Here we are, another holiday season coming to an end and another end-of-the-year market with nowhere to go but down. Yes, it’s a gloomy way to look at generally bullish market reactions. The U.S. economy is picking up steam in all the right places – wages, inflation, jobs, manufacturing, and housing. U.S. homebuilders’ confidence soared this month to the highest level in 11 years, reflecting heightened expectations of better sales now and well into 2017.

So, why would the bullish U.S. economy market trends of 2016 turn bearish? Simple, the immediate market reactions to The Fed raising interest rates is wrong, all wrong, and there will be a correction coming.

Market reactions aren’t always as they seem

Remember “irrational exuberance,” the sentiment that drove market reactions up in the late 1990s and dropped it down hard in 2001? What we are seeing in the market now is something different. Yes, the U.S. economy is doing fine, and there is a digital technology boom happening big time, but, the U.S. economy has made the transformation into a digital economy, and it is bearing fruit for everyone, except corporations. The earnings reporting in January may be the first sign of a new market trend. Given the rapid rise in the U.S. dollar (a 14-year high), it’s likely the SPY PE Ratio, 26.08 +0.16 (0.62%) as of 12-15-16, will not improve.

IDX 1-4-17

IDX is sitting in a 14-year high position. The latest trend moved up $2222 per contract in the last 13 trading days.

This brings us back to why the immediate market reactions to the recent Fed announcement are wrong. The “exuberance” in the market is not about a frenzy for making money on vaporware. It is about a market building on vapor-politics.

The pundits suggest higher rates will lead to bullish market reactions for financial stocks. And they will be, eventually. But, there is a bit more to the story about rising financial stocks.

The incoming administration has made it clear it will remove the “shackles on Wall Street” with a rollback of Dodd-Frank. It also wants to “obliterate burdensome regulation” on a variety of industries, specifically oil. The good ‘ole days of freewheeling financial trading are coming back. And oil companies will be drilling wildly again, or so the market believes.

There’s only one problem, if the Republicans can actually accomplish either of these things, it will take some time. The issues of rising U.S. dollar, oil prices, interest rates, and an earnings PE ratio well above the historic mean (15.63) will mesh with expectations dashed. Keep an eye out for markets turning south sooner rather than later.

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