Stocks May Race To ATH Ahead Of The Blue Wave That May Never Come
Stocks broke out and are likely to rise even higher as optimism builds about a blue wave sweeping over the market.

Stocks May Race To ATH Ahead Of The Blue Wave That May Never Come

October 9, 2020

STOCKS – NONE

Macro – SPY, RSP

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Stocks rose sharply on Friday, with the S&P 500 rising by about 90 basis points and the Nasdaq 100 increasing by about 1.5%. It seems the S&P 500 and the Nasdaq 100 have both broken out, clearing critical levels of resistance and are likely to continue to head higher into the election. My expectations are for the S&P 500 to rise back to its recent highs around 3,600 and QQQ Nasdaq 100 ETF to rise back to $300. At the current trajectory, we should get there by the beginning of November.

The President appears to be making his best attempt to keep the market afloat by talking about Congress’s potential stimulus deals. Although I believe it is unlikely for the Senate to pass a stimulus deal, I think as long as the President keeps talking about it and the House of Representatives continue to engage. It will give the market an optimistic view that a deal can be done. As long as that optimistic view remains, the market will continue to rise in hopes of getting another large stimulus to help boost the economy and, therefore, boost earnings.

S&P 500 (SPY)

The S&P 500 broke above a critical level of resistance today, around 3,470. It’s likely to result in the S&P 500 climbing back and filling the gap at about 3,590. We can also see that the relative strength index is breaking out, rising above its own resistance. Clearly, bullish momentum is returning to the market. Additionally, the advance-decline line has broken out to new highs indicating that breath has improved tremendously since August. It suggests that the market is seeing broader participation.

Even the equal weight ETF RSP is very close to a breakout of its own and potential gap fill that could bring it back to its own highs. This appears to be a very bullish trend, suggesting that we will likely see the rally continue over the next few weeks.

Due to the election, it is hard to forecast anything that happens after that cycle. Therefore, right now, I’m focusing on the next three weeks. I will worry about what happens after as we get closer to or after the election. I am currently trying to determine who I believe will win the election. Based on that, I am trying to determine the potential impacts of the equity market and going through different scenarios with my subscribers and Reading the Markets. (Premium content – Trump And Biden May Actually Be Tied)

My current scenarios suggest that the Presidential race is much closer than what the polls are giving credit. In fact, many of the polls make the same mistakes made in 2016, under-sampling segments of the population; this under-sampling creates massive distortions in the lead that Joe Biden has over President Trump. It could mean that the market will be in for a big surprise when the election is over. Based on some of my early findings, it appears that President Trump and Joe Biden are virtually tied in many of the key states that count the most, and even in some of the national polls, when you re-randomize. Re-randomizing, the polls for what real voter election turnouts tend to be, makes more sense. Historically, most of my work shows that a wide margin has oversampled democrats in most polls over Republicans. This is important because we know from the past elections that people typically vote for their party. Therefore oversampling of one group and under-sampling of the other makes it appear that Joe Biden is winning by a much larger percentage than may actually be the case, especially if the voter turns out to be what it was in 2016.

The market is now assuming a blue wave will occur across the country, resulting in the Democrats controlling the House, Senate, and the Presidency, resulting in stimulus far bigger than what is currently being discussed. I don’t see that happening yet, and I believe that after the election, the market may be in for a significant decline, should it be disappointed by the outcome.

That’s all there is going to be for tonight, have a great weekend

-Mike

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