Markets endured the chaos emanating from the White House, as Press Secretary Sean Spicer resigned and Trump threw Attorney General Jeff Sessions under the bus as the investigations by the FBI intensified. It was disclosed this week that Sessions, while under oath, was less than forthright about disclosing his conversations with the Russian ambassador to the US during the elections.

Adding to the mix, Trump is exploring the option of a self-pardon, along with pardons for the rest of his clan. The net result was that US Equity markets ended the week mixed up, with the Dow Industrials closing - .35% (leaving a gap down after making new highs) while the Nasdaq 100 closed over +1.40 % (while also eking out new all-time highs).

The Russell 2000 (IWM) also made a new high, but was unable to break out of its well-defined, 8-month trading channel. The rotation back to value stocks hit a brick wall, as Nasdaq stocks are now back in the lead with great volume.

Adding to unusual reactions to news, ECB head Mario Draghi affirmed a dovish stance to monetary policy, but the markets didn’t believe him, and the Euro rallied. Some attribute it to the fact that world-wide trust in the US (especially in the Eurozone) is coming undone and that supersedes even monetary policy.

Another bit of unusual market action: the health care sector rose (specifically biotech, which increased +2.6%), an inverse-expected reaction to the stall in the Senate on the repeal of Obamacare. Last week, we highlighted that the outlook for solar looked sunny despite the Trump pivot to coal and that group moved up +3.29%.

Our biggest concern right now is the deterioration of three risk-on indicators that flipped to negative this week. Gold roared back (+2.0%) into a bullish phase, bonds rallied, while utilities gained more than any other sector.

On a positive note, volatility plunged to some of the lowest levels ever. A huge wager that volatility has bottomed and will peak in October was placed by an undisclosed large player. If the call is correct, it will make about $ 250 million.

Trying to make sense of the recent market action across the spectrum of global assets is a real challenge for even the smartest Global Macro players. The simplest and most logical explanation is the constant flood of money by central banks sloshing into the equity markets are causing the dislocations we are currently experiencing. The result (for now) are shallow corrections in the equity markets and historically low volatility.

This combination of strong market action with lurking deterioration beneath the surface, a volatile political climate, a very long-in-the-tooth rally, and a negative seasonal is a dicey environment. Although we are not yet on a bonafide sell signal, stay tuned and watch gold, as it could be a leading indicator to exit the party.

This week’s video:

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