The overall market jumped sharply higher on Wednesday after the results of the midterm election results were known. Some analysts were speculating that the jump was due to the Republicans retaining control of the Senate while others were speculating it is because the Democrats took control of the House. Personally, I think the reason for the big jump was simply because the election was over and the result was known. It removed one big uncertainty for investors—period.
While that uncertainty is gone, there are still plenty of other issues facing the market. As I write this, the FOMC is holding its November meeting and the results will be released later today. The expectations are for the rates to be left where they are for now with another 0.25% hike in December. Fed Funds futures show a 92.8% probability of rates staying where they are this month and a 75% chance of a hike in December.
Even if the Fed makes the moves investors and analysts expect, I am still watching the 10-year treasury yield and it is getting closer to hitting the target level that concerns me. I talked about how 2% jumps in the 10-year yield have preceded corrections in the market and the two bear markets of this century in an article last month.
The red line is at 3.336% and that represents a 2% jump from the low in July ’16. After peaking at 3.248 in early October, the yield fell in two out of three weeks. But the yield jumped last week and is up again this week and it is closing in on the key level again.
Another uncertainty that didn’t go away after the election is the ongoing trade war with China. President Trump has been addressing this issue on his own and Congress hasn’t been involved in the process at all. I personally thought we would see a resolution to the dispute before the midterms, but that didn’t happen.
Both sides have made statements that they are willing to negotiate, and both have made statements that they will not cave to pressure from the other side. Meanwhile, stocks in both countries rallied in the first part of November, but they still have resistance points to deal with if they are to continue climbing.
The S&P 500 jumped 2.12% on Wednesday and that was one of the best days of trading in the last year. However, the index still faces resistance at its 50-day moving average. The chart below shows how the index has moved over the last 15 months. We see that the market rallied for five months from September ’17 through the end of January. We then had a three-month period where the market trended lower and that was followed by another 5-month trend higher.
Since the beginning of October, the index has been trending lower with a bounce back over the last two weeks. If you believe in symmetry in the market, the decline from the beginning of October has only been a month and a half long so far and would suggest the trend lower would last through the end of December at the very least.
The Nasdaq and the Russell 2000 are also both below their 50-day moving averages and will likely face a certain amount of resistance at those trendlines. The Dow is above its 50-day after the jump yesterday. The Dow Jones Transportation index is still below its 50-day and I wrote about how the TRAN and the Russell were possible prediction tools for the rest of the market a few weeks ago.
The bottom line is very little has changed for the market with the midterm elections. The same concerns that were there before the election are still there now. Consumer confidence is still high, the trade war with China hasn’t been resolved, and interest rates are still rising. The indicators that have caused me to be cautious for the last few months are still there.