We got more evidence yesterday that this week’s “breather” in the stock market will be followed by a further rally into the election. We’ll still have to watch the action in the market for a couple of more trading days, but the “internals” of the market during the three day decline we’ve just experienced have been pretty good. First of all, the market was able to retrace almost all of its morning losses by the close yesterday...and the breadth for all the major averages was actually positive (even for the Nasdaq...which fell by almost half of one percent). In fact, the breadth was not very bad at all over the previous two days, so yesterday’s positive breadth was bullish. On top of this, the average daily volume over the past three days has been just 2.6bn shares for the composite volume...so you can see that the selling intensity has been very mild.
This kind of action is exactly what you normally see when a pull-back in the market is just a very-short-term phenomenon in a stock market that is headed higher over the following weeks. We’re not quite ready to send up an “all-clear” signal, but if the market can bounce-back over the next few trading days, it’s going to confirm that this week’s pull-back was merely something that was working off the very-short-term overbought condition that had developed at the beginning of the week.
Another item from yesterday that gives us more confidence in a bullish outcome to this short-term situation was the action in the chip stocks yesterday. The SMH semiconductor ETF opened 2.3% lower at the beginning of trading, but that was its lows for the day. It was able to bounce 1.75% off of those opening lows and limit the decline to a paltry 0.39% on the day. We’d also note that yesterday’s volume in the SMH was the lowest in over a year. In other words, the selling pressure was so mild in the morning that it had nowhere to go but up after it opened down by more than 2%. (As soon as the buyers realized that the sellers were not interested in dumping their shares at those low prices, the buyers had to step to the plate and start accumulating some shares.)
Don’t get us wrong, we still believe that the longer-term prospects for the stock market are risky. The market is very expensive...and we do not see the fundamentals improving in 2021 to the degree that the perma-bulls believe they will. However, experience taught us a long time ago that the stock market can frequently move in a much different way than the underlying fundamentals would justify over the short-term (and even over the intermediate-term sometimes). Therefore, if this week’s mild pull-back is followed by a nice bounce over the next few trading days, it will pave the way for a retest of the old highs by Election Day...even though 2021 is almost certainly going to be a challenging year for the stock market in our opinion. (Chart attached below.)
Finally, on the political side of things, we’d just like to highlight that the election is far from over. First and foremost, we all remember how bad the polls were four years ago. However, the developments of the past 36-48 hours have helped the President’s chances in a material way in our humble opinion. Even though Donald Trump is the sitting President, he’s still seen as an outsider. The egregious actions by FB & TWTR to keep a negative article about VP Biden and his son in the NY Post from being forwarded on their sites is exactly the kind of insider shenanigans (insider BS) that voters voted against four years ago.
The main reason Mr. Trump was able to win in 2016 (and why Bernie Sanders was able to put up a fight against Hillary in the primaries) was because the American public had become sick and tired of the Washington DC establishment. That establishment is already looking bad once again this election year...with its inability to get a fiscal stimulus plan passed. Therefore, it’s not out of the question that a late shift by the electorate could turn the election in the President’s favor once again.
No, we’re not saying that President Trump is now likely to be re-elected by any means. However, when you combine the developments we just mentioned...with the obvious bias that was projected in the tone of the questioning of the two candidates in their respective “Town Halls” last night...it tells us that the Democrats just might piss this election away...just like they did four years ago. It’s not likely...but it wasn’t likely in 2016 either.
Either way, if the stock market is trading at or near all-time highs as we move into November, Mr. Trump’s chances of winning will rise. They might not rise enough to take him over the top, but if the Democrats (and those who support them) keep pulling the same kind of BS they have over the past 48 hours, people are going to forget how much they hate the way the President carries himself...and vote for him once again........We like to be as even handed as we can on politics, so we’re merely stating what we see...and what we see from the Democrats is not helping their cause.........This election is not over just yet.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.