We are not out of the woods yet with the political headlines over the next two weeks with three presidential debates.
We are entering the sixth week of the most volatile six weeks of the year only this year we have the election uncertainty to give us two additional weeks of potential volatility.
Since 1980, the week after the first presidential debate has been negative 83% of the time. The average decline is -1.8% for the Dow and -1.5% for the S&P. The Monday night debate is going to have about 100 million viewers, or the equivalent of a Super Bowl only with no commercials.
The next two debates are the following Tuesday and Sunday on October 4th and 9th. If the first debate does not end with a clear winner the next two debates will be even more important. The market does not like uncertainty. Portfolio managers would rather have a clear leader so they can restructure their portfolios ahead of the event.
For instance if Clinton were to win the first debate convincingly the energy and biotech sectors would crash and gun manufacturers would soar. If Trump appears to be the clear winner, the energy sector will surge along with defense and infrastructure companies.
We managed to get past the Bank of Japan's monetary policy update and the Fed's decision to wait until December to raise rates. Now we have to get past the debates. Fortunately, the debate on the 9th will still give portfolio managers time to buy stocks in the last two weeks of October and beat their fiscal year end on October 31st. Assuming the street likes the candidate that is ahead on October 10th, the last three weeks of October could be strong because of pent up buying.
The S&P rebounded on post Fed short covering to resistance at 2,175 and right in the middle of the prior consolidation pattern. Overhead resistance to 2,193 is strong because of the weeks we spent at that level. If the S&P were do dip back below support at 2,150 is would be negative for market sentiment.
The Dow has a similar pattern with the index falling back on Friday to critical support at 18,250. If it falls back into that sell off congestion, we could see a retest of the lows at 18,000. That would also be negative for sentiment and a break below 18,000 could quickly turn ugly. While I am not expecting it we do need to be prepared for every eventuality.
The Nasdaq was the strongest index last week with two consecutive days of new highs. Friday's decline on the Apple and Facebook news is still in new high territory. As long as the Nasdaq does not fall back below 4,800 the other indexes should eventually heal. Apple's problems are likely to linger and the impact on the chip sector could be severe.
The small cap S&P-600 almost made a new high and was the second strongest index. Unfortunately, there are a lot of energy, biotech and chip stocks in the index so it could see some extreme volatility after the debate.
We have a very heavy economic calendar next week with 11 Fed speeches and 2 speeches from Janet Yellen. There were 3 dissenters to the Fed decision last week and that was only the third time in the last 30 years that has happened. We can expect the speakers next week to be stressing their point of view in an attempt to sway opinions. We could have some ugly headlines. However, December is so far away that investors may ignore any hawkish comments.
S&P futures are down -5 as I type this and all the Asian indexes are negative. It would appear we are headed for a negative open but there is still a lot of darkness before the dawn. The futures can change in an instant given the proper headline.
I would continue to add stocks to your shopping list with entry points at various support points below the current level. We have a good chance of seeing another decline in the next two weeks if Monday's debate does not end well.
Send Jim an email