US stock market indexes rallied strongly this summer and have recently bumped up against resistance at their yearly highs set back in the spring, at around 13,250 in the Dow. So far, the markets have failed to break out to new highs for the year and have retreated (see last bar in the weekly chart below). As always there is a spirited debate as to what will happen next.
The “risk-on” bulls argue that stronger than expected retail sales in July are a sign that the economy will pick up this fall. Further, they argue, it is looking more likely that some kind of deal will be reached in Europe to rescue Spain’s banks. And the dollar is falling and gold is rising once again, which they claim should be good for stocks and commodities just ahead. This, they say, should enable the indexes to break out to new highs for the year with a nice rally to follow. Bulls are always optimistic.
The “risk-off” bears don’t see the economy picking up, nor do they believe that any real “fix” is in the works in Europe. They argue that the market is over-bought – too many investors are long and are looking for a place to step out of the market ahead of the very uncertain election outcome. A failure to break out to new highs now, they argue, should weigh on the market and lead to a nasty reversal to the downside prior to the election.
Obviously, I don’t know what will happen just ahead, but it will not surprise me whichever way the market moves at this supposedly key juncture. In fact, it wouldn’t surprise me if both the bull and bear camps will have reasons to declare victory in the next few weeks. How so?
Specifically, the major indexes could manage to rise to new highs for the year, maybe even in the next couple of weeks. If they do, it would signal a technical rally just ahead that could chase many of the bears to the sidelines. But that rally, assuming it occurs, could be disappointing especially in light of the current low trading volume – not unusual for late August when many players are on vacation.
If so, then another downside correction could well begin, thus validating both the bulls and the bears in the next few weeks or months. But regardless of what happens in the near-term, I happen to agree with those who believe that a lot of formerly “risk-on” investors will be looking to reduce exposure (i.e. – get out or reduce positions) before the election on November 6.
Yes, I know that some cynical investors and traders don’t believe it matters much who wins the election. But I happen to believe that this year’s presidential election is one of the most critical in my adult lifetime, and it could have major implications in the equity markets next year and beyond. I also think a majority of investors and traders agree with me.
If I’m right, a lot of people will be looking to reduce exposure before the election, and that could lead to another downside correction over the next 74 days until the election. How big a correction remains to be seen.
I’m just glad that all of my money in the stock and bond markets is managed by professionals who take an active approach to managing the risks we face. Some have the ability to move out of the market into the safety of cash (money market) should conditions change – or actually go net “short,” using “inverse” funds if a new downward trend unfolds.
Unfortunately, most investors are still enamored with Wall Street’s “buy-and-hold” mantra and will get clobbered yet once again if the markets turn south before the election, which is a real possibility if it looks like the current occupant of the White House will be re-elected for a second term – in my humble opinion.
With that said, I should probably leave it there.
Have a great weekend everyone!
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