Market Recon: Staying Net Long Financials Despite the Run

"Many of life's failures are people who did not realize how close they were to success when they gave up." -- Thomas Edison


I still do like the banks and consumer finance names going forward. I really do. The financial sector has largely gone sideways for about a month now. That can be taken as evidence of the petering out of the "Trump Rally" to support a bear case. This can also be taken as a constructive consolidation for those who call for a resumption of the reflation trade.

I did promise you some market violence this month back in December, and I think it likely that we do see some of that turbulence. The banks start reporting quarterly numbers this Friday, but there are serious rabbit holes blocking our path. Senate confirmation hearings begin today for the president-elect's nominees. First up will be Alabama Senator Jeff Sessions (Attorney General) and retired Marine Corps General John Kelly (Department of Homeland Security). Anything that slows down, distracts, or prevents the new administration from pursuing policy change will cause doubt in the marketplace. Uncertainty will hurt.

On top of the politics of it all, net short positions in U.S .Treasury futures have reached record levels. The last data that I've seen for this has the total net short at almost $92 billion. Will there be squeeze that compresses Treasury yields (interest rates) in our near future? You may have already seen evidence of a coming short squeeze in the space, as the utility sector, a bond proxy, moved in opposition to the Treasury space yesterday. That could also be due to a lack of faith that there will be the desired level of deregulation.

Staying Net Long Financials

I may alter my positions as I see opportunities present themselves, but I do believe that after some market violence, the trend gets back on track, and it's not just due to a period of consolidation. This environment that we are about to enter is a once-in-a-decade, or maybe it's a once-in-many-decades, event for banks and consumer finance type names.

In fact, in my humble opinion, even though they have already seen a parabolic run and then gone sideways, there should be several causes for a desirable effect in place. What could possibly go wrong?

1) Most pro-business POTUS in a long while. Heck, since maybe forever.

2) Pro-business Cabinet. Should all or almost all of the nominees get through the process, this group is not likely to get in the way of getting things done.

3) Compliant Legislature. You would think. Right? This may be the wild card.

4) Hawkish Central Bank. At least they seem to want to be. All the FOMC needs is further justification. Remember, the Fed's shareholders are the banks themselves.

It may be asking a lot to think that all of this falls into place. This crew is not going to be making s'mores together on Saturday nights, but can you remember when there was a chance like this that you could actually visualize for the markets broadly, and the financial space specifically? The influence here, will be more of those who do. and less academic in nature. The effects would seem within reach.

1) Lower Taxes. This should happen quickly. Should.

2) Less Regulation. Again, some degree of success here would seem easy to get through, when one team is driving the bus. One team.

3) More money moving around the broad economy at higher interest rates. Nothing lifts all boats like the velocity of money. Nothing helps the banks like making the credit game a viable business again.

I've stated my case. I am long several banks and consumer finance types going into earnings. I am not a daredevil, though. I am buttoned up pretty well, and have gone the expense (it stings, but you only need to be wrong once to learn this lesson) of protecting myself through the options market. For home-gamers with only a cash account, it may make sense to take a profit here, and play the game with house money.


06:00 - NFIB Small Business Optimism Index (December): Actual 105.8, Expected 99.2. Like all other confidence surveys since Election Day, Small Businesses have joined Consumers, Homebuilders, and Manufacturers in printing at multi-year high levels. Areas showing exceptional strength for December in this report are: "expect economy to improve", "expect real sales higher", and "now a good time to expand". Oddly, "current job openings" remain a negative in this series.

08:55 - Redbook (Weekly): Last Week 2.4% y/y. Every week, it seems that the Redbook comes in healthier, and healthier. Then we hear something horrific from the retail crowd. This item has been trending near its highs for the year.

10:00 - JOLTS (November): Expecting 5.65 million, October 5.53 million openings. This item is somewhat dated, and not likely to impact the marketplace upon its release. The number of job openings seems pinned to either side of 5.5 million for about a year and a half now, indicating either a severe mismatch in skills required and what's on the resume in aggregate. As we saw the Labor Market Conditions Index print in surprise contraction for the month of December (for the ninth time in 2016), all this print tells you is that there are a lot of openings and a lot of people outside the labor force

10:00 - Wholesale Inventories (November-rev): Flashed 0.9% m/m. This data-point flashed at a surprising 0.9% increase on a month-over-month basis when expectations were for only 0.1%. This revision will not cause all that much of a market reaction. However, this item is then combined with manufacturing and retail inventories to create the headline item known as business inventories. You will see that print this Friday.

Sarge's Trading Levels

These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.

SPX: 2294, 2282, 2272, 2263, 2255, 2245

RUT: 1383, 1375, 1366, 1357, 1349, 1339

There are no quarterly earnings scheduled for release today that caught my attention.

At the time of publication, Stephen Guilfoyle had no positions in the stocks mentioned.

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