Why Taxes Caused Yesterday’s Selloff, August 18, 2017

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If there was one “reason” for the sell-off yesterday, it was taxes—specifically, the dying dream of tax cuts and a profit repatriation holiday.

That’s why the Cohn headline spooked stocks. It’s not that markets particularly love Gary Cohn. Instead, he’s important because he’s viewed as a key figure in pushing tax cuts through in early 2018, an expectation that market has held on to (until, perhaps, yesterday).

If Cohn resigns, then the prospects for tax cuts (and almost more importantly, the foreign profit repatriation holiday) dim… significantly.

The declining expectations for tax cuts and profit repatriation hit tech especially hard yesterday and it combined with the underwhelming CSCO/NTAP earnings to push that sector sharply lower—and falling tech dragged the whole market down yesterday afternoon.

Now, going forward, clearly there’s been some damage done on the charts (the S&P 500 closed at a one-month low), and momentum indicators are showing warning signs.

And, those warning signs are appearing at a particularly dangerous time for markets (in the short term) as late August is particularly favorable for “air pockets” to form in the markets given that a lot of desks are minimally staffed due to summer vacation. Point being, I don’t think we’re done with the uptick in volatility yet—again due mostly to the calendar.

However, Nasdaq, SOXX and FDN all remain above last week’s lows. So, while Thursday’s trading was clearly painful, I’m not ready to get materially more defensive just yet (although clearly we’re watching those indicators very, very closely going forward).

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