Stocks closed at record highs last week as Congress released the final version of its tax plan. But some strategists are floating a classic market adage to describe the market's response to the pending legislation: "Buy the rumor, sell the news."
On Wall Street, "Clients have been literally positioning capital into tax reform plays since August, and even in the fall. So we think January, for a whole bunch of reasons, is going to be very rough," Larry McDonald, founder of the Bear Traps Report, said last week.
Investors have piled into small cap, financial and industrial stocks this year, on the hopes of some sort of tax relief. According to McDonald, investors will likely wait until 2018 to harvest gains, in an effort to avoid paying taxes.
"People are going to take gains, and they're going to put off the gains until January… and people are going to sell on the news," he said. "I'm pounding the table… get long volatility for January because people are going to sell tax reform on the news."
Markets have hit successive new highs as investors anticipated a tax bill that would benefit corporations. Still, weakness has emerged as members of Congress have wavered in their support of the bill, and it now appears the market has already priced in the so-called "good news" as the legislation gets a final vote, then heads to the Oval Office for President Donald Trump's signature.
The markets' record gains this year have come with historically muted and virtually non-existent volatility — which McDonald warned could pick up in January.
Source: CNBC
Trader-G.Bozhidarov
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