Why the market can rally without a stimulus deal

By Jani Ziedins | End of Day Analysis

Oct 20

Free After-Hours Analysis:

Tuesday turned into a decent day for the S&P 500. While the index only gained a modest 0.5%, more important is Monday’s selling didn’t continue. At least for the moment, the market seems to be finding its footing near 3,425 support.

The big talking point continues to be the next round of Covid stimulus. Nancy Pelosi put a Tuesday deadline in order to pass something before the election. While that now seems unlikely, a few days here or there doesn’t matter that much to the market. More important is a deal gets done and so far all things are pointing in that direction, even if it turns out a little delayed.

That said, I don’t think the market is placing a lot of emphasis on these stimulus negotiations anyway. If it was, we would see far larger swings following these deal/no-deal headlines. While a 1% pop or drop feels like a big deal in the moment, this is more meaningless noise than the catalyst for the next big directional breakout or breakdown.

The market is expecting something around $2T in stimulus. If it doesn’t happen today, then it will come shortly after the election. If it gets delayed into next year, that is most likely because Democrats won the election and Republicans are dragging their feet. But even a multi-month delay isn’t that bad for stocks because a Democrat-led stimulus will almost certainly be larger than anything allowed by Republicans today. The stimulus could be late, but the size will more than make up for it.

No matter what happens, there seems to be more upside than downside as everything turns out less bad than feared. The election will go off without a hitch. Our politicians lack the will to lock the country down again. And more stimulus is coming. All of those things are near-term bullish for stocks.

That said, anything could happen over the near-term and that includes a pullback under 3,425 support. But Monday’s dip to could easily be “close enough” to check that box and the market never looks back. If the index trades well Wednesday, all is forgotten and forgiven. If we get another dip under Monday’s lows, prices will most likely undercut 3,400, even if just momentarily. As soon as the index retakes 3,400, that is our signal to jump back. As always, start small, get in early, keep a nearby stop, and only add to something that is working.

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.