11/9/2018 Weekly Update: The Election's Over Now What
by Zach Marsh on Nov 9, 2018
Weekly Recap
S&P 500 +2.13%
10 Year Treasury +0.20%
Gold -1.87%
Volatility -12%
Weekly Update: The Election is Over, Now What?
If the market had been suffering from the overhang of uncertainty of the midterm elections, we can now say: that’s out of the way. While it may be convenient to blame the October sell-off on the elections, it all may be coincidental. However, on Wednesday, the market did respond positively to the results, preferring gridlock to unchecked spending. That rally was short-lived, and over the course of the last two trading days, the S&P 500 gave back much of the gains achieved on Wednesday.
Only time will tell if the “Election Rally” was the final thrust higher in the relief rally that began October 30th. The test for the market was never if we could rally from the depths of the October “despair,” but rather how the market responds as it gives back hard fought ground achieved over the last two weeks. The S&P 500 Index’s first test will be 2750, followed then by 2700. If the market finds support at one of these two levels, it may resume its upward march. However, if it breaks through 2700 we could be on our way back to test the lows from October. Either way, I would expect choppy markets over the next couple weeks.
One thing that bodes well for the market is that the holiday season is typically a good time for the stocks. Since 1950, November and December represent the months with the highest average monthly returns. Should we get seasonal support for the market, the rally may carry the S&P back up close to the old high levels around 2900, or 4.5% higher than today’s prices.
Ultimately, my gut tells me, that the pick-up in volatility witnessed since February is part of a long-term “rounding off” period for the market. Think of market tops resembling hills rather than mountain peaks. We can get large spikes up and down, but when we assemble all of these “spikey” corrections together they form a rolling over pattern, much like a hill. Similar patterns emerged preceding the bear market in 2001 and 2008; violent corrections with recovering rallies, playing out over a number of months. In 2008, this “rounding off’ period began in August 2007 and lasted until the end of December 2007, before it began its concerted, precipitous drop of 53%. At the end of the tech bubble, the “rounding off” period lasted from about July 1999-February 2001, before yielding to the bear forces.
My own personal theory is that the length of the preceding bull market impacts the length of the topping out period. The longer, more sustained the bull market, the longer it takes to tip over. If the market makes it until March next year without a 20% correction it will mark its 10th anniversary. This is an extremely long bull market. Therefore, the “rounding off” period may last a little while longer.
Thanks for reading,
Zach and Dave
Calibrate Wealth
515-371-5316
https://www.calibratewm.com/blog-01
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