Interpreting the market’s election reaction

Mid-week market update: It’s always instructive to see how the market reacts to the news. If I had told you that the dual market nightmare scenarios of a contested election and a deadlocked election consisting of a Biden Presidency and a Republican-controlled Senate were to come true, would you expect the market to take a risk-on or risk-off tone?

Based on publicly available reports, Biden is on his way to the White House. If he were to win all the states that he is leading in, Biden would win the Presidency. As well, the Republicans have retained control of the Senate, which puts the idea of a Blue Wave sweep to rest. That said, the presidential election is very close and subject to challenge. The likelihood of a contested election that winds up in the courts, and the streets, is high.


In the face of all this uncertainty, the S&P 500 melted up to regain its 50 dma.


Market strength in the face of bad news is bullish, but there were some blemishes beneath the surface.


The good news

Let’s start with the good news. The back-to-back 80%+ upside-to-downside volume on Monday and Tuesday negated the 90% down day from last week, according to Lowry’s. This has to be regarded as a positive development for the bulls. In addition, we have a potential Zweig Breadth Thrust, where the market recycles from an oversold extreme to an overbought condition in 10 trading days. Last Thursday was day 1, and the market has until next Wednesday to achieve the ZBT buy signal.


ZBT buy signals are extremely rare. The last one occurred in January 2019, and it was extremely successful (see A rare “what’s my credit card limit” buy signal).



Murky internals

On the other hand, short-term market internals is raising cautionary flags. Today’s rally was led by large-cap Big Tech stocks. The NYSE Advance-Decline ratio was only 1.3 to 1, and small-cap Russell 2000 was only up 0.0%, compared to 2.2% for the S&P 500.

Longer-term, I have concerns about the health of the bull. New bull markets are usually characterized by changes in leadership. The Big Three leadership themes have been US over international stocks, growth over value, and large caps over small caps. As the chart below shows, only small caps have rallied through a declining trend line, indicating a possible change. While US stocks have been largely flat against global stocks, their relative uptrend is intact. The same could be said about the growth and value relationship, whose trend was tested recently but growth remains dominant.


Notwithstanding a possible ZBT buy signal, I find it hard to call this the start of a new bull without a definitive signal of changes in market leadership.

46 thoughts on “Interpreting the market’s election reaction

  1. All the people who did not like Trump are wishing him adieu and his date with the Southern District Court in New York hoping that he will get to wear an orange suit to match his skin tone. Unfortunately, for investors there is a price to pay for a divided Government. The Senate in Republicans will lead to gridlock. This is how BoA explains:

    “it was supposed to be the second worst possible outcome: a Biden presidency (which appears likely absent a SCOTUS reversal of the mail-in wave in battleground states) coupled with a Republican Senate, was said to result in “Bearish Gridlock” which according to Bank of America would be bearish for economic growth, corporate profits and financial markets (but it would be bullish for more stimulus from the Fed). In any case, as BofA sarcastically puts it, “after $21tn of monetary & fiscal stimulus in 2020, $0 of follow-on support would be deflationary.”

    The reason for BofA’s dour outlook: political parties historically have used obstructionist tactics when out of power to thwart key legislation, most often through the “rediscovery” of commitments to “fiscal discipline”. As an example, BofA cites the budget austerity during 2012-2015 as a major reason for the slow economic recovery. Incidentally, the bank’s reco “in this scenario investors should prepare for lower returns and higher volatility. Raise cash and buy Treasuries, munis, and high-quality corporate bonds.”

    On a technical basis we have had two days of a reflex rally from an oversold market. The market yet has two lower highs to contend with and and a October 13 low. Once the initial euphoria is over we will get to see if the rally has legs. In my book the jury is still out.

    For readers with strong opposing views of Biden and Trump may I suggest a little levity:

    1. I think the market is celebrating a gridlock.

      Corporate tax rates and personal capital gain tax rates will now stay the same. Stupid green new deal and other stupid proposals are now non-starters.

      Just leave us alone and we will be better off.

      It is very simple. If you reduce regulations and tax, economy will grow fast and furious.

  2. It is eminently clear that the country is evenly divided with unparalleled amount of discord, chaos, violence, anger and hate. Notice the boarding up of businesses in major cities. No amount of stimulus will make up for the fear. In my sixty plus years in US, I have witnessed parties fighting for their ideas, not to shut up the ideas of the other. I am fervently hoping that Biden charts a new path and Republicans meet him half way. I am tired of the divisions. Bank of America is probably right but for wrong reasons.
    The election is over and all ballots must be counted no matter how long it takes. Recounts and challenges must be allowed to proceed as the law allows. Then only we will have finality..
    I am optimistic that we will compromise and move forward. Everyone will not get everything but everyone will get something. If that happens, we will have a better country and markets.

  3. How do you spell Gridlock?

    But even if Biden prevails, a newly empowered Mitch McConnell is expected to rediscover Republicans’ preference for cost-control and belt-tightening, according to Bloomberg. Also, liberals aims on health-care and court packing will be virtually off the table.

    Liberals’ most ambitious aspirations — from expanding the Supreme Court to granting statehood to Washington, D.C. — stand even less of a chance. And House Speaker Nancy Pelosi — who could face a leadership challenge and is certain to sustain losses to her majority — may be unable to provide Biden with crucial leverage in negotiations over the federal budget.

    Republicans have already telegraphed that they’re likely to rediscover religion when it comes to deficit spending, after adding nearly $4 trillion in debt during Trump’s first term.

    Biden held himself out as the one Democrat who could deal with Republicans in Washington, dating back to his time in the Senate with McConnell. McConnell and Biden cut a deal in the lame-duck session after Obama’s re-election making President George W. Bush’s tax cuts permanent for most Americans, a compromise later criticized by Democrats.

    But Biden may find McConnell isn’t the deal-maker he once knew. The majority leader recently had to disappoint even Trump when he couldn’t muster the votes for a large coronavirus stimulus package, a sign that restive Republicans may be in even less of a mood to cut a deal with a new Democratic president.

    Presumably, McConnell will revert to the staunch opposition he utilized during the Obama years, as the GOP moves to preserve as much of Trump’s policy legacy – including the tax cuts – as possible.

  4. Cam- You have no idea how bad I feel this morning. Not because the market faked me out – that happens every day. But because I saw the successive gaps up coming, and failed to follow through.

    Here are the two relevant quotes from Monday.

    rxchen2 says:November 2, 2020 at 11:46 am

    I think risk is to the upside. Many if not most are waiting for a post-election signal to buy into or sell short. What if it turns out the real buying opp was last week’s -5% decline?

    rxchen2 says:November 2, 2020 at 5:25 pm

    The pain trade? IMO, it would have to be successive gap-up opens every day this week. I don’t think it’s far-fetched. Markets are still oversold. Sentiment has pulled back, and the wall of worry rebuilt – indexes did pull back over -5% last week, after all. As Cam points out, both the FOMC announcement and the jobs report have receded into the background and may thus have the effect of sparking unexpected moves – and how many traders are positioned for an upside surprise?

    I had just enough faith to open positions on Monday morning and again at Monday’s close. Then I closed them all on Tuesday. Wednesday was a slap in the face. Today? A little more than that.

    That’s how the most valuable lessons in life get our attention.

    1. What’s my gut telling me now? That’s the thing about gut instinct – it’s not something we summon at will; it just shows up when the time comes.

      1. That’s why I try to focus on a process rather than the latest P&L. Of course the process doesn’t always work but you need to focus on a set of rules and analyzing the rules. Otherwise you’ll just get lost in your emotions.

      2. Right. That’s one of my weaknesses (although properly understood and managed it’s also often one of my strengths).

    2. The market gave me two chances to correct my errors.

      1. When the DJIA closed weak on Tuesday and/or opened muted on Wednesday.
      2. When SPY closed well off its highs on Wednesday.

      I recall considering (and then rejecting) both buying opps.

      Today? Well, that’s where common sense trumps almost anything else – if it was already prudent to refrain from buying Day 3 of a multi-day rally, then the right move on Day 4 is to take a walk.

  5. cooling off at resistance at 3520 – I see next up at 3575 if happens to break through for some reason, and if it’s any consolation, I wouldn’t expect us to go through 3700 anytime soon so the upside is getting more limited by the day after these successive gap ups. We still have Covid, and the Trump wildcard reaction to the Biden win announcement this afternoon. Plenty of risk to rubberband us back down to somewhere more reasonable.

    1. I think 3588 followed by new all-time highs is in the cards – probably before the end of November. The question is how we get there.

      The ultimate play for underinvested traders (like me) would be a -1000-point flush in the DJIA. But that’s exactly why it’s unlikely to happen.

  6. Barring some crazy news event, I think you are right that it would be too easy to get a flush to give everyone an easy entry point. If we keep getting fairly orderly gap ups daily, what will it take to get us to an upside capitulation from the sidelined investors (that would THEN set the stage for the rug pull)?

        1. I mean overbought is at .615. A close above 3550 on the S&P 500 would most likely trigger a ZBT buy signal.

    1. I like your take, Jarad.

      What then is the difficult (yet correct) entry point? One advantage I have right now is knowing exactly how it feels to be sidelined. I would probably take a swing at SPY given an entry 1% above. I would also reject any entry point >2%. That still places any entry point in between on the table as likely FOMO options. So I think we close >2% higher, and that the ‘correct’ entry point lies above 2% for a potential Friday gap up.

      That leaves me sidelined and I’ll just have to suck it up 😉

      1. The market often rewards bad behavior just long enough to set up the ultimate punishment. Cam is right about sticking to a process.

      2. I know the sidelined feeling for sure, I felt that way for months this year! We’ve since tested that 3520 again and are again chopping below. Does it seem strange that we had an FOMC statement today that nobody cared about, what a strange market! I tend to think in terms of ‘resistance becomes support’ so could see 3480, 3440, 3420, below, but interesting that earlier we couldn’t even get below 3490 so would give the benefit of the doubt to our just flagging and building up steam for that push up to 3575 with a firm call on the election tonight or tomorrow morning with no subsequent drama being the final catalyst for the blow off top on this week’s run? Will unemployment numbers dampen things tomorrow instead? What I have seen in prior weeks is weakness early on Friday followed by an end of day ramp up, will that continue this week or will the streak be broken? For the record because it probably seems like i’ve been cheerleading all week – I think all of this is crazy and we are overextended here, but this is exactly what I was afraid would happen despite it being absurd, maybe 2020 has finally broken my bias that the market will make sense.

  7. Quantifiable Edges

    Today could see 4th day in row $SPY low > yesterday’s close (unfilled gap). Only other 2 other instances ever: 1) 1/5/18 – kept running higher for 3 more weeks. 2) 10/12/20 – marked Oct top.

    1. Of course, the period following those three weeks in January 2018 was followed by a memorable decline.

  8. I think Corona virus gets worse here, much worse. A complete shut down is what will be required to control this wave. Such a complete shut down will need a massive stimulus, which a Republican senate most likely does not allow (presuming a Democratic Prez). Go figure the effects on the stock market.
    I am kissing the fairy tale ideas of bipartisanship, unity, improving the country, good bye. Sorry for these harsh sounding words. The romance of America is over, well and truly. This was long time coming, Prez Trump may be seen as the cause of such a divide, but democratization of news by social media, challenging main stream media is the chief reason behind this IMHO.
    This is not a political post but a commentary of recent events, that are likely to stay with us, the way I see it. China is waiting, to use to its advantage any American weakness. Taiwan may be the next little morsel it gobbles with a single chopstick lick (last morsel was Hong Kong, as America slept).

    1. One also needs to watch the two senate races in Georgia, both likely to lead to a run off in early January. Both may go democratic, eventually, that could well upset the balance in the senate 51-49, in favor of the Democrats (the other two are independent senators that usually vote with democrats). Right now it is 47-47 (Democrats to Republicans).

      1. D.V. I think you might be on to something. If you watch MSNBC or on the other hand Fox News you might as we be living in two different worlds. There is no middle ground. We now live in a world where the press is “called the enemy of the people” and there is nothing which is considered the “truth” but is disputed by an alternate set of facts. T.V., the news papers and social media all have a different audience that is catered to regardless of what E.R. Morrow or Walter Cronkite would have considered to be unbiased or unvarnished set of facts. Till this changes we are going to see a steady decline of the prestige and trust of the institutions that we relied on. Congress as an institution has the lowest approval rating in many decades. Sad but that seems the reality that we face.

          The above article echoes my earlier sentiment. Worth reading in its entirety IMHO. That said the article ignores the two potential Georgia runoffs.
          FWIW, the blue wave never happened. This is likely going to be an embattled Presidency, with bitter republicans, being emboldened by a 6-3 Supreme Court. All I need to know is how much stimulus and how fast. A stimulus delayed is a stimulus denied. That is all that matters now for investments. Next black swan? Covid.
          Stimulus in January? Give me a break.

  9. Meanwhile, NIO keeps plowing ahead. Amazing stock play. I haven’t had the guts to hold large positions overnight, which has been the wrong play.

  10. The Hulbert Sentiment Index has jumped +15 percentage points in the past days to ~40%. So the excessive pessismism noted last week has essentially dissipated and is no longer a tailwind.

  11. So we have that Trump speech, a coronavirus mutation in Denmark and the risk of the senate switching to blue in runoff votes in January (not a political statement, but it collides with the current market narrative) Will we get another gap up?

    1. I think once the dealers normalize their hedge books and the election fever is over, exploding Covid-19 cases and no or limited stimulus in sight will temper the animal spirits in the market.

  12. Got the alert from Cam, breakaway momentum it is then! I saw Walter Deemer’s post yesterday stating three 80%+ up days this week so far. As yesterday I think we are just bull flagging here ahead of another push. Am wondering if we get the end of day ramp like most Friday’s as well, or if the uncertainty around how Trump will respond to the election being called will keep things subdued today into the weekend, with the push coming next week after we wake up on Monday with no major issues?

    1. No breakaway momentum signal yet. Just taking a shot and playing the odds right now.

      A measured bet, and certainly not all-in.

      1. yes, and sorry for my exuberant language, I realize precise language matters here and we have not gotten the actual signals, just odds that show us headed that way, that can absolutely reverse at any moment. Thank you Cam!

    2. Jarad-

      Thank you and Alex for the alert and repost – I was on the fence until I read it, and it resonated immediately.

      (a) Despite the successive gaps up this week, the SPY has only recovered last week’s decline. Possible double bottom with a higher low set last Friday?

      (b) Emerging markets at YTD highs.

      Taking a swing via VT (the world market) + starter positions in RYSPX (Rydex SPY) + VTIAX (Vanguard ex-US). For me that’s the safest way to play it.

      1. I’ve noticed that index funds work best during impulse buy waves. It’s almost impossible to guess which sectors will rise or fall, and trying to be cute usually ends up hurting me. It’s like spreading chips across the board when the biggest payoff comes from simply playing the pass line.

        1. I completely agree, watching the dollar swings from the conglomeration of all stocks is plenty exciting for me, even when tempered by a large ballast of BND. I don’t really bother with individual stocks – I have all of the ARK funds, which is about as concentrated a risk as I can handle and makes me feel like I am investing in something cool, though this is a just a few percent of my holdings (though psychologically it looms much larger than that!)

  13. Best of luck to us all Rxchen! I put more cash to work on that last dip (if it could even be called that) largely in line with your positioning actually – VTI has always been my generic ‘market holding’, just been investing in it for forever, but in addition picked up a good amount of VT for further diversification here. Price action today looks constructive for further gains, a few minutes to go but interesting I don’t see much profit taking after what would have been a very easy week to justify some. Let’s see where we close here…

  14. For those wondering what the big deal is about the Mink outbreak in Denmark, a new strain of COVID-19 was successfully contracted from Mink to Humans.

    This is really bad. If you can recall, the original disease was contracted from bats. Not much information on the new strain, but consensus among professionals is that all travelers from Denmark should isolate and quarantine.

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