Tax Reform Sets Grandpa Russell (IWM) On Fire

October 1, 2017

Weekly Market Outlook

By Keith Schneider

blankThe Trump administration pivoted away from another failed attempt at repealing the Affordable Care Act (Obamacare) and moved on to the next big item on its agenda, tax reform. Markets have started moving ahead of anything formal being agreed upon on Capitol Hill, so it’s a classic “buy the rumor and sell the news” situation developing.

The sell the news moment of course could be that nothing much comes out of the bill or that it’s watered down. Regardless, any reduction on taxes on the corporate level should have the biggest relative benefit to smaller US based companies that comprise of the IWM, hence most likely the main reason for the nice pop.

In our weekly update on September 17, we focused on the Russell 2000 (IWM), AKA Grandpa who had been ill and been badly lagging the other US indexes (only +2% since January 2017 as compared to the NASDAQ 100 +23% YTD.)

We highlighted that he was poised to gain strength, and that it was where fresh money currently sitting on sidelines was likely to find a home.

We were not sure of the catalyst that might drive this rotation with much news focused on multiple hurricanes and other distractions. However, our proprietary indicators were very clear and certainly demonstrate what any great tape reader or floor trader knows…

Act based on price and find out the reasons later. Or as trading great, who started his career on the floor of the NY Cotton exchange, Paul Tudor Jones, aptly stated, “Price moves first and fundamentals come second.”

The recap for September shows that the IWM gained over 6% while Tech laden NASDAQ 100 lost -.5% for the month. A very strong relative performance indeed. Our risk gauges continue to be lit green and continue to gain strength.

On the sector front, Semis and Tech continue to lead, Utilities lag (a good sign) while one other beaten up sector is on the road to Wellsville.

We cover this emerging sector and a whole lot more in this week’s video.

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