Thursday, November 03, 2016

Investors Positioning For The Worst In U.S. Election Outcome

In five days the U.S. election will be behind us, absent a contested outcome. Through yesterday's close, the S&P 500 Index has been down seven consecutive days putting the Index down 4.2% from its August 15 close. This weakness in the markets is now showing up in technical indicators like the CBOE Equity Put/Call ratio. At the close Wednesday, the equity put/call ratio was reported at .99 which is an indication of extreme equity market bearishness from which rallies tend to occur.

Other technical market indicators are also indicating a market that is oversold or at least near oversold. As can be seen in the below market chart, the stochastic and money flow indicators are at levels that have coincided with an oversold market.

And lastly, the percentage of S&P 500 stocks trading above their 50 day moving average stands at 27%.

In summary, investors seem to be positioned for a market that reacts negatively to the election outcome. As the second chart above shows, the market's reaction to the BREXIT vote was certainly negative; however, the sharp decline was fully recovered within a week of the BREXIT results. And from a fundamental perspective, the earnings recession seems to be coming to an end with third quarter earnings now tracking to be up 2.9% with 76% of S&P 500 companies already having reported results. With company fundamentals/earnings turning more favorable and equity shocks like investors are anticipating with the election outcome, the current pullback is more likely to be only temporary as we noted in our BREXIT commentary in June.

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