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JPM: “Until Market Abandons Hope for a Tax Deal, There Will Be No Significant Weakness”

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Monday’s session started off poorly, with one of the biggest pre-opening selloffs of 2017 on fears surrounding the implementation of Trump’s fiscal agenda. Since then, however, the Friday gap has been almost filled as a new batch of “buy the dippers” came out and did what they have done so well over the past 8 years.

Why the intraday bout of hope that this morning’s low is as bad as it gets?  According to the intraday market update from JPM, the answer is simple: “the market isn’t abandoning hope of action on the tax front by any means and until that happens the SPX will struggle to sustain sig. weakness.” The result: as shown in the chart below, the S&P is now just barely in the red, after being over 20 points lower earlier in the session.

Below is the full intraday note from JPM’s Adam Crisafull:

Market update – it’s been a very quiet session so far. Stocks are obviously weak but flows are orderly and not particularly busy (and the major indices have bounced well off their opening lows).

Recalibrating political expectations is the main reason for the softness as investors debate the timing and scope of a tax bill, although the market isn’t abandoning hope of action on the tax front by any means and until that happens the SPX will struggle to sustain significant weakness.

It seems like many are circling ~2300 as an approximate area of support (premised on the SPX’s ability to earn ~$133-135 in ’18 w/o anything happening in Washington) and thus sentiment isn’t alarmed or panicked.

One of the biggest problems for this tape is the lack of scheduled catalysts – there isn’t anything major on the calendar over the next few days and weeks (Mar jobs Fri 4/7, CQ1 earnings season beginning Thurs 4/13, etc.). Work is underway on a tax bill but it will likely be several weeks before even rough signs of a consensus begin to emerge in the press (and in the meantime a gov’t shutdown is possible at the end of Apr). At this point the SPX is down ~2.6% from its recent high (2400) and ~1.1% from where it stood before Trump made his address to Congress on 2/28 (2363). The index is still up ~4% YTD and ~9% from where it closed on 11/8 (2139).

* * *

US sector trends – the weakest groups include banks (esp. regional banks), cap goods, autos, and steel while retail, healthcare, tech, and staples are outperforming. Within healthcare a lot of stocks levered to ACA are rallying following the demise of ACHA (HCA, UHS, CNC, etc.).

Retail is a notable bright spot as expectations for BATs fall further (BBY, SIG, DLTR, KSS, TGT, JWN, GPS, LB, etc., are all doing well). Some of the bond proxy groups bounced at the open although they have weakened from their morning highs. Most of the leading laggards within the SPX are either financial or material/industrial-related (FCX, MS, HBAN, CMA, SCHW, ZION, RF, etc.).



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