The upside breakout over 3430 that began last week extended into a buying spree this week. A modest correction then ensued. This pullback seems normal, so far, and the bullish case is still intact as long as $SPX remains above 3400.
The equity-only put-call ratios are grudgingly bullish, as these ratios have turned down again even though they are still at very low levels on their charts. It feels like more of a "sell cancel" than a "buy."
This is a subject that we wrote about in the July 31st, 2020, issue. Cumulative Advance-Decline Volume Breadth (CVB) is determined by 1) calculating the daily difference between volume on advancing issues minus volume on declining issues, and then 2) keeping a running sum of that daily total. We pointed out that there have been a few times in the past where this CVB made a new all-time high while $SPX had yet to do so. Every time, $SPX followed along to a new high of its own.
We have previously seen that $VIX has a slightly different pattern in election years than in most years. We wrote about this in the September 4th issue, so please refer to that article for more detail on this. The graph of $VIX in election years is reprinted on the right. The wild market action of 2020 caused point “A” to be much higher than it previously was (maybe we should be using the median here, too). The low point of $VIX after that occurs just about exactly on the first of September, and 2020 matches up with that pretty well. From there, $VIX rises sharply into October, holding onto its high levels until the election takes place and then begins to back off. It remains to be seen if that scenario will play out this year.
Two weeks ago, it appeared that the bears had control of the market. But if they did, they fumbled it badly. Beginning with a modest oversold rally on September 24th, the broad market has staged a strong rally, backed by some of the strongest breadth we've seen in while. Now, $SPX has broken out over what had been multiple resistance in the 3425-3430 area. That has changed the $SPX chart's designation to "bullish."
$SPX In Election Years
We have $SPX data going back to 1950, so it wasn’t too difficult to construct the following Table, which shows the performance of the market (as measured by $SPX) each election year, from the last trading day in July through the day prior to Election Day. It should be noted that the stock market was closed on Election Day until 1984 – a rare bit of trivia probably not known by most younger traders.
There are a lot of cross-current buffeting this market currently, and another major one has been added: President Trump has tested positive for the corona virus. This raises all sorts of uncertainty about governance (will the Vice President have to take over?) and the election. There is no way to know how this is going to play out. All we do know is that the S&P futures reacted only mildly dropping about 50 points on the news. So, the following commentary is based on the technical factors that we do know.
There are currently a number of factors affecting the CBOE’s Volatility Index ($VIX), most notably the upcoming Presidential Election and the fears of market volatility that a contested election might foist upon the stock market. But there is another element that is affecting $VIX, and it is not getting much press. Specifically, it is the after-effect of an initial bear market “shock” on $VIX.