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By Jani Ziedins | End of Day Analysis
End of Day Analysis:
The S&P500 closed within a few points of all-time highs Thursday as the post-election rebound continues. We survived a lot of bearish headlines this year and no matter what they cynics claim, the market isn’t listening. While there is a chance we could kiss all-time highs and tumble back into the heart of the trading range, the more likely outcome is breaking out and continue higher.
The market enjoys humiliating the largest number of traders at any given juncture. Stumbling from here means patient bulls with piles of profits will give a small portion back. That doesn’t sound very humiliating to me. On the other hand, smashing all-time highs will send bears scrambling for cover. Shorts will be forced to cover and anyone out of the market will start second-guessing their decision as they watch everyone around them raking in profits. It’s pretty obvious which side has more to lose here.
We’ve been flirting with 2,200 for nearly half a year. The longer we hold near this level, the more likely it is we will break through. Unsustainable levels are by definition unsustainable. If we were going to crash in a hopeless ball of flames, it would have happened by now. This resilience tells us there is a lot of support behind these prices. If all of the headlines we encountered in 2016 couldn’t break this bull, it is really hard to imagine something coming along in the final weeks of the year that will break it. The smart money is clearly betting on this bull, not against it.
Right or wrong, when confident owners don’t sell, supply stays tight and prices remain firm. Bears can argue until they are blue in the face, but it all matters for naught if they cannot convince owners to sell. I’m not sure what 2017 holds, but things look good for the market going into year-end. Fight it at your peril.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
It’s been a week since Trump was elected president and the market is holding up amazingly well. Today’s gains puts the S&P500 within striking distance of all-time highs.
Reality turns out to be a long way from the pre-election consensus that a surprise Trump win would roil global markets. I’m not criticising because I also assumed Trump’s win would unnerve investors. Everyone assumed it was Hillary’s election to lose and markets hate surprises. Overnight stock futures traded that way when they cratered 5% as Trump captured key swing-states, but by the time we opened Wednesday morning most of those losses vanished and we quickly traded in the green.
While Trump’s win was largely unexpected, the market likes the GOP’s more business friendly approach to governing and is why stocks reacted positively in the aftermath. One of the most powerful signals in trading is when the market does the opposite of what everyone expects. Rather than sell Trump’s surprise win, the market told us this was a buying opportunity. And the last few days of support has confirmed that signal. The question is what happens now that we are pushing up against the upper end of the summer’s trading range.
We’ve been trading sideways for months because nothing new was happening. The GOP capturing all three branches of government is definitely something new. Reforming corporate taxes is on the GOP’s agenda as is a tax holiday so corporations can repatriate their overseas cash. Both of these will boost profits and dividends, and thus stock prices. At least that is why people are in a buying mood.
We are coming up on significant resistance near 2,190 as we approach all-time highs. If we break through, expect us to keep going into year-end as underweight money managers are forced to chase. If the market cannot attract new buyers at all-time highs, demand is becoming a serious problem and that doesn’t bode well for next year. At this point I give the edge to bulls because countless headlines have been unable to break this market. When owners refuse to sell, it doesn’t matter what the headlines are.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Analysis
It’s taken awhile, but the stock market is finally doing something! We’ve been mostly range bound since mid-summer, but traders are finally getting pre-election jitters and that nervousness lead to eight consecutive down days for the S&P500. What was previously viewed as a slam dunk win for Hillary is turning into a much closer race than most expected. It is still Hillary’s election to lose, but Trump is giving her a run for her money.
Last Friday’s FBI revelations are finally showing up in the polling data. Battleground states like Nevada, North Carolina, and Florida that were leaning toward Hillary last week have shifted ever so slightly in Trump’s direction.
While momentum is always a good thing, the Electoral College math still favors Hillary. In addition to taking the above mentioned states, Trump also needs to steal one of Hillary’s “firewall” states; New Hampshire, Colorado, Pennsylvania, or Michigan. Without one of those, the math simply doesn’t work for Trump no matter what is going on in FL, NV, and OH. At the moment, New Hampshire is Hillary’s most vulnerable firewall state and is more important to the outcome than the much talked about FL, NV, and OH.
While we can dissect the polling data a million different ways, the more important question is can we believe it? The biggest challenge in polling is counting the right people. Obviously we don’t want to ask a 12-year old who she will vote for. But what about a 34-year old male? Surely his opinion counts, right? Would we feel the same way if we knew he has never voted? So maybe we shouldn’t count him. But what if we find out he drove 5-hours to attend a Trump rally. Does that make a difference?
Voter intent is the hardest, yet most important thing to measure. This is especially critical in a historically unpopular election. We will have people who have voted in every presidential election since the 1970s skip this one because they find both candidates so deplorable. We will also have middle-aged, blue-collar workers vote for the first time because they are so passionate about Trump. Countless polling results are being thrown at us, but if they are using a flawed measure of voter intent, the polls everyone is taking for fact could be way off the mark.
Right now Trump has a one-in-three chance of winning. That means if we held three elections under similar circumstances, the favorite would win twice and the underdog once. This has nothing to do with the candidates and a last-minute surge, but reflects the errors that naturally arise anytime a small sample is used to predict the characteristics of a larger group. If we’re not asking the right people the right questions, our poll won’t accurately reflect the opinions of the larger group.
As we discussed previously, a Trump win would unnerve the market because he is the least understood major party candidate in modern history. While he is using this outsider status to his advantage to attract disgruntled voters, markets hate uncertainty and no one really knows what a Trump presidency will look like. Even though many people don’t like Hillary, the market prefers her because at least we know what we are getting. The market always prefers a damaged status quo over a wildcard. And if anyone doubts that, the market’s current bout of weakness largely coincided with Trump’s improving chances.
While all that Electoral College and Statistics stuff is interesting, what we really want to know is how to trade this. The simple answer is those that are in the market should stay in, and those that are out should stay out.
The time to sell defensively was weeks ago when everyone was comfortable. Reacting emotionally to a selloff rarely results in a smart trading decision. If someone has long-term positions, stick with them and ignore this near-term volatility. Contrary to popular opinion, the president has little influence over the economy and stock market. While we could see some volatility after the election as supporters of the losing side reflexively dump their stocks at a discount, that will be a better buying opportunity than time to get defensive.
If someone has cash, stay calm and continue watching. Prices might get even more attractive over coming days. But rather than fear impending doom-and-gloom, we should be greedily rubbing our hands together as emotional owners start giving money away. Risk is a factor of height and we are at the lowest levels in months. While no one can pick the exact bottom, it is less risky to buy today’s selloff than it was to hold last week’s benign sideways drift.
The widely expected Hillary win will be a relief to the market. While we might see Trump supporters dump their stocks in disgust on Wednesday, the relief of a conclusive outcome will no doubt keep any post-election weakness brief. A Trump win on the other hand will be a surprise and not something that is currently priced in. Fear of the unknown could lead to an extended selloff. But like I said, the president isn’t as important as most people think, especially one that has a strained relationship with Congress. Within two-weeks the market will go back to business as usual, which up until this week was hovering near all-time highs. If people want to give us stocks at a discount, it would be foolish not to take them.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Analysis:
The S&P500 tumbled for a 6th straight day as it undercut 2,120 support and closed at the lowest levels since early July. While there wasn’t a decisive headline driving the 1% midday selloff, most people chalked it up to pre-election jitters. The encouraging thing is we bounced off 2,100 support after briefly violating it. Rather than trigger a tidal-wave of defensive selling, buyers rushed in and we closed well off the midday lows.
This is the largest directional move we’ve seen since September’s rate-hike tantrum and is the longest losing streak in over a year. Is this forewarning us of much worse to come, or did we just pass through the worst of it?
Up to this point, most assumed Hillary would walk away with the election, but last Friday’s reopening of the FBI investigation into Hillary’s email servers gave Trump a small boost over the weekend. While he still faces long odds, closing the gap made people reconsider the prospects of a Trump presidency.
The market prefers Hillary because she is the establishment candidate. We know what we are getting with her and it won’t be much different from what we’ve had over the last eight-years. The market hates uncertainty over all else and it favors Hillary because she is a known quantity.
While we spend a lot of time debating the merits of each candidate, most people give the president way too much credit for influencing the economy and stock market. Four-years ago we went through a multi-week selloff following Obama’s reelection because emotional Romney supporters were dumping their stocks at steep discounts. We bottomed at 1,350 and with the benefit of hindsight, anyone who sold those lows was clearly an idiot. There is no reason to think this time will be any different. Sore losers dump stocks and savvy buyers snap up the discounts.
A big part of what pulled us down over the last six-sessions is the risk premium associated with an uncertain outcome next week. No matter who wins, that risk evaporates Wednesday morning once the result is conclusive. Removing that risk is bullish, but that is only one component of what will affect prices Wednesday.
A Hillary win is largely priced in and will produce a relatively modest reaction. A Trump win is definitely not priced in and will cause larger reaction. Today’s selloff definitely tells us which direction it will be. But even that will get priced in relatively quickly and the market will go about its business just like it did after both of Obama’s elections and every other election before that.
Many stock owners will trade emotionally next Wednesday and there will be a lot of profits waiting for those who keep their composure. Prices will bounce pretty quickly following a Hillary win because that is the expected outcome. If Trump wins, wait a few more days for the emotional selling to subside before buying the dip.
Jani
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