The US elections have finally arrived.
I have no interest trying to add to the reams of commentary on the US election outcome. I think we all know that not much will change either way.
The American government (Republican or Democrat) will continue to spend more money than it can afford to and will pay for it with printed dollars. If any cans need kicking they will be booted by both parties until they can be kicked no more.
But what about the idea that the stock market does better depending on which party wins the White House? If you want to trade stocks on the back of the US election outcome then stop.
You should keep reading today’s Money Morning before you punt your retirement savings using that strategy…
The fact is there is no clear correlation between stock market returns and who is in the White House. You can see that in the chart below from Alliance Bernstein:
Do Stocks Care Who’s in the White House?
But that’s not to say the US election won’t trigger a market reaction. It’s just that it won’t matter who wins.
I think the risk is to the downside after the US election, because the stock market has been pumped up by a string of better than expected data that I believe was massaged higher in order to help Obama’s prospects. That means we may see some mean reversion in the data over the next month or so.
So as far as I’m concerned the US election is a bit of a fizzer in relation to stock market direction. I’m glad it’s now almost out of the way so that we can focus on other things, such as the real canary in the coal mine — the euro.
The euro has turned back down over the past few days. The movements in the Euro are often a good proxy for the risk on/risk off trade. We have seen a strong rally in the Euro since mid-July from US$1.20 to nearly $1.32. The rally is starting to look a little tired now, having retested the downtrend from the last couple of years (see chart below).
The intermediate trend has also shifted to the downside in the last week, when the 10 day moving average closed below the 35 day moving average. There is now a fairly good chance we could see the euro trending back down towards the lows at US$1.20 over the next few months. If that occurs then we may also see equity markets coming under pressure.
The earnings season that we just witnessed in the States was certainly nothing to write home about. Many companies were massaging their future revenue projections down after seeing their top line growth fading or negative.
QE3 (money printing) has come and gone and it’s quite clear that equity markets are no longer screaming higher at the mention of money printing. The yields on stocks are now so low that you have to wonder just what value remains in buying the stock market at these levels.
There are plenty of analysts pointing at the low P/E (price to earnings) ratios of stocks currently, but the big question is whether the current projections for earnings are valid. With falling revenue projections as mentioned above I think earnings will be under pressure going forward.
On the local front, the Aussie dollar reacted positively to the lack of an interest rate cut yesterday. But as I mentioned last week there is a growing divergence between the Aussie dollar and the Continuous Commodity Index (CCI).
Commodity prices have fallen quite sharply lately but the AUDUSD is ignoring the price action. The high yields in Australia have certainly helped to prop up the Aussie dollar, but I think it’s only a matter of time until the weakness in commodities is reflected in our currency. My projections are that we will see the AUDUSD heading towards the mid-90′s over the next three to six months.
We have seen a big rally in stock markets world-wide since European Central Bank president Mario Draghi made his ‘whatever it takes’ comments about saving the euro. The usual cycle during the crisis has been for stock markets to rally on the back of hopes and promises and then slowly wake up to the reality that the promises made haven’t fixed a damn thing.
Then markets turn back down as reality dawns. When the sell-off becomes aggressive enough the central bankers and politicians are forced to wheel out another set of promises and bailouts. Then the stock markets turn back up in hope that this time it will be different.
My bet is that we’re getting fairly close to the inflection point where markets wake up to the fact that the crisis isn’t actually over. The buying pressure is still present at the moment, but the last few weeks’ price action has given a hint that the rally is getting long in the tooth.
So, what does this mean for stock traders?
Look out for a sharp sell-off in the S+P 500 once it snaps beneath the 1390-1400 area, which is currently providing strong support. It will only take one nasty night to break through and then we will see a distinct shift in momentum.
Murray Dawes
Slipstream Trader
From the Port Phillip Publishing Library
Special Report: After the Bust
Daily Reckoning:
Why Gold Hasn’t Risen
Money Morning:
A Non-Mainstream Guide to the US Presidential Election
Pursuit of Happiness:
Seven Questions to Answer Before You Retire
Forget the US Election, This Stock Market Event is the One to Watch For
