It was the worst drubbing of stocks in 2017 on Wednesday as the fear index (VIX) surged 46%. If you are wondering whether the wheels are coming off, the short answer is “no.”

VIX

 

It doesn’t mean that emotions sparked selling at the open, caused a domino effect through the session into the closing bell, and went away overnight. However, it does mean that the notion of selling while “overdue” based on a calendar of expectations is mostly a warning shot aimed at Washington, D.C., and not an indictment of the rally or our economy.

On that note, you must not panic; and at the same time, be ready to pounce.

Rules of Engagement

When the market hits one of these air pockets, there are several things we do as investors that are the exact opposite of instructions given by flight attendants:

• We don’t ball up into a fetal/crash position
• We don’t close our eyes
• We don’t reach for oxygen
• We don’t scream
• We look for opportunities

Now is the time to put together your buy list, and even begin to put on new positions.

Populating List

The buy-on- dip approach to the market has worked for the past eight years- I’m sticking with it because the underlying fundamentals have given me confidence.

The great news is the timing is perfect; we are just about done with earnings season, so you should have a list of names that fit these descriptions and look for stocks that:

• Beat on the top and bottom lines
• Took market share
• Expanded margins
• Offered strong guidance
• Shares popped after earnings release

Pulling the Trigger

When exactly should you pull the trigger once you have your list? The mainstream media war against the White House will never stop. And the big economic data that could seize the investment narrative, including the next jobs report are weeks away. Well, in this case, I like to rely on charts but I’m also comfortable with the fact that I’m not going to pick the bottom; but understand it is critical to have a better entry price on the way down, rather than waiting for a reversal because these quick gains are going to go so fast, you will think you missed it. This happens all the time, right?

Key Support Points Major Indices

• Dow: 20,741 then 20,400
• S&P 500: 2,367 then 2,329
• NASDAQ: 5,950 then 5,800

Derailing the Trump Agenda

The talk of impeachment and the wheels coming off in D.C. is unnerving, but it’s mostly hyperbolic wishful-thinking by the media and Trump foes. Guys, I do not have anything in my fundamental work that has already factored in the Trump economic agenda for 2017. Delays do not impact my model. In fact, most of Wall Street hasn’t assumed anything, nor has the Federal Reserve. Actually, it would be like adding high-octane nitrous oxide to an already fast car.

The Real Story

Since the mainstream media and other business channels won’t tell you, I am going to show you the real deal because they loathe discussing the Trump Rally and the economy other than to call it a bump when it’s up or cry that’s it’s crashing when it’s lower.

This economy is rocking because post-election enthusiasm is now our reality and it’s not a flash in the pan. Yesterday, the Atlanta Fed lifted its outlook for the current rate of growth to 4.1% after strong data on housing, factory usage, and production. 

In fact, there modeling began to improve after the most recent Retail Sales report last week. After the close, L Brands (LB) surged as much as 6% on earnings beat and higher full-year guidance. This underscores my contention that the brick-and- mortar sell-off stepped into mall-based retailers isn’t the story of the American consumer.

Yellow Flags

One thing you must always know when the market rips higher or plunges is that there are other stories beyond the headlines and talking points of talking heads. Yesterday, it was the bank sell-off, particularly in large money center banks that dragged their smaller brethren’s along for the ride.

I am not 100% sure what’s going on as there maybe issues beyond the inability to unwind the Dodd-Frank Act, but I’m digging deeper. 

XLF

 

Then there are headlines that the U.S. household debt has eclipsed the peak that precipitated the Great Recession. I’m not as concerned; in fact, I see some positives that I will lay out in the Afternoon Note or tomorrow morning’s Hotline Report.

Today’s Session

Equities have been under pressure all morning, but there have been hints that buyers are already stepping up to the plate.

Interestingly, the tech juggernaut sector could remain under the most pressure after earnings disappointment from Cisco (CSCO) and Alibaba (BABA).

Walmart posted mixed results with a tiny miss on revenue and four cent beat on earnings.   Shares are edging higher.  The bigger issue for the company today are the hearings on tax reform after Rep. Brady threw in the towel on a border adjustment tax, but hinted he might try again under a different name (that will fool them for sure).

Also, the administration is pushing hard to speed up parts of its agenda including alerting congress on a 90-day countdown to adjustments in NAFTA.

Some folks are anxious over the decline in the US Dollar, which is still relatively high based on historical levels where DXY at 90.0 was a top.  Moreover, President Trump voiced concern over the dollar being too high, so this should be good news for the White House.  It certainly is good news for multinational corporations.

For today, I say allow the market to open and see how quickly it attempts to rebound having already come 50 Dow points off the pre-opening low.  There is a chance we have to test a triple digit decline for the Dow Jones Industrial average, and not rally too quickly.

Comments

Your a breath of fresh air - Markets rule not this damn beltway of leakers Ramon Espinosa on 5/18/2017 10:16:44 AM

you always have a level headed assessment of the situation, unlike some others who are either "chicken little" (the sky is falling!) or they are rearranging the deck chairs on the Titanic with their "all is well." Dwight Frisbee on 5/18/2017 11:51:25 AM

Thanks Charles for your consistent wisdom of stability re the mkts. The talking birds get riled, D.C. is loving rocking the country in any manner in contrast to achieving the needs of us citizens. You keep me settled. :) Karen Fleming on 5/18/2017 2:19:31 PM

love to read what you have to say. However, I am still concerned that some of the market rise was faith in Trump. By Aug, that overly optimistic view might have faded as the nation realizes that 1 man does not govern alone. Wouldn't it be better to wait to buy in the summer doldrums? ellen on 5/18/2017 5:07:04 PM

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