Up until today, all major U.S. stock indices were sharply lower amid the fallout from President Trump’s executive order to temporarily clamp down on travel from seven majority-Muslim nations. Trump had managed to become an overnight celebrity on Wall Street, thanks to the sheer potency of the Trump Trade. But, the man could just as quickly turn into a pariah, thanks to his bohemian style of leadership. Yesterday, the media were crying about how the honeymoon with Trump was over. Today, the Dow is back above 20,000. What is a trader to make of all this?
The Dow Jones industrial average and the broad-market S&P 500 were, at one point, down by nearly a percentage point in Monday’s trade while the tech-heavy Nasdaq Composite tanked nearly 1.2% after the president placed a 90-day ban on travel from Iraq, Sudan, Iran, Yemen, Somali, and Libya, while immigrants from Syria, ISIS’ stronghold, were banned from travelling to the United States indefinitely. Further the president issued a 120-day suspension of the U.S. refugee program.
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The ban spurred widespread angst and protests especially amongst tech companies, many of which have large populations of immigrant workers. For instance, Google’s Sergey Brin, Tesla Inc.’s Elon Musk, Microsoft’s Satya Nadella and Expedia’s Dara Khosrowshahi among others are all immigrants occupying top corporate echelons. Amazon, Microsoft, and Expedia have already filed a declaration supporting a lawsuit against the order while 23 other companies met on Tuesday to discuss filing an amicus brief in support of the lawsuit.
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The Customs and Border Protection Agency said on Tuesday that about 721 people had been denied coming to the country after it began enforcing the ban, while 1,060 green card holders had been granted waivers. While the markets may have overreacted to the travel ban, these figures don’t account for the number of people that were prevented/will be prevented from boarding planes in their home country in the first place.
The Department of Homeland Security later clarified that green-card holders would not be locked out.
According to a Reuters poll, 49% of Americans say they agree with the travel ban, compared to 41% who disagree. But, when it comes to perceptions about the usefulness of the ban, the results are less favorable, with only 31% of Americans feeling more safe after the ban, compared to 26% who feel less safe. So why, then, is the DJIA swinging wildly?
Is The Trump Trade Invincible?
While the immigration ban does bear economic ramifications for the country, traders may now question whether the Trump Trade is as invincible as many had believed. The Trump Trade was responsible for near-double-digit gains for stock indices since his election, but the fallout from the ban clipped part of those gains through Tuesday. This up and down proves that the markets are keenly watching to see how Trump executes on his pledges and could quickly turn bearish in case of any fumbles.
After the travel ban, the Dow Jones first reclaimed some ground, then closed 122.65 points lower, its biggest one-day loss in 2017. That selloff put the Dow below the 20,000-mark, just three days after punching through the psychologically-significant milestone. On February 3, the Dow closed over 20,000 again.
Dow Jones Industrial Average Index (DJIA) 5-Day Returns
Some traders might argue the Dow at 20,000 is a largely irrelevant event. In a way, that might be true, because the index is built on a survivor bias, meaning it’s made up of only winners. Although the Dow Jones consists of just 30 stocks, 133 stocks have at one time been featured during its 132-year history, with General Electric being the only remaining member from the original bunch. It’s therefore easy to say that stock market euphoria alone can continue powering the rally.
But it’s equally important to look at the technical side of the index–and right now it’s not that good. Traders should not forget that the Dow flirted with 20,000 for more than a month, at one time coming within 0.34 points in mid-December before beating a hasty retreat.
The Dow chart now has several chart patterns that might limit the strength of the rally over the short-term. The chart has a well-established trading band with the lower edge close to 15,600 while the upper edge is near 18,300. Projecting the trading band upwards gives a target of 21,000. This is a long-term trend, but one that won’t be easy to achieve, given the fact that the trading band is a rising wedge that increases the probability that prices will collapse and reverse course.
The S&P 500 has also lost ground in the last five consecutive trading sessions, marking the first time it has done so this year.
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S&P 500 Index (SPX) 5-Day Returns
Takeaway for Traders
The Trump ban has brought about a sharp spike in market, uncertainty as traders and investors try to handicap the effects of less-open borders on key sectors of the economy. Even more worrying for traders, is the fact that the immigration flap has managed to take the market’s focus off highly relevant and positive Trump pledges, such as tax reforms and economic stimulus programs. At this point the greatest danger would be, if the ban triggers major concerns about global trade. This calls for traders to exercise caution in the near-term since the markets may remain jittery until the dust settles.
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