Market Insights: Tuesday, November 5th, 2024

Market Overview:

The Dow, S&P 500, and Nasdaq all advanced as Wall Street positioned for the 2024 presidential election results. On Election Day, US stocks showed strong gains across the board, led by the tech-heavy Nasdaq Composite (^IXIC), which rose approximately 1.4%. The benchmark S&P 500 (^GSPC) gained around 1.2%, while the Dow Jones Industrial Average (^DJI) increased by 1%, climbing over 400 points and marking a recovery from prior losses. With Kamala Harris and Donald Trump locked in a tight race, markets brace for potential volatility, as delayed or contested results could create lingering uncertainty. Historically, even prolonged election disputes have not deterred the longer-term upward momentum in equities, although short-term turbulence is expected. The dollar weakened as traders moderated expectations for a Trump victory, and the 10-year Treasury yield (^TNX) edged down 2 basis points to settle around 4.29% after an intra-day peak at 4.36%. The Federal Reserve is also in focus, with Chair Jerome Powell anticipated to implement a 0.25% rate cut in Thursday’s announcement, a move highly anticipated alongside the election’s outcome.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) recorded a solid 1.21% increase, closing at $576.69 after trading between a low of $570.52 and a high of $576.42. The ETF opened at $570.84, reflecting a bullish reversal from the previous day's cautionary trading. Trading volume remained below average at 36.39 million shares, suggesting some investor hesitation amid the broader uptick. Key technical levels remain in place, with resistance now marked around $578 and support at $570, offering traders crucial reference points in this volatile week. The ETF's reduced trading volume suggest that the market is awaiting further clarity from election results and the Fed's policy decision before committing to a new direction although closing above $575 puts the bulls back in the game with a chance to move the markets higher.

Major Indices Performance:

The indices displayed a coordinated rally, with the Nasdaq leading gains among major averages, while the S&P 500 and Dow followed closely. The Russell 2000 also outperformed, gaining 1.90%, reflecting renewed optimism in smaller-cap stocks. Among prominent tech stocks, the "Magnificent Seven" group had a particularly positive session, with Tesla and NVIDIA showing notable strength, signaling selective investor confidence in high-growth areas. While this upbeat movement is encouraging, investor sentiment remains cautious given potential election-related uncertainties. The broader sentiment suggests the market is tentatively optimistic but prepared for abrupt shifts contingent on near-term political and economic news.

Notable Stock Movements:

In the energy sector, crude oil prices climbed 0.85%, reinforcing support for energy stocks amidst rising geopolitical concerns. Tech stocks led the market’s upward movement while Boeing also captured attention, with its shares rallying following the end of a prolonged labor strike. Despite early gains, the strike resolution did not completely sustain Boeing's momentum, reflecting broader caution. In contrast, Big Tech stocks like Apple and Microsoft rose, supported by the weaker dollar and anticipation of a rate cut, suggesting market resilience even amidst macroeconomic uncertainties.

Commodity and Cryptocurrency Updates:

Oil continued its upward trend fueled by ongoing geopolitical tensions that have reinforced the commodity’s resilience. Gold increased by 0.21%, as investors diversified risk strategies amid election and economic concerns. Bitcoin surged 3.2%, closing above $69,000, as its appeal as a hedge asset grows among both retail and institutional investors. Cryptocurrencies overall have exhibited mixed sentiment, yet Bitcoin’s stability suggests robust support, especially as discussions continue around regulatory clarity and broader adoption. Despite headwinds, Bitcoin’s recent performance hints at a continuation of its upward trajectory as traders assess macro cues for a more definitive directional signal.

Treasury Yield Information:

The 10-year Treasury yield dipped by 0.49% to close at 4.289%, hovering just below the 4.3% level that has previously signaled caution for equities. Yields remain a pivotal focus as investors await the Fed's policy announcement on Thursday, with lower yields typically encouraging equity investment, particularly in rate-sensitive sectors. The retreat in yield levels suggests that investors are weighing a protective stance against near-term risks, especially those tied to election uncertainties and potential economic policy shifts. This trend highlights an ongoing tug-of-war between defensive and growth-oriented strategies.

Previous Day’s Forecast Analysis:

Monday’s forecast emphasized a careful approach, advising traders to respect key resistance around $575 and to adopt a defensive strategy. The market's cautious sentiment and the recommended approach to treat rallies with skepticism proved accurate, as SPY encountered resistance near forecasted levels. We suggested shorting rallies around $575 while longs were encouraged above $569.

Market Performance vs. Forecast:

The market’s action on Tuesday differed from the forecast of a sideways, chop-filled market. With the markets all moving higher in unison, the model did not anticipate this probability. Perhaps market participants moved the markets out of a sense of joy that the end in this contentious election cycle is near. Volume was low which tends to exaggerate moves. The forecast did call for longs above $569, which certainly worked well, and for shorts around $575 which did not produce results. The bulls have wrestled control of the market from the bears with today’s close above $575. While one day does not foretell what is likely to transpire the rest of the week, fear has been replaced with optimism heading into tomorrow and the battle between the bears and the bulls now slightly favors the bulls. But the bulls also need to reclaim $580 and higher to solidify their control and to reestablish the bull trend. The next several days will foretell the most probable future for the markets.

Premarket Analysis Summary:

As of 7:53 AM ET, SPY was trading at $570.49, with upside targets at $572, $572.50, and $574.25, and downside targets at $568.50 and $566. Given Election Day’s heightened atmosphere, market movement was expected to be choppy, with consolidative price action as the dominant trend. The analysis suggested looking for rally opportunities at support around $568.50, while advising caution against extended downside moves beyond $566. Traders were encouraged to focus on quick responses to price fluctuations, particularly around key resistance at $572, with expectations of a largely range-bound day.

Validation of the Analysis:

Tuesday’s trading activity came as a surprise to the model and to our forecasts. A rally the day of the election is atypical…such is trading. Our models are correct 70% of the time and today was one of the 30% days…we have not had one in a very long time! We did however favor tactical longs above $568.50 to as high as $574.25 which set up nicely at the open. The trend was strong and as such, while we attempted to short the $575 level, this didn’t deliver material profits. We stated for some time above $575 the bulls will retake the reigns so with the rally into the close above $575, our bias has now shifted to favoring longs to $580 and higher.

Looking Ahead:

SPY is projected to trade in a massive range between $562 and $590, with the election and Fed decision as key variables influencing sentiment. A sustained move above $578 will initiate a continuation of the rally, whereas a dip below $575 could imply further declines. Traders should remain alert to potential sentiment shifts, particularly in reaction to Election Day developments and polling updates, as these may provide directional cues. The bears need to close below $570 to put pressure on the bulls once again, otherwise the market is likely to continue higher.

Guidance for Traders:

With volatility expected to rise tonight and perhaps this week, we continue to favor a defensive trading approach. We are holding VIX 19 Calls which we will close out tomorrow and with VIX above 21 they should end up ITM. We do not believe today’s rally provides the all clear for the bulls as today’s reversal was on low volume. We would like to see several closes above $575 on volume before initiating new longs toward the all-time highs. And any failure of $570 opens the door to much lower prices. Monitoring election results for clear outcomes will be critical, and traders should be prepared to shift positions quickly as results or Fed policy announcements impact sentiment.

Market Sentiment and Key Levels:

Key support is now $575, with lower support positioned at $569 and $567. A sustained breach below $567 could trigger a steeper pullback toward $562, reinforcing bearish pressure. Resistance is $578 which is likely to slow the bulls advance.

Expected Price Action:

Absent the election, we would project SPY to fluctuate between $572 and $580 on Wednesday, with a cautious, bullish bias. Given the high-impact events surrounding both the election results and the upcoming Federal Reserve decision, SPY's price action is likely to be much more volatile. A sustained move above $575 could trigger a brief rally, but without a strong catalyst, this may be short-lived. Conversely, a break below $570 may signal further downside, potentially leading SPY to test support at $565 or lower levels if selling momentum intensifies. Traders should anticipate two-way price swings on Wednesday, with both quick reversals and potential breakouts, creating opportunities for tactical trades within this range. An elevated VIX suggests that volatility will remain high, favoring a strategy of short trades on failed breakouts near resistance and cautious long entries on failed breakdowns near support, with an emphasis on managing risk in this sentiment-driven environment.

Trading Strategy:

Wednesday's strategy emphasizes identifying shorts around $578 and longs from $574. The market may need a day to digest today’s move in the context of the election and or pause until the results of the FOMC meeting are announced. So while we anticipate major volatility incoming, it would not surprise us in the least to see the market do nothing on Wednesday, setting up a major move later in the week.

Risk Management and Warnings:

With the election and Fed meeting adding to market uncertainty, strict risk management is essential. Cautious entries and controlled position sizes will help traders navigate sudden shifts in sentiment, with economic and political developments likely to drive sentiment over the coming days.

Model’s Projected Range:

The model forecasts a $562.50 to $589 range for SPY, with bullish sentiment due to being Call dominated. This range is massive and perhaps the largest we have seen all year. This implies heavy trending price action on Wednesday. You do not want to be on the wrong side of the market tomorrow. Once price starts to move you must trade with the trend otherwise you risk suffering major losses. SPY continues to trade below the bullish channel in place from the September lows and a new channel has not formed due to today’s reversal. It’s very likely tomorrow the bull trend channel is updated to incorporate the last four days price action, or a new channel is formed. Traders should observe how the model  computes which scenario has the highest likely outcome to know what to expect from SPY going forward.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price closing above resistance. The range is average and there are extended targets above indicating a fairly strong bull trend which will likely move prices higher overnight. The MSI rescaled higher several times today, expanding its range and printing extended targets above which drove today’s $6+ rally. MSI support is $576.21 and $574.28.
Key Levels and Market Movements: The MSI began rescaling higher just prior to the open and immediately printed extended targets. Users of this tool understand this means a strong herd move is likely and sure enough, price pushed right through every minor support level until it hit a major level at $575 where it took a pause. But pause is all the market needed as extended targets continued printing above and the market broke above $575 to reach the days’ highs at the close. The model’s forecast wasn’t very accurate today but once again, the MSI showed us the way advising us to get long at the open and ride the trend to at least $575. The MSI also kept us from shorting major resistance given it printed extended targets for most of the morning session. These targets ceased printing shortly after noon and the opportunity presented for a quick mean reversion short which delivered small gains. Once again having the MSI update in real time showed us the way which is particularly useful when the market is not performing as expected. This showcases the true value and power of this sophisticated and valuable tool. 
Trading Strategy Based on MSI: The MSI's current state suggests the bulls are in control with price likely moving higher overnight. We advise caution given election results will start to flow in a few hours. Be sure you check the MSI before trading tomorrow and simply follow what it shows you. Tomorrow is a trade what you see day and there is no better way to do that than using the MSI. We no longer favor selling rallies. Instead we will look for long entries from support and possibly the gap to close near $580. This is totally predicated on the election, however, so again, trade what you see.   

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers are selling $577 to $585 and higher strike Calls implying Dealers do not believe prices will move beyond $585 on Wednesday. To the downside, Dealers are buying $576 to $563 and lower strike Puts in a 3:1 ratio to the Calls they are selling, implying a slightly bearish to neutral view of the market for tomorrow. Dealers too were caught off guard today but you may recall they did not add to their downside protection, hence their positioning for the day was accurate. Dealers have not changed their positioning from yesterday and are generally neutral.
Looking Ahead to Friday: Dealers are selling $584 to $592 and higher strike Calls while also buying $577 to $583 Calls in size, indicating the Dealers strong desire to participate in any rally that develops post-election. We mentioned yesterday that Dealers were positioned more optimistically heading into the end of the week and they continue to hold this posture at the close today. If anything they have added to their upside exposure. To the downside, Dealers are buying $575 to $550 and lower strike Puts in a 3:1 ratio to the Calls they are selling/buying. They have reduced their protection from today and are only slightly bearish and more neutral. Again we stated yesterday that by not increasing their protection they were in fact implying a more optimistic outcome. That played out today to perfection. The Dealers still appear to be positioned for higher prices and less volatility than might otherwise be typical.

Recommendation for Traders:

The convergence of election results, FOMC policy, and high Treasury yields sets the stage for a potentially wild market the next several days. But we may all be fooled as the market typically does not do what everyone believes it will do. In times like this being nimble and trading what you see is your best strategy. Sitting on your hands is also a viable strategy. While Dealers appear to be saying the worst of the sell off is in the past, traders should remain vigilant in the event volatility spikes. We recommend reviewing our premarket updates daily for actionable intelligence and insight into the day’s price action.

Good luck and good trading!