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The Rebound of Small-Caps and Transports Stands Out: Market Recon

"The risk of a wrong decision is preferable to the terror of indecision." -- Maimonides

The Name of the Game "Risk on" was the name of the game on Monday. Tensions over imminent global thermo-nuclear war receded. North Korea decided to put any attack plans aimed at the U.S. territory of Guam on hold. How sweet. The president ordered an investigation into the possible theft of intellectual property by Chinese companies, adding it to the already-in-motion investigation into the possible dumping of steel in U.S. markets. This may or may not have had something to do with North Korea's sudden cessation of aggressive gesturing toward the U.S. and American allies.

Traders and investors could get back to worrying about quarterly earnings on a day-to-day basis, and policy that might impact currency valuations, as well as bond market yields for the medium term. The news cycle spins quickly in 2017. Trading off of market sentiment is perhaps the greatest of all skill sets. There is no doubt that in order to do so, one must be agile, quick of mind, and completely leave the ego in the closet.

There is some danger in the Pavlovian experience. Many navigating through today's marketplace have been trained through years of trial to simply buy the dip. Why? Simple question. Over what now must be considered a considerable portion of even a not quite so young person's career, markets, governments, central banks and economies in general have been able to avoid catastrophic outcomes in face of looming threats of what appear to be dire possibilities. That experience is quite different from the one that drove an entire generation of retail investors out of the marketplace a decade ago.

Those driven away have lost out on tremendous opportunity. Those who appear to know how to play this game have been right so often, they will not see it when they are wrong until they are very wrong. Such is the effect. A marketplace perverted by the distortion of the point of sale has been the cause. Do we ever find our way back to honest price discovery? I may not be young enough.

'Capeesh?'

Though Monday's markets paint a generally pretty picture, two things stand out to me as somewhat special. They would be the rebound of both the small-caps, and the transports. While the S&P 500, which I'll use as a proxy for the broader equity market, was chugging along to a gain on the day of 1%, the Russell 2000 picked up 1.5% on the day. And the Dow Jones Transportation Average? A cool score of 1.6%. Dead cat bounce? Sure, some might say that. I say that if you even use that term, you might as well be honest with yourself, and admit that you just do not know.

What we do know is that U.S. small-cap equity funds saw outflows of $950 million for the week ending last Wednesday. We also know that those same funds have seen more than $10 billion worth of funds flee the space since St. Patrick's Day. The reasons are plain to see. A weakening U.S. dollar and a lack of visible progress on corporate tax reform. Tax reform would be a policy initiative that would positively impact smaller firms in far greater proportion than it would their larger cousins. What have we seen in the currency space as August has developed? Support for the U.S. dollar, that's what. The dollar has made a stand specifically against the euro in August, and more broadly against the euro-weighted basket known as...


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