The Morning After the Election

By Lawrence G. McMillan

Trump has won, but the world is not coming to an end.  Futures plunged overnight – at one point touching limit down = 107 points!   But prices have completely recovered, and futures were trading on the plus side just moments ago.  Prices are still swinging around rather rapidly, but in general volatility is deceasing, and more buy signals are coming to fruition.

$SPX bar charts that show overnight prices are going to look a lot different than charts that only show “daytime” prices. Is the overnight futures low at 2028 valid support? Hard to say.  In any case, $SPX may have some resistance at yesterday’s high (2146),   The down trend line on the $SPX chart runs about at that level, so a close above 2150-2160 would be a positive as far as the $SPX chart is concerned.

Prior to the election, put buying was still quite heavy, so the equity-only put-call ratios continue to race higher, and thus they remain on sell signals.  Likewise, the Total ratio continues to rise, but it is in oversold territory, and a buy signal will be forthcoming in the relatively near future.

Breadth was positive yesterday, and so both breadth oscillators have moved to buy signals.  This morning, breadth is negative, but these buy signals will probably weather that storm unless things turn much uglier later today.

Volatility indices were slightly higher yesterday, but are getting crushed today. $VXST is down 34%, or 8.7 points, this morning. $VIX is nearing 15.  Ironically, $VXST is still higher than $VIX, so the “$VXST crossover” buy signal is not in place yet. $VIX has dipped below $VXV, though, and so the final conditional buy signal that we have outlined may well occur at today’s close – if $VIX closes below $VXV.

A lot of crazy action is taking place.  In short, this played out in a very similar manner to Brexit: the polls showed Brits would vote to stay (or Hillary Clinton would win), and the markets had a huge rally the day before the vote. Then when the vote went the other way, stock prices plunged sharply but only for a brief period of time.  Apparently, a similar vote is coming up in Italy soon.  

One last point: after Reagan was elected in 1980, stock prices fell in a slow bear market for nearly two years – until August of 1982, when interest rates finally began to drop.  Then, from there to the top in 1987, a huge rally took place in stocks.  Don’t count out something similar now, although things happen much more quickly now than they did then.

In summary, our indicators are turning bullish, and we will follow suit.  The put-call ratios will probably be the last to acquiesce, after which it would be a very positive environment, assuming that $SPX has broken through the 2150-2160 levels as noted above.

This commentary was featured in this morning's edition of The Daily Strategist. Sign up for a free 7-day trial today.