The financial markets have completely discounted a Biden win and a split government, and the complete elimination of uncertainty.
That said, the facts suggest the road ahead could prove far more challenging and could be anything but settled, if history is any guide.
The S&P 500 Index and NASDAQ 100 Index have pushed higher to challenge resistance marked by highs created both in early September and also in mid-October and getting immediately above these levels after a 5% rally in recent days, could prove difficult. Breadth came in far more favorable for risk assets though on Thursday, and Materials took top spot which had been generated by Healthcare on Wednesday. Industrials and Financials both roared back to show good participation which had been lacking on Wednesday, yet the technology stocks outperformance is anything but certain, if stock chart patterns by Apple (AAPL) are any guide.
Overall, a few charts are important to study to get a handle on “what’s moving” and not on this bounce. While Stocks have certainly forged ahead higher in recent days, Treasuries have as well, as yields have dropped down to near critical support. Remaining above .74 bps is critical for the 10-Year US Treasury Bond Yield (TNX) and for the Financial sector, it’s thought.
Meanwhile the US Dollar index which had shown evidence of trying to turn higher ahead of the election, plunged down to challenge October lows. This is truly important in how Equities along with the Emerging market trade and the Metals work in the days/weeks to come. A big breakdown under October lows gives further fuel to Gold moving higher, at a time when cycles actually point straight down into December. This gives some pause that this gold rally is the right directional move. Yet, given the negative correlation with the US Dollar index and Equities, it makes sense that no meaningful turn back higher should happen ahead of Equity rally also peaking out and both could happen towards the latter part of next week.
The Bottom line:
The key message here is that it’s unlikely markets make MEANINGFUL further headway throughout November, and the road ahead likely is far choppier and has a decent chance of retreating.
This is given 5 key factors:
1) Investor Sentiment has gotten a lot more positive of late.
2) Technology is still facing headwinds per AAPL, MSFT, GOOGL stock charts
3) There has been a lack of market breadth and momentum follow-through in recent days, (largely on Wed, not Thursday)
4) There is meaningful resistance on sector charts of Financials, Healthcare (weekly), Discretionary, and Industrials, while groups like Transportation remain laggards.
5) Cyclical pressure in the back half of November is a concern.
This latest 2-3 days of gains, given no victory being announced in Presidential elections for 2020 seems like a gift. While there are certainly stocks i favor to make progress in the days ahead, one should avoid pressing Technology as a group to continue to outperform, and specifically utilize any weakness in Utilities and REITS as a chance to buy these groups, along with giving implied volatility some serious consideration if stocks maintain their resilience into the back half of next week without an Election winner.
Twitter: @MarkNewtonCMT
Author has positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
