Short Term Choppy – But Longer Term Bullish

• Market’s range-bound until we get greater certainty
• VIX to remain high the next 2-3 weeks
• Longer-term view bullish – supported by fiscal and monetary policy

Last week I warned of some near-term selling pressure… 

For example, I referenced the loss of momentum and negative divergence on the weekly-MACD. This is often an early warning sign of prices easing. 

I also cited possible over-head resistance at a key Fibonacci retracement zone… along with the high VIX level. 

Now if you combine these technical signals with:  

• an unlikely stimulus deal this side of the election; and
• absence of a clear US election winner come Nov 3rd… 

… it’s not surprising to see the market give back a few points. 

And today that’s what we saw…. with the broader indices giving back around 1.8% (and slightly less for the tech-heavy Nasdaq)

S&P 500: Range Bound until Nov 3rd

There isn’t a lot to add from my update over the weekend – where I penciled a possible move lower: 

S&P 500 – Oct 26 2020

And whilst mainstream will sell the headline “market selloff” – reality is things have barely changed.

We have essentially been range-bound for a few months. 

For example, take a look at the weekly chart up-close – we’re trading at the same level as we were August 17th

S&P 500 – Range Bound through August to October

The week of Aug 17th – the S&P 500 closed at 3397.

Today the market closed 3400. 

If you packed up and went on holiday for the past 70 days – there has been virtually no change. 

Now today, the S&P 500 was down 1.8% and the Nasdaq off just 1.6%

And that’s what you would expect with a VIX above 30. 

What’s interesting (to me) is the S&P 500 has found support at the 10-week EMA (red line). This is expected but it remains less clear whether it will hold. 

My expectation is this near-term move lower could see us closer to 3200 (which is also the zone of the 35-week EMA)

From mine – this is where investors start nibbling at quality names (like Apple among others)

Note: Apple was positive today despite the broader move lower. 

Near-Term Choppy / Longer-Term Intact

If I look at the near-term outlook (e.g., next 1-3 months) – things are likely to remain volatile. 

And that will be especially the case if there is no clear winner on the election come Nov 3rd (just 8 days away)

I think the market would prefer a clear Presidential winner from either party – than one which is uncertain. 

And from there, certainty with the Senate would also be helpful (n.b. I think the House will remain very much Democrat). 

And should the outcome not be definitive through November and December – markets could easily shed 10-15%.

That may rattle some investors and/or traders… pending your lens. 

However, if we zoom out and assess the monthly chart, the longer-term bullish trend remains intact. 

From mine, a 15% sell-down is nothing to worry about… 

S&P 500 – Monthly Trend – Oct 26 2020

The monthly trend which began (technically) from 2010 remains in place – with the 10-month EMA above the 35-mth EMA. 

And whilst the March panic of this year crashed through the 35-month EMA – it didn’t last. 

What I expect to happen here is markets may ease back towards the 35-month EMA (or around 3,000 on the S&P 500 – or 12% lower) – which will be a good long-term risk reward play. 

The primary reason I say this is two-fold: 

• an extremely accommodative monetary policy from the Fed (with rates negative in real terms) – which is likely to remain in place through 2023; and
• trillions in fiscal aid coming down the pike from the government (regardless of who wins the election in November)

Those two factors alone (more than anything else) will most likely be supportive of higher equity prices. 

And whilst there will be dips along the way (for example, as traders try and digest uncertainty with COVID infections, shutdowns etc) – the incredible amount of monetary support will help put a floor under the market.

I think it’s bold be ‘outright bearish’ given the immense support from the both government and central banks. 

And even if the “less business friendly” Joe Biden wins the election (which is what most polls suggest) – it’s unlikely to be a disaster for the stock market (as Trump is trying to sell). 

I say that because Biden will likely push for a further $2T to $3T in stimulus – which the market will welcome. 

Obviously this will need to be balanced by higher corporate tax rates and tougher regulations (especially in energy and big tech) – but net-net it will be positive in the very near-term. 

However, over the next few weeks, my feeling is we’re going to be range bound (as we have seen the past 3 months)

And until some of these bigger concerns are behind us (e.g. a COVID second wave, a fiscal package and its timing; and the US election outcome) – then this is how things will most likely trade. 

But when we get past that (and we will) – then equity risk premiums will come down (with much lower VIX) and I would expect stocks to resume their path higher. 

Regards,
Adrian Tout