Daily Commentary: October 23, 2020

Jeremy Engelbrecht1Option Commentary

Stimulus Bill Today Of Bust – The Market Wants Its Fix Now

Posted by Pete Stolcers on October 23

Yesterday the market found support just above the 50-day moving average and encouraging comments from Nancy Pelosi sparked optimism that a stimulus agreement might be reached before the election. I believe that today is the last chance for that to happen. In the absence of a stimulus bill, I believe that the market will drift lower into the election as Asset Managers reduce risk.

Amy Coney Barrett will be confirmed as a Supreme Court justice next week and Democrats won’t be in a mood to negotiate a stimulus bill a week before the election. Even if an agreement were reached next week, the bill could not be passed before the election. Politicians won’t be around to sign the bill because they will be campaigning.

Mail-in voting varies from state to state and this could delay the election outcome for weeks. Uncertainty could spark civil unrest and this could potentially postpone the stimulus bill.

The Coronavirus continues to spread domestically and in Europe. Major metropolitan areas are back in phase 3 and some leaders are considering stricter lockdowns. This virus will impact economic growth.

Earnings season will climax next week and tech giants will report. Earnings are expected to decline 20% in Q3 on a year-over-year basis. At a forward P/E of 23, valuations are stretched. AMZN, GOOG, MSFT and FB account for a huge percentage of the S&P 500 market cap and anti-trust hearings are casting a dark cloud over these companies.

Economic data points have been decent and activity is stable. Initial jobless claims were below 800,000 yesterday and that is the lowest level we’ve seen in months. China’s economic numbers have been relatively strong.

I believe that we could see some profit-taking into the election, but any pullback will set up an excellent buying opportunity once the election results are known. Coronavirus treatments have improved the survival rate and AstraZeneca believes it will initiate mass distribution of its vaccine before Christmas. I’ve been reading that taking vitamin D can greatly reduce the risk of getting Coronavirus and that it can greatly improve the recovery. It won’t do any harm and I suggest you take some.

Swing traders should be in cash. We only have one position and it will not be impacted by the election results. If the market pulls back dramatically before the election we may take bullish positions. If not, we will patiently wait for the outcome. This is a binary event and it’s prudent for traders to be on the sidelines.

Day traders should expect intraday volatility. I liked the rebound yesterday above the 50-day moving average and we are seeing follow-through this morning. We have been finding excellent opportunities on both sides of the market. Expect sharp moves during the day that are based on stimulus rumors. When the market hits support or resistance, watch for a reversal. This is a very “newsy” environment and you have to increase your probability of success by leaning on stocks that have relative strength/weakness, technical breakouts/breakdowns on a daily chart and heavy volume. These characteristics lead to orderly directional movement and they will help you navigate a noisy market backdrop.

Support is at the 50-day moving average and resistance is at SPY $349. Encouraging comments from Nancy Pelosi were offset by pessimistic comments from Larry Kudlow. Steve Mnuchin said he was “pretty happy” with the progress. That is not a ringing endorsement. The price action today will be dictated by a stimulus agreement (or the lack thereof).

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