January 11, 2017, 4:00pm EST

For two full months the Trump rally has consisted of higher stocks, higher yields, a higher dollar and higher commodity prices — all on the prospects of hotter growth and a sustainable period of prosperity ahead.

Since the night of November 8th, it’s been “buy it now, prove it to me later” market.  But people are expecting there will be a period of time where the markets begin trading in “prove it to me” mode.

Often we see a “buy the rumor, sell the fact” phenomenon in markets — it’s a reflection of investors pricing new information in anticipation of an event, and then selling into the event on the notion that the market has already valued the new information.  With that, the period surrounding the January 20th inauguration could be the “sell the rumor” moment (in fact, we may be working on it now).

Many are hoping it could be the second chance given to those that have been left behind in the great Trump reflation rally.  The question is, how deep or shallow that correction might be, and how long or short-lived it might me.

I would argue, it’s going to short-lived and shallow (maybe very shallow), for all of the reasons I’ve discussed in this daily note, not the least of which, is a world starving for a return to meaningful and sustainable growth, and the perception that this is the best chance we’ve had and might have, to get the global economy back on track.  Trump’s tone today, in his press conference, indeed, indicated that he would waste no time executing on his plan.  That favors a short-and-shallow correction scenario for the Trump rally. And shallow corrections are typical of strong trending markets.

With that said, since the election, here’s a view of key markets (taking the last price before the election night whipsaw):

The yield on the 10-year has gone from 1.85% to over 2.64% on the Trump effect. But despite a surprisingly hawkish Fed on December 14th, and even more hawkish fundamental data since, the high in yields, thus far, was marked the day after the Fed meeting last month. And today yields traded just below 2.33%, the lowest since November 30th!  For technicians, the 38.2% (Fibonacci) retracement of the entire move is 2.34%.  That would be considered a shallow retracement.

The dollar (index) has gone from 97.68 to 103.82, and today trades at 101.28 which is the lowest level since December 14.  Commodities (the broad commodity index) have gone from 183 to 193, and today trades at 191.  Both have room for another 1% or so lower.  The dollar looks very strong.

What about stocks?  The S&P 500 has gone from 2,138 to 2,278, and now trades at 2,262.  A shallow retracement for stocks of the Trump rally would be about 2,225 (which is about 2% lower from here). Given the policy outlook, those wishing for something deeper may not get the chance – a couple of percentage points from here may be the gift.

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