It’s been just on one week since our last S&P500 update. Partly that’s because the S&P500 has been kind enough to follow the roadmap we laid out in our last update “providing the S&P500 remains on a closing basis above the 2610/2590 support region, my preferred scenario is for the S&P500 to recover a portion of its recent losses”. The second aspect was a desire to provide an update after the outcome of the U.S midterms elections was known, thereby providing one less political pothole for the market and traders to negotiate into year end.
Firstly, to recap the results and implications of the U.S. midterm elections. The Democrats won the House of Representatives; however, the Republicans were able to retain control of the senate with a slightly stronger margin. The strong rally in U.S. equity market overnight which included a 2.0% rally in the S&P500 and 3.0% gain for the Nasdaq indicates the split congress was a market friendly outcome. This is because it limits the ability of the Democrats to wind back last year’s Republican tax reforms and drive impeachment proceedings, both potential sources of instability. On the other hand, the result also ensures President Trump lacks a voter mandate to pursue some of his more contentious policies including a further intensification of the trade war against China.
Returning to the markets, the evidence is building that the S&P500 can resume the trend from earlier this year of outperforming other global stock markets and our reasons are as follows.
Share buybacks in the U.S., resumed this week post the conclusion of the bulk of Q3 corporate earnings reports. Share buybacks serve to underpin demand for equity markets given companies repurchase their own stock. November is historically the most active month of the year for share buybacks and its worth noting 2018 is shaping up as the most active year in history for share buybacks. The resumption of share buybacks comes on top of a strong seasonal trend for U.S equity markets to rally into year end, i.e. the Santa Clause rally.
Also supporting the idea that U.S equities can resume their outperformance after their fall in October is the tendency for U.S. stock markets to make gains after the U.S midterms. In fact, according to Risk Hedge: “Since 1946, there have been 18 midterm elections. Stocks were higher 12 months after every single one. Every single one.” Not only that “Since 1946, stocks have risen an average of 17% in the year after a midterm”. Admittedly 18 is not a huge sample size, however the 100% success rate does capture the attention. Furthermore, we note that positioning is much cleaner in the U.S. equity futures space after the October shake out, which saw long positions from asset managers significantly reduced.
Finally, the clean break and acceleration above the 200-day moving average at 2765 overnight does suggest the S&P500 can consolidate its gains in the near term, before a test of the 2824.25 high of 17 Oct. A break and close above 2824.25 would then open the way for a deeper recovery towards the 78.6% fib retracement at 2873.5.
From here though it is unlikely to be one-way traffic and we would be looking for signs of exhaustion to indicate that a retracement has begun.
Source Tradingview. The figures stated are as of the 8th of November 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.
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