Question of the Day: Are Markets Waiting to Fade the Election Rally?

There is a general trader view to let the election come, then fade the market. This is no more profound than "buy the rumor, sell the news." More likely, the market stays a bit longer, waiting for the Fed's QE2 announcement the day after, since there is a well-known FOMC pattern: the market usually rises into a FOMC pronouncement, then falls. The question du jour is, does the market follow a simlar pattern during mid-term elections?

Bespoke provides a wealth of data for elections and markets, worthy of baseball-statistician-turned-political-poll-watcher Nate Silver and his 538.com. Stocks normally do well on election day and the days after: a gain of 53 bp (0.53%) since 1970. Before 1970 the market was closed on election day, and looking at the day after as a surrogate, markets have been up 28 bp since 1900, vs. the average of 3 bp for all trading days. Over election week the mid-term election gain has been almost 1%:

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The fundamentalist point of view is that QE2 will not do much to help the economy, especially when the expected Tea Party victory will turn fiscal policy towards austerity. Trader's Narrative reports that the word from the pits in Chicago is that the average response from the primary dealers is to expect $930B of QE, but very few expect anything beyond $500B to be announced, setting up the market for a missed expectation and a drop Wed.

The technical point of view is that the market is nearing a top of sorts, even from the bulls such as Carl Futia. The ever bearish STU sees the S&P in the final throes of an ending diagonal, which requires one more sharp move up - perhaps the election day rally. This structure limits the rally to below Sp1209 (or wave 3 would be shorter than wave 5). Their alt count is a running triangle (which has a large second leg) that also means a sharp rally to come. (The current waves do not meet Neely's definition of a running triangle, since leg D failed to finish above leg B.) Normally the thrust out of a running triangle goes at least the widest part of the triangle, which would target 1214.

Under Fractal Finance we have just had a double top at 1196, and a triple top would normally be expected before a change of trend. This would be consistent with an election rally that holds below 1200 and fades. If instead we break and hold above 1196, Fractal Finance would remain bullish, as it has been since mid-Sept.

Another technical issue is an increasing divergence among the leading sectors, typical of a top. Tech stocks have been leading, and quite strongly, having run from a one-year low in relative strength (not price) to a one-year high in just two months (chart courtesy Bespoke):

The fomer leading sector of the Hope Rally, however, financial stocks, have lagged badly in the same period, and are on the verge of breaking to a new one-year low as well as breaking below a support level at 42.5 (chart courtesy EWTrends):

The irony of this divergence is that QE2 is largely designed to shore up the banks, especially in the face of a pending foreclosure-gate disaster. The banks manage the primary dealers of Treasuries, and would be beneficiaries of a concerted program of QE. They could use it to continue to swap toxic stuff out and good stuff in. For some reason the expectations of QE are not rallying the prime beneficiaries. The risk of a second wave of bank issues is trumping the QE bailout. 

Comments

[Account Deleted]

S&P 500 Analysis after closing bell: CLICK HERE

[MT]

http://i366.photobucket.com/albums/oo106/mtcharts/vix.png

[shanky]

Well done as always.

[Wave rust]

QE 2.0 is about to mess up those averages, but what's a trillion between a handful of traders.

Is QE 2.0 just filling up the Hindenburg for a Veterans Day "surprise landing"?

How much is a trillion? It's relative.

http://www.dailycognition.com/index.php/2009/03/25/what-1-trillion-dollars-looks-like-in-dollar-bills.html

That is a good perspective. You can send that oicture to your grandchild and circle one of those pallets and say, "this one is yours. You owe this one."

wave rust

[Neo Tzu]

How Bradley dates and the 10 week cycle may play out...

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=56216457

[Neo Tzu]

Clif High of Half Past Human suggests large tipping point hits November 8-11, 2010....

http://cosmicgnostic.com/node/1004

[Whitebear]

Tipping point??? Go back to a year ago when he pronounced how Oct 25, 2009 would be the tipping point of the market, the beginning of P3, the end of the sucker's rally since 2009 March. We all know how it ends.

[Neo Tzu]

Ive never heard Clif High mention he was an Elliottwave technician so I doubt he ever used the term P3

Oct. 25, 2009 did produce a top, a 400 point Dow selloff and a 10 month sideways move however.

Clif High is a type of weatherman....does a missed weekend snow forecast from your local TV weatherman invalidate meteorology?......it sure doesn't......near misses also dont invalidate the High-Ure chaos science technology which has had direct hits.

[Neo Tzu]

Mathematics of Voting

It is more likely that you will die in a car crash on the way to the voting booth than it is that your vote will make any difference in any election...

Video here:
http://www.youtube.com/watch?v=21uJUZuIcEo&feature=player_embedded

[Ron]

There is no control, Neo Tzu, for a world where someone decides not to vote.

The Clif stuff, like Idiott Wave, is religion, not science. I like religion but I don't like using it to predict the future.

[Account Deleted]

S&P 500 Futures before opening bell: CLICK HERE

[MHD]

Yelnick.... does Tony C. wave count still have problems that makes you think his wave counts can't possibly be right? It does feel like this uptrend will never end and maybe he's right about wave 3 up is occurring and not wave 2 up with wave 3 down to follow.
Any new thoughts?

[yelnick]

MHD, the problems remain: there is no extended wave in the three purported impulses, and no alternation in the corrective waves. 

From my earlier comment regarding no extended wave (1.6x longer):
wave 1 went from 667 to 956 or 289 ptswave 3 went from 869 to 1150 or 281 ptswave 5 went from 1045 to 1220 or 175 pts 

From my earlier comment on no alternation:
alternation can be across five dimensions: distance, time, intricacy, type (flat or sharp), or percent retracewave 2 went from 956 to 869 in a 4 week simple zigzag that retraced 30%wave 4 went from 1150 to 1045 in a 3 week simple zigzag that retraced 38% was wave 2 a flat that started in mid-May and alternates? No, that the C wave broke as a zigzag not a "5"

I had a dialog online with Tony over his earlier count, where his original impulse count had some odd waves (ie the inside wave bigger than the outside), but he has since modified away from that 

So what is this? Two reasonable possibilities as to a corrective wave:
wave 2 triple zigzag that should be topping about now (at a retest of the April highs)big X wave between a large flat (2000-2009) and the second wave of the Great Recession, upcoming

The X wave has two counts:
triple correction since Mar09 that is in its third pattern, a flat since Feb 2010 or maybe a triangle, ending soonthe drop since the April high is a wave B of a larger zigzag that will power up to 1300 levels by 2012

[JT]

Bears are totally underwater again.
Just watch the FIREWORKS as SPX 1200 gets taken out later this week!

[PSA Video]

Volume keeps getting lower and lower - a giant trap door sinkhole is about to open up and trap the bulls

-> http://www.youtube.com/watch?v=xxm8-7VnIcs

[MT]

Europe ( CAC, DAX and FTSE ) is still in correction. SPX could end W3 or a B wave. Coming correction marks it.

http://i366.photobucket.com/albums/oo106/mtcharts/CACf.png