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Clif Droke

Clif Droke

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock…

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What's Preventing the Dow from Exploding?

The stock market has once again entered a period of consolidation as investors wait for the results of the most important legislative decision of the year.  The fight to repeal and replace Obamacare has taken the spotlight as Congress debates the passage of legislation that would eliminate its most burdensome aspects for businesses and individual taxpayers alike.

Internally, the NYSE broad market has been unsettled for the last several days after a period of relative calm in the months following the U.S. presidential election. There have been more than 40 stocks making new 52-week lows on a daily basis since last week. This makes almost two weeks that the number of daily new lows has exceeded 40, which reflects an increase in internal selling pressure. Most of that selling pressure is coming from consumer/retail stocks, bond funds and, increasingly, energy stocks.

The extremity of internal selling pressure isn't yet great enough to cause any major concerns about the strength of the stock market's intermediate-term uptrend. If the new lows don't soon diminish, however, it could eventually cause problems for the interim trend as internal weakness spreads from the above mentioned sectors to the broader market.

Following is a graph of the daily cumulative NYSE new highs-new lows. It's telling that for the first time since the Nov. 9 election, the highs-lows have stalled out. And while the trend is still technically up for the highs-lows, that trend could be broken if the new lows continue to expand in the next couple of weeks.

NYSE Highs-Lows

It's clear that the honeymoon phase of President Trump's election is over as investors aren't giving a free ride to the stock market until he delivers on some of his campaign promises. The most critical of these promises concerns the proposed overhaul of the Patient Protection and Affordable Care Act (a.k.a. Obamacare). The mainstream news media are in full swing right now with negative stories which undermine the Congress' effort at eliminating the onerous taxes surrounding Obamacare. The tantalizing prospect of having the bill's individual and employer mandates (which forces individuals to purchase health care or else pay a steep penalty) repealed is one big reason why the middle class turned out in droves to elect Trump.

Now it's time for the Republican-controlled Congress to "spit or get off the pot" as the saying goes. Congress has an excellent chance to relieve a massive tax burden on individuals and small business owners by approving the proposed repeal of the Obamacare mandates. Unfortunately, there is now a concerted effort underway within Congress designed at undermining the proposed overhaul.  It can't be emphasized enough that the repeal of the Obamacare taxes would be of tremendous benefit for the economy by relieving the stress created by years of burdensome taxation. That pent-up energy would likely express itself through a massive rally in the Dow and major averages, which have been tethered by the uncertainty surrounding the Obamacare reform debate in Congress.

A repeal of the individual and employer mandates would also likely result in a hiring spree by small business and would give the stock market the euphoric burst of investor confidence needed to achieve heights undreamed of by even the most optimistic bulls. This in turn would stimulate even more business activity due to the stimulative effect of America's financially-driven economy.

It's sobering to think that how the rest of 2017 turns out for investors and wage earners alike might very well rest in the hands of Congress even as we speak. All we can do now is pray for the best outcome and hope the Congress is able to deliver what would be the most extraordinary gift that Washington could possibly give the American taxpayers. 

 


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