Momentum Monday - The Election Has Brought Volatility

Many say that Presidential elections are irrelevant in the long term. The reality is that they can have a significant impact in the short-term. It is not usually to see a 5% daily move in either direction depending on how the market reacts. By definition, markets are forward-looking and try to discount any major event that could happen in the next six to nine months. Wall Street is convinced that the market has discounted a Republican win. What you should ask yourself is – are we going to see a “buy the rumor, sell the news event” if this actually happens? And what if it doesn’t happen? Obviously, we don’t need to guess. We can make our moves after the elections.

To make things even spicier, the next FOMC meeting is next week. The Fed is expected to cut interest rates by 25bps. Anything different is probably not priced and is likely to lead to a significant reaction. Keep in mind that after the last rate cut in September, rates have gone straight up. For me, this means that another decisive 50bps cut might lead to a reversal in rates. If this happens then small caps, regional banks, biotechs, solar, and housing-related stocks are likely to outperform. I will wait for the market reaction first.

In the meantime, we are still in the midst of earnings season which always brings an extra level of volatility. META, MSFT, and AAPL sold off slightly after their earnings last week. GOOGL gapped up but it gave up its entire gap. AMZN also gapped up near its all-time highs around $200 where it has stalled for now. Closing above 200 can potentially lead to a rally to 220 in November. One of the strongest Mag 7 stocks after earnings this season is TSLA. We saw a significant 2-day rally followed by a 5-day pullback. Let’s see if the earnings gap holds here. It seems the upside gaps in strong stocks have been used to take profits as there hasn’t been much follow-through past the first and second day after earnings.