The market's momentum can be derailed by many different forces, but the one you need to respect the most is the bond market. Right now, the bond market is giving off all the wrong signals for the stock market, because rates are going down and they need to go up if we are going to continue the gains that we have seen in the banks -- a crucial component of the rally.
Let me say from the outset that no bull market should really be threatened by lower interest rates. They are the mother's milk of so much strength in stocks, that the idea that they can be derailed by lower rates is pretty fanciful.
That said, we know that the banks need higher rates to make more money, and we have seen the bank stocks go down pretty hard in this period, because rates have slipped and the 10-year bond no longer seems headed to 2.5%. In fact, if you didn't know any better, you would say that the Fed isn't going to raise rates in December and the new Fed Chief, Jay Powell, is a dove who will no longer stick to the higher rate increase story that is integral to the continuation of the financial rally.
Remember, much of this market is driven by blind algorithmic trading, and the trades are set to sell the financials if rates don't go up, and that's what's happening.
Now, here's where my analysis comes in: it's ridiculous to base positions on this little move in rates. Not only that, but our rates are going lower, I believe, because the European rates have plummeted and the markets are linked. I think it has nothing to do with the Fed.
All that has happened here is that the bank stocks have gotten cheaper on earnings than we have seen in a while, and they should be bought with the expectation that we will get a hike and they will go higher eventually, given the strength in the economy.
In other words, the algos are wrong, just like they were wrong when the market sold off on the dollar, or when it sold off on oil -- both temporary trends that shook out many.
I say focus on the strength of the companies. Focus on the numbers. Don't obsess about the bonds. Don't ignore them, but don't make them your strategy, because all you are doing is mimicking the machines, and the machines can't think. You are imitating short-term swings that will lose, not make you, money.
In other words, carry on, don't freak out and perhaps buy a bank stock -- JP Morgan (JPM) -- with the benefit that the quarter will be strong.
One other thought: there is a rumor of an amorphous bank stock tax that keeps coming up in the tax reform chatter. It is unconfirmed, and I believe the bank lobby will kill what's ever in the works. I just consider it another stumbling block to making money.