It took a couple of days, but Wall Street reacted as we expected it to as the indexes were overbought. In case you missed it, this is what we wrote last week:
“The stock market is primed for profit taking. It’s that simple… the NASDAQ and S&P 500 are in overbought territory. The last time the two indexes had relative strength readings (RSI) above 70, prices fell about 5% in short order. As we type, the NASDAQ is sporting a 75.73 RSI and 76.93 for the S&P. As a rule of thumb, more than 70 is too high (sell) and less than 30 is too low (buy).”
That arrived in your inbox last Tuesday, stocks started their fall on Thursday and are down about 5% as of this Tuesday’s close.
We aren’t going to say that’s it for selling, because only the market knows where the knife stops falling; however, 10,900ish might be as low as the NASDAQ goes for a while. The index finished its slide at 10,847.59 which is roughly the tech-heavy index’s 50-day moving average of 10,881.58 and climbing.
From experience, it’s not uncommon for selling to subside in close proximity of the 50-day benchmark during strong uptrends. Stocks could vacillate in the next day or two on uncertain ground before picking their next step. Ideally, we’d like to see the market open down triple digits, selling taking prices lower and then buying kick in and turn the red start into a green finish.
Under normal circumstances, that’s a tell-tale “it’s safe to get back in the water” signal that buyers are back. Overall, it’s our educated guesstimate that the worst of the downdraft is over but it’s not prudent to “buy the dip” until we have some confirmation that odds favor prices moving higher.
We aren’t there yet.
Normally, we’d highlight a sector exchange traded fund (ETF) and a stock here but will refrain until our models and analysis lead us to believe bulls are back. Instead, we will opt for some insight on what investors can expect from the stock market from here to election day.
We looked back at the last 10 presidential elections to see how stocks performed from Labor Day to election day, from Labor Day to year end in election years, from election day to year end and if the S&P 500 predicts the winner.
Here’s what we found:
Seven of the last 10 election cycles, stock rose between Labor Day and election day by an average of 3.17%. The three down years lost an average of 10.92% (more on the three down years shortly.)
Six of the last 10 years stocks were higher at the end of the year than they were on Labor Day, up and average of 8.01%. The down four trimmed off an average of 11.14%.
Six of the last 10 elections years saw prices rise after election day by the close of the year, typically gaining 4.86% while dropping a similar 4.64% in the four sour years.
If you are a President Trump fan, you are going to want stocks to be higher on election day than they opened after Labor Day. If you are rooting for ex-Vice President Biden, then you are pulling for prices to drop by election day (let’s keep the loses limited – Okay?).
The last three times the S&P 500 fell from Labor Day to election day, the party in the White House, Republican and Trump in this case, lost. If prices are higher when the market opens on November 3rd, odds are President Trump is re-elected.