Well we got a surprise to the upside on the NFP number today with the markets knee jerk reaction being a pop higher. Yesterday we discussed the need for a possible oversold bounce and it appears that’s exactly what we are getting. There were many market participants noting the advance in equities yesterday was done on low volume, which is true, but I also noticed some of the more ‘risk on’ pockets of the market making up some nice ground that had been lost over the previous few weeks.
Going into election Tuesday next week I wanted to put up a chart from Calculated Risk that shows the performance of the S&P 500 after election day going back to 1952. Bill McBride put this chart together on October 28th, and as you can see, there’s no real trend being displayed. Bill noted “the median increase from election day to the end of the year was 3.6%.”
This is only sightly better than the typical November and December total advance of around 2% (between 1928-2009). So yes, it appears there is a slight bump the election provides as the uncertainty traders face going into November 6th is washed away this but nothing to get overly excited about.
But what do things like look from here? The below chart is what looked interesting to me after the market closed yesterday, it’s a ratio of the S&P 500 and the Guggenheim Defensive Equity ETF, which shows us the relative performance of the large equity index and the defensive equity names. We can use this chart to determine if defensive stocks are leading or lagging the overall index. As you can see, the ratio has put itself in a nice flag pattern, which is bullish for equities if/when we get a breakout which will likely happen today as the market digests the positive payroll data and takes us higher.
Going forward we could likely see a continuation of the rally that began yesterday and possibly test the 1430 and 1460 resistance areas if bulls can maintain control. Earnings season is continuing to look ugly, but it seems the market’s main focus right now is the election. I haven’t lost my pessimism for equities but I must respect the charts that present themselves and although it still appears any continued advance we get in risky assets will be short-lived, there’s little reason to fight it…depending on your time frame.
I liken the current equity market to a boat slowly taking on water in the middle of the ocean….it won’t sink right away but if the holes aren’t plugged then there is little hope the boat will make it to safely to shore.
Source: The S&P 500 Change Following Presidential Elections (Calculated Risk)
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