In the last three days the S&P 500 has rallied 120 points. Under-allocated Asset Managers are playing catch up and they don’t want to miss a year-end rally. Bond yields are not keeping pace with inflation (negative real returns) making equities attractive on a relative basis. Earnings season typically attracts buyers and banks are reporting this week. All of the dark clouds are currently being ignored and momentum is fueling this rally.

The S&P 500 is trading at a current P/E of 23 and that is rich by historical standards. Profits in Q3 are expected to decline more than 20% year-over-year and they will be hampered by the second wave of the Coronavirus. Lawmakers in Europe and the US are considering antitrust regulations against tech giants (Amazon, Apple, Facebook, Google and Microsoft). Tech stocks are leading the rally and this backdrop is being ignored. PC sales are posting their largest gains in a decade due to stay-at-home policies.

Many small businesses are suffering and they need the stimulus bill. Politicians are not likely to reach a deal before the election, but fiscal stimulus will be the top priority for whichever administration takes office in November. The market is addicted to easy money and knows that it will get a “fix” in November.

States are mailing out ballots and the policies/deadlines vary from state to state. This will delay the outcome and cases of fraud are being reported nationwide. If it takes more than a week (likely) to determine a winner, the country (and the market) will suffer.

The economic data points have been decent, but we are far from a “V-shaped recovery”. China reported that imports rose 13.2% and exports increased by 9.9% from a year ago. Those are very solid numbers and China has a three month lead on the US. They have been able to lockdown their people and this has contained the spread of the virus.

Swing traders should sell out of the money bullish put spreads that expire before the election. We have been focusing on stocks that have a tendency to rally into earnings announcements and Option Stalker searches find those stocks. Sell the bullish put spreads below technical support and let accelerated time decay work its magic. The market momentum is extremely strong, but the backdrop is weak. I would prefer to buy stocks because profits are soaring, not because of a lack of attractive investment alternatives. We are a few weeks from the election and I plan to be on the sidelines on November 3rd. Generate income in the next few weeks and go to cash.

Day Traders should focus on the long side. The upward momentum is extremely strong and I am finding better opportunities on that side. Chinese stocks are in favor and the tech sector has also been red-hot. You won’t have to worry about a massive market decline since the bid is strong, but I would use caution if you are buying stocks that gap higher right out of the gate. Make sure that support has been established and buy stocks with relative strength and heavy volume. If the market and the stock close on their high, hold some of the position overnight.

The market has gapped higher three consecutive days and the low from each of those days has been greater than the prior day’s high. This is an extremely bullish pattern, but I would not chase. Given the current momentum it looks like we are going to test the all-time high before the election.