We’re in an interesting part of the year. An interesting cycle that includes the election. With this, we as traders want to remember a few basic things.
Let’s cover them right now.
The first one is a bit of a history lesson, but bear with me because it’s important…
A History Lesson:
This isn’t to inject politics into our trading, but to inject the psychology of politics into our trading decision and expected direction. So the gridlock trade is on. This is nothing new, Gang. Since 1945, there are six different scenarios for the way in which the legislative branch and the executive branch can be combined: split Congress versus unified Congress, Democratic President, Republican President, and again split or unified Congress.
Now if you’re not aware, there are actually two optimal combinations historically.
- A unified Repubican government: Republican Congress + Republican executive branch
- A split Congress + Democratic executive branch (this is what the market’s realizing right now based on the current count)
With that being said, those are the two outperforming bullish scenarios in the market for the S&P annualized since 1945. These are the two best scenarios to be long stocks. And currently, we’re seeing the equity markets start to rally.
A Distribution Market Trend:
However, please keep in mind that despite this tendency, we still have to focus more granularly on the individual stocks and sectors because the broader indices are still in chop. They’re still in what’s known as the distribution market trend. Historically as long as we’re in a distribution market trend, we’re more likely to bounce off the floor and stall at the ceiling and we tend to go back and forth… but we always want to respect the trend that was. That means we’ll favor the over sold buys. These are the buys that trigger as the market trades down to the floor of the range (to the support of the range).
Now being focused on the sectors and on the individual stocks means what markets are election/politically agnostic? What are our markets that don’t care about the combination we talked about above and/or don’t care about who is in the White House? If you want to give these guys a cute little nickname you could call them the election honey badgers.
Election Honey Badgers:
There are certain pockets of the market that have been outperforming. The semiconductors sector (SMH) have been very strong as they’re being led by Taiwan semiconductor. The utilities sector (XLU) has been outperforming, while being led by NextEra (the heaviest weighted stock within the utilities). Another outperforming sector has been cloud computing (CLOU). Although it’s not a favorite of mine, it’s still worth taking a look at even though it has a few bearish names within it.
Going even further though, there’s another place we can look. It’s a combination of the XLI and the IYT to sort of create more infrastructure exposure. Infrastructure is interesting because regardless of which candidate was going to win (either Democrat or Repulbican) infrastructure was probably going to benefit regardless. Proving that fact, it’s been quite resilient.
XLI, IYT, and XLU in combination would give you exposure to that.
Looking Inside The Sectors:
One you have that combination put together, you can look inside each one of those broader sectors and look at the individual stocks within them that are outperforming. These are going to be guys like Ryder and FedEx within the IYT. For XLU, we have a number of stocks that are outperforming, and XLI has outperformers like John Deere, Caterpillar, Honeywell, and UPS to name a few.
So we still very much have to use a stock picker type approach in this environment. Because again, the broader averages are still choppy. So it makes sense to crack those indices open — think about sector, think about stock. That’s the way we’ll operate at least throughout November. I believe this is going to be integral to the way in which we set up for 2021 as well, Gang. That means watchlist building, stock picking is going to be the way in which we navigate through this choppy market.
Before we can start to bet on the tides again and look at betting on ALL the boats, we have to focus on individual boats within individual sectors.