7 Signs of a Post-Trump Sentiment Shift

While there is an obvious divide in America after Donald Trump's surprise election victory, one thing seems certain: Wall Street is elated. Of course, there are pockets of weakness -- big-cap tech and solar stocks, to name two -- but the Dow Jones Industrial Average (DJIA) is on pace to wrap up its best stretch since 2011, and if history is any indicator, strength could beget short-term strength for blue chips. Below are seven signs the sentiment tide has shifted, as well as two signals to inspire the bulls.

1. The Dow is on pace for a weekly gain of more than 5%. In fact, since 1990, the DJIA has enjoyed a rally of that length and magnitude just 22 times (23, if this week's gain comes to fruition), according to Schaeffer's Senior Quantitative Analyst Rocky White. The last time was in December 2011.

Following previous signals since 1990, the Dow has gone on to average a four-week return of 1.13% -- nearly twice its anytime four-week return of 0.64%. However, the month after a signal also tends to be more volatile than usual, as measured by the bigger-than-usual average positive and negative returns, and the standard deviation of 5.83%, compared to 4.22% anytime.

2. Small-caps also wrapped up their best five-day stretch since December 2011, as traders seek riskier assets. The Russell 2000 Index (RUT) is now headed for a sixth straight day of gains -- a feat accomplished just one other time since 2014 -- and a weekly gain of 9.5%. Likewise, the broader S&P 500 Index (SPX) is on pace for its best week since October 2014, having surged more than 3.6%. 


3. Traders were also flocking to options and commodity futures in droves. According to CME Group, volume across all asset classes -- which includes Treasuries and stocks -- hit a record of 44,516,949 contracts on Wednesday. Meanwhile, the Chicago Board Options Exchange (CBOE) just yesterday recorded its highest call volume since January, with nearly 1.4 million contracts traded.


4. Even beaten-down healthcare stocks saw the biggest inflows since October 2015, according to the latest BofA-Merrill Lynch data, as fears of a Hillary Clinton-led war on drug pricing abated. Stock and options volume on the Health Care SPDR (ETF) (XLV) hit an annual high on Wednesday, with call open interest now at an annual peak of more than 338,000 contracts. At last look, the XLV is set for a weekly gain of 6.2%.


5. The Thomson Reuters/University of Michigan consumer sentiment index rose by more than expected in November -- and that was before the election results and subsequent stock rally. Specifically, the index jumped to 91.6 from 87.2 in October, surpassing both expectations for a rise to 88.0, and the average 2016 reading of 91.1.


6. The American Association of Individual Investors (AAII) weekly sentiment poll just recorded its largest increase in bullish sentiment since July 2010. After that signal, the S&P went on to record a six-month gain of 19.9%, according to Schaeffer's Quantitative Analyst Chris Prybal. A resurgence in AAII bulls of 15% or more has happened just 46 other times, going back to 1987, with the SPX averaging a six-month gain of 2.92% -- more than double its average anytime six-month gain of 1.17% -- and positive 72% of the time. Meanwhile, the streak of self-identified "neutral" investors outnumbering "bullish" AAII investors was snapped, after 53 straight weeks. Still, this is the 54th straight week where under 40% of respondents were bullish.

7. The National Association of Active Investment Managers (NAAIM) exposure index jumped about 15 percentage points. That marks the largest weekly increase since July, when the index was flirting with record highs. The NAAIM index was docked at 72.96, as of Wednesday's close.

 

In conclusion, traders would be wise to heed the four stages of sentiment: off a major bottom, it's despair, disbelief, acceptance, and euphoria; vice versa off a major top. (Or, as the old adage goes, "markets advance on a wall of worry" and "decline on a slope of hope.") When sentiment hits the "euphoria" phase, sideline buying power has been exhausted, resulting in a top. However, considering we were knee-deep in fear just one week ago, it's likely safe to say there's still plenty of money that could pour in to help drive higher highs.

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