Last night, President Trump delivered his first speech before Congress, effectively a State of the Union address. He adopted a more statesman-like demeanor and spoke of themes of unity and making America great again. He pledged massive tax cuts, health-care reform, higher defense spending and $1 trillion in infrastructure investment. He also endorsed NATO—contrary to remarks he had made earlier—which calmed some nerves. The tone of the speech was also more uplifting than his Inaugural Address.

While the president was grand in his promises, he was light on details. For example, will he push for a progressive tax plan or one that favors the rich? Furthermore, it’s easy to declare his lofty goals, but to actually implement them in reality is a whole different challenge. Still, his presidential speech was enough to buoy market optimism. 

When we look at the QCHA, the un-weighted average of all stocks traded on the New York Stock Exchange, however, we see that it’s underperformed the S&P 500 by more than 40 basis points today.

The S&P 500 Index consists of 500 of the largest U.S. stocks. Furthermore, the index is market capitalization-weighted, meaning that the largest stocks have the largest influence on the performance of the overall index. On the other hand, the un-weighted QCHA gives the same weight to every stock NYSE-traded stock, which means it gives smaller stocks greater representation and it provides a wider view of the overall market.

When the market is strong, QCHA tends to outperform the S&P 500. That it significantly lagged the S&P today suggests that the rally may not have sustaining power.

The upcoming Federal Open Market Committee meeting, during which Fed officials will determine the next leg of monetary policy, is coming into investor focus. Just last week, the odds of a March rate hike, according to trading action in the Fed Funds Futures market, were less than 25 percent. Today, it’s shot up to about 67 percent, or two in three. President of the San Francisco Federal Reserve Bank John Williams (he has no vote on the FOMC this year) is the latest to opine that a rate increase warrants serious consideration in the upcoming meeting.

Fed officials will also release their quarterly economic projections at the end of the March FOMC confab. If their projections imply a faster-than-expected pace of tightening, it could give market participants pause.   

We recommended the SPDR S&P 500 ETF (SPY) June 235 put option yesterday. The trade doesn’t look very good at this time given today’s market exuberance, but we think there are reasons to expect the rally to run out of steam.       

We also have open the SPDR S&P 500 (SPY) June 220 put option. Effectively, we are double-betting on a stock market decline.  
 
Our other open option trade is the PowerShares DB US Dollar Index Bullish Fund (UUP) June 25 call. The dollar rallied today in reaction to Trump’s speech and especially given the growing likelihood of the Fed raising rates, we expect the dollar strength to continue for a while. A persistently strong dollar eats into international corporations’ overseas revenue and profits.
 

Besides the options, we currently hold open (long) positions in NovaGold (NG), Gabriel Resources (GBRRF), Schlumberger (SLB) and Trilogy Metals (TMQ).