September Low is Part of Longer Term Consolidation

As the election countdown approaches, the stark contrast in the opponents and uncertainty of a clear quick outcome have escalated. Stocks peaked September 2nd and have been in a corrective mode throughout much of September. Our  September 2nd ExecSpec letter indicated a possible immediate top with a drop into mid to late September to the SP 3200 to 3400 zone as outlined below. While a broader trading range has been our outlook into the Lame Duck  post election period, major oversold stock index levels have not appeared in the September swoon. Normally each year we see several notable oversold and overbought indications among our primary indicators (below). The pandemic crash in March and stimulus driven rebound since have created record extremes that have altered typical behavioral responses. Overbought conditions are lasting longer and typical strong oversold metrics are failing to be reached. Some of our benchmark technical markers of overbought and oversold shown here continue to struggle to reach unanimous extremes since the pandemic panic lows, although the general time window for future market action has occurred much as expected. All time record Bullish bets in Call option buying relative to Bearish Put buying in August favored a decline in September toward 3200 in the SP 500 Index. While sentiment did not hit an oversold condition in September, a short term low appears to be in with a likely continued trading range until the election. With post November 3rd election volatility already being priced in by investors expecting a delayed and contentious Presidential outcome, stock prices may be more news sensitive than usual. If renewed equity market plunges occur in the November to January time frame, they should be viewed as buying opportunities regardless of a Trump or Biden victory due to (1) the federal reserve promise of rock bottom interest rates and sky high money creation, (2) fiscal stimulus and (3) promises of infrastructure spending. Our Central Bank and even our politicians can’t afford to let the economy backslide until a higher “annual” GDP growth plateau is achieved >2%.

On the daily comments from our short term updates we had the rare appearance of an old Norm Fosback indicator that triggered a final down wave on September 21st. The Three Tests and a Tumble rule we use occurs when a clear price support is tested 3 times, separated by rallies and upon a 4th test we often see prices plunge through support in a final leg of a correction. Along with the mid to late September SP 3200 to 3400 projection we had already forecast at the start of the month, it was logical to then expect at least a strong bounce from the recent lows, even though lower prices were needed for us to achieve normal oversold conditions. Resistance for the current 2 day rally should be in the low 3400’s basis the December SP if we are to remain in a sideways consolidation period through year end. 

Another timing aspect that supports the recent market lows is the symmetry with the June correction we expected to occur in September. This behavioral symmetry indicated that investors should expect a low in the September 21 to 24th time frame. A move back to the mid to upper 3400’s in not in our short term outlook, but it would would imply that the SP test the upper 3500’s. After this trading range rebound fades, the current downside risk into Thanksgiving is a brief spike under SP 3100.

Several times we have pointed to an interesting relationship of stock prices and poll numbers when the election is about 3 months away. We have been using the Real Clear Politics average polling in battleground swing states for 2020 vs 2016 (below). When the chart is in the Blue zone it means Biden is polling better than Hillary vs Trump on the same date in 2016. When in the red zone it means that Trump is outperforming Biden relative to Hillary in 2016. Given Trump’s 2016 victory in these key states leading to a national win, it’s logical a Trump victory surprise is likely if swing state polls show Trump doing better against Biden than Hillary. While linking stock market action to changing poll numbers is far from a science, we note that from late July to early September when Trump’s relative polls were improving, the stock market accelerated higher without pausing. As the survey trends shifted to Biden in early September, stock prices fell. Biden’s numbers may again be fading just when the stock market bottomed on the 23rd. It will be interesting to see how the first Presidential debate affects polls and possibly stocks in the critical September window. Should the assumption be made that stock investors prefer Trump, perhaps due to Biden’s promise of higher capital gains taxes, this may not be impactful to the economy and equities longer term. A Biden victory increases the odds of higher taxes, but also much higher odds of infrastructure and welfare spending that could ignite the cyclical, industrial and value sectors of the stock market that have been left in the dust by big tech. Unless stock indices are hitting new highs near the November 3rd election, we would look for buying opportunities sell offs over uncertain Presidential and Senate results and the court battles that may ensue.




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