Don’t Let Your Guard Down on Nov. 9
If the presidential campaigning has you stressed out, join the club. A recent Huffington Post poll found that 81% of Americans wish the election was over. The riotous debates, uncivilized language and voter suspicion of both candidates has left many Americans eager for the dawn of Nov. 9.
But in a couple weeks investors might look back and think that now was the calm before the storm. Despite some suggestions that we will see a “relief rally” once the new president is elected, I think the market will need some time to digest the new president’s agenda.
The technical behavior of the S&P 500 indicates volatility in the near future. While I don’t base my stock recommendations in Growth Stock Strategist and Profit Catalyst Alert on charts, I do keep a close eye on some technical measures that help decipher the health of the overall market. And it looks like the market could use a sick day.
Although the S&P 500 is up almost 5% year to date, it has been range bound since August. Most importantly stock market breadth, a measure of how many stocks are participating in a rally, looks weak. As of mid-October only 29% of stocks were trading above their 50-day moving average versus 70% in August. Often times the movement in the market averages is influenced by a rallies in a few large cap stocks (the S&P 500 is a market cap weighted index). Market breadth is a better illustration of the market’s overall health.
The market hates uncertainty, and it’s swirling around Wall Street like confetti in a ticker-tape parade. For the first time in years we do not have an incumbent running for president, guaranteeing new leadership regardless of which candidate gets elected.
There’s also the likelihood that one or both houses of Congress will be flipped from Republican to Democrat. While it may seem counterintuitive, the gridlock in Congress for the past two years has been bullish for the market. Investors are simply more comfortable buying stocks and companies more comfortable starting projects when they know the rules governing taxes, tariffs and regulatory issues will not change. Status quo—or gridlock depending on your perspective—is good for business.
Since 2014 Republicans have ruled both the Senate and the House. Since that time President Obama has had little success in moving any legislation into law. Polls are increasingly suggesting that we will see a Democrat in the Oval Office come January. Election forecasting site FiveThirtyEight estimates the Democrats have a 67% chance of taking over the Senate. And while it’s unlikely the Democrats will win the 30 seats necessary to win the House, a Democratic president will certainly encounter a friendlier Congress when pushing for change.
Patrick O’Hare, chief market analyst at Briefing.com sums it up like this: “To get major legislation passed—the type that can make a big difference in terms of economic prospects and earnings—you’ve got to have Congress involved. Even though the presidential candidates promise a lot of things and are talking tough on issues, it’s going to take three to tango. You need the president, House, and Senate, and it’s all got to come together between those three to get major legislation through and passed.”
I’ve been warning since late August that the market isn’t the picture of health. Earnings beats are met with half-hearted rallies and small misses met with hammering blows. I’ve been adding bearish option trades to my Profit Catalyst Alert portfolio and keeping tight stops on the names in both Profit Catalyst Alert and Growth Stock Strategist portfolios.
In fact, just this week I recommended a put for PCA subscribers that’s a play on the sagging apparel market.
It will take some time before major legislation gains traction, but the market should begin to heal as more information becomes available. In the meantime, as your portfolio is resting up, you can contemplate the mindset of the other 19% of voters in the aforementioned poll who wish the election season would never end.
I guess some people are just gluttons for punishment.