
FAANG vs. the market (market capitalization)
FAANG stocks: $2.8 trillion
U.S. market capitalization $28 trillion
But this week the total market value of the FAANG stocks dropped to about $2.75 trillion, a loss of about $60 billion in market cap. Facebook and Apple alone are down about $17 billion each, followed by Google at nearly $15 billion, and Amazon and Netflix with smaller declines.
FAANG Market cap declines (this week)
Facebook $17.8 billion
Apple $17.7 billion
Google $14.7 billion
Amazon $6.6 billion
Netflix $3.1 billion
Total: $60.0 billion
The good news is that this group stabilized on Thursday. And for the year, they are all up, as much as 56 percent for Amazon and 32 percent for Alphabet. Four have at least doubled and in some cases tripled the S&P 500's 18 percent gain. It will be interesting to see how much longer can that continue, even with outsized revenue growth.
FAANG stocks this year
Amazon up 56 percent
Facebook up 53 percent
Netflix up 51 percent
Apple up 49 percent
Google up 32 percent
The Dow Jones industrial average first crossed 23,000 intraday on Oct. 17. Because the Dow is a price-weighted index, the higher-priced stocks typically have a bigger influence on the Dow's movements. This again was the case with the move from 23,000 to 24,000, with higher-priced stocks such as UnitedHealth, Boeing, 3M and Apple all contributing the bulk of the gains.
The one exception is Goldman Sachs, which despite being the second-highest-priced stock in the Dow (after Boeing), contributed only 23 points to the Dow's gain.
Here's a breakdown of the stocks that contributed the most to the Dow's 1,000-point run from 23,000 to 24,000, based on the closing prices on Oct. 17 to the opening prices today.