Mid-week market update: There is an adage that when dentists start to buy, you should be selling. I came upon a tweet by a resident in Los Angeles with a dentist in the Santa Monica area. The dental office is expecting riots next week, regardless of who wins the election.
FBI firearm background checks are surging. Anecdotally, both sides are arming themselves in preparation for civil unrest.
Is this peak fear? It is time to buy the panic?
Peak fear?
Notwithstanding this week’s market weakness, this chart of asset class implied volatility (IV) shows that fear levels spike the week of the election, and retreat afterward.
Other indications of market panic are evident. The VIX Index has spiked above its upper Bollinger Band (BB), which is a sign that a temporary bottom is near. That said, the VIX went on an upper BB ride during the February-March decline and took some time to actually bottom. The prudent course of action is to buy when the VIX recycles below the upper BB after a spike above.
As well, my estimate of the Zweig Breadth Thrust Indicator reached an oversold level today, which can be a sign of a short-term bottom. The caveat is this indicator also stayed oversold for some time before bottoming in March.
The risk-off tone is not solely attributable to election jitters. A second and third wave of the pandemic seems to be taking hold. Across the Atlantic, the DAX skidded through its 200 dma on the news of fresh lockdowns in Germany. The CAC is already trading below its 200 dma, and it weakened today on the news of French lockdowns.
Buy the panic?
When the market panics like this, it’s difficult to call an exact bottom, but we may be nearing a short-term tradable bounce. One of the constructive signs is the behavior of the NASDAQ 100, which has been the market leader for much of this year. The NASDAQ 100 remains in a relative uptrend against the S&P 500, which is a positive sign for the bulls.
I wrote on Sunday (see How the Election held the market hostage) that it may be time to position for a reversal trade:
Tactically, it may pay to position for a reversal. If the market were to rise in the coming week into the election, a prudent course of action might be to sell ahead of the event, On the other hand, significant market weakness could be construed as a buying opportunity.
I also wrote on Monday (see The momentum vs. seasonality dilemma) that traders are caught between negative momentum, as evidenced by Monday’s 90% down day, and positive seasonality for the last four trading days of October. It seems that momentum is winning out. Is it time to position for a reversal?
My inner investor is deploying some cash at these levels. My inner trader is staying on the sidelines until after the election to avoid event risk.
The key word in the last sentence of Cam’s post may be ‘some.’
I’m positioned for a bounce, but IMO the odds of a continuation of the decline tomorrow are probably 50/50.
Currently ~8.6% invested, and open to adding if we open in the hole again on Thursday.
Yeah, I think position size is important. If it bounces tomorrow, easy money. If it keeps tanking the stress is less. But don’t add “a la FOMO”, you already have a position, so if it zooms up, good.
Volume on the ES mini was high today, not as high as some of the biggest down moves, but high enough to be a short term bottom. I kept telling myself AMZN, AAPL and FB are reporting earnings tomorrow, it has a good chance of making for a bounce before the close. After they report, I dunno
Today after the close AMZN, FB, and AAPL are reporting their earnings. If the earnings are better than expected and stocks react negatively means the market is acting poorly for other reasons and has not fully corrected.
So, sell the rumor, buy the zombie apocalypse, is that the strategy? I’m asking for a friend.
Closing QQQ.
Closing RYSPX at the 730 window.
SPX now taking off. No position. That’s fair. Can’t win ’em all.
Reopened SNAP. Trading around NIO.
SNAP taking off.
Out of NIO/SNAP.
Reflex snap back rally or the real deal? It’s been hard to determine in 2020. I’m leaning towards a dead cat bounce. There’s been significant technical damage, and another V right here just doesn’t feel right.
I would be willing to buy and hold ~SPX 3200.
As suspected. In my previous comment “the tell” was the earning reports and the reaction to them. Market (NDX) is diving.
Dead cat it is.
AAPL now trading at September 25 levels.
To me, looks like market is beginning to price in a split election result (stimulus more difficult to pass), we are already back at late Sept levels.
Although I am not sure of it is election and how much due to virus/lockdown.
Looks like we’re all waiting for price discovery.
I don’t see too many traders buying into the decline today and I don’t blame them. My only target right now might be SPX 3200.
https://www.marketwatch.com/story/bonds-arent-protecting-against-a-stock-market-selloff-are-investors-jumping-to-cash-11604087099?mod=mw_latestnews
Cash is king.
3226 held today. This is the line in the sand. My gut tells me this breaks next week.
I was watching the 3225 level on futures as the line in the sand as well today D.V. I thought it was going to break on that last test and this would be the first Friday in a long time without the end of day ramp, but of course we ramped as usual into no man’s land, reflecting uncertainty going into next week. I had loaded up shares across my accounts on one of the earlier tests to position into the election (going from under invested to ‘less’ underinvested, so not a conviction bet). I think the event risk going into next week is in both directions – for example a democratic sweep could set off a buying spree in anticipation of stimulus and other spending. The markets could just as easily drop from here of course, and I’m still sitting on enough cash that I will be happy no matter what direction we go (we drop and get a black Friday sale, or the market rises and at least I’m happy I’m not completely chasing.) My bias going into next week is surprisingly bullish. My reasoning is that there is so much worry baked into the election that anything short of the ‘expected riots’ will be met with an unwinding of volatility and a rally fed by relief over the fact that we aren’t killing each other in the streets. Best of luck to us all going into November!
https://www.yahoo.com/finance/news/nj-gov-on-a-covid-19-lockdown-if-we-have-to-shut-the-whole-place-down-we-will-205402414.html
I have been worried about this for a while. This may happen and would be very very damaging to the economy.
agreed – this is the risk I am most worried about after the election. We have the ‘safer at home’ initiative in Colorado, which actually worked rather well in the first wave. With cases rising there is talk of implementing more restrictions again, which I would support, but you are right this is not great for the economy. Anecdotal data incoming – but I am part of this recurring continuing professional education class that has been going on since early summer with other Colorado CPAs. We have a pretty diverse mix of industries and locations in Colorado in this cohort as well so it seems pretty representative of our economy here. We hadn’t met since last month and since the last class one group member lost her job unexpectedly, while another said her company is in shut down mode and will dissolved before year end. Another guy was talking about his company was suddenly falling apart. I took that as a sign that some of the delayed financial stresses are starting to break through finally – so going into a second lock down could bring a lot more of these types of ‘on the edge’ situations to a head.