Date: November 2, 2020

Election Like Y2K – Smart Money & Tech Behaving Poorly

It’s been a long year. It’s  been a long election cycle. Thankfully, it’s the bottom of the 9th and two outs. No one wants the game to go extra innings. For the past week or two I have written that whatever stock market move happens into the election, plus or minus a day or so, the opposite move should happen this week. In short, the bulls should steady themselves and a rally should begin. That’s a pretty exact forecast and I know I am sticking my neck out, not only in opinion but with money as well. If I am wrong, I don’t plan on staying on wrong for long.

I continue to be surprised at how many people are so overly concerned about the election consequences on the markets. Let’s remember that markets hate uncertainty and the inability to plan for it. Cowards flying planes into buildings. Oil embargoes. An election is a known event, months in advance. And investors have had a long time to prepare for all outcomes. In a way, this is like Y2K.

Will ANYONE be surprised at ANY outcome? I think not.

Biden win / Senate blue

Biden win / Senate red

Trump win / Senate red

Trump win / Senate blue

No one earns 270 electoral votes (House chooses President. Senate chooses VP)

Contested election (Been there, done it)

Just look at the volatility indices and implied volatility to know that the options market has overly inflated values. That usually leads to a quieting in the markets. Someone tweeted me this morning that stocks will be down 47% THIS WEEK. I thought it was a typo and he meant 4.7%. Nope. I can find few people who believe it’s a buying opportunity. Most are preparing for Electionmageddon. Remember, when the news is out it is more important to see market reaction than what the actual news is. Don’t get sucked into the media’s opinion. That won’t help your investments.

Last week I wrote and tweeted that the stock market was absolutely not declining because COVID numbers were spiking. That was the convenient and lazy excuse for the decline. I said that because mega cap technology and work for home group of stocks was hit much harder than the rest of the market.

Energy and banks were leaders to end the week. Materials weren’t far behind. Internet, semis and comm services lagged. Hmmmmm. Might something else be at play here? We are going to see very shortly. Something is definitely wrong with the Fab Five Plus that never go down. In fact, since my piece about selling Apple in mid-August, the whole group has been disappointing. When I look at the charts of the Fab Five Plus, most look like they have peaked for a while; certainly they are done outperforming.

If you want to know what else concerns me, smart money hedgers have gone from  heavily net long since March to heavily net short over the past month. And the stock market saw two days where 90% of the volume was on the downside last month without even one intervening day to counter that. It will be interesting to see what hedgers did last week when the data is released next week.

On a final note, please vote if you haven’t already. Vote left. Vote right. Vote red. Vote blue. Vote purple. Just vote.


Paul Schatz, President, Heritage Capital