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Mid-Week Market Update

www.trading-adventures.com

Mid-Week Market Update

and a look at Mid-Term election years

Andrew Moss, CMT
Sep 28, 2022
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Mid-Week Market Update

www.trading-adventures.com

It hasn’t been the cleanest progression, but the bounce pattern we’ve been looking for (Could we see a bounce?) is getting some follow-through today as all three major indexes traded above this past Friday’s high.

We’ll bypass most of the charts (I’ll share two important ones) normally included in the Mid-Week Market Update, and look at the potential bigger-picture implications of this move.

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From today:

That’s a pretty meaningful reversal in implied volatility $VIX

Check out the reversal in the US Dollar $DXY

On to the Election Cycle


Don’t make this political

It doesn’t matter. There have been plenty of bull and bear markets under the leadership of both parties. Frankly, politics are often the worst reason for, or against investing. The market doesn’t care so much who wins the vote, D or R.

The market does seem to pay some attention to the election cycle.

Think about what politicians are doing during this time. They’re campaigning. They’re offering solutions and making promises.

They’re going to fix everything that’s broken. Right?

  • Inflation

  • Interest rates

  • High prices

All of that will be taken care of if you vote for them. Right?

Sure.

It sounds ridiculous. Things aren’t that simple.

But is it possible that we are all subject to the slight changes in mood that can result from these promises?

A little hope can go a long way.

Impossible to prove? Perhaps. Again, it really doesn’t matter.

What does matter is knowing how these cycles have played out before. There is a pattern. We’ll take a look.

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But first:

  • Of course, we need to be mindful of the bear case as well.

  • Of course, we’ve never seen a bear market environment where Treasuries, the risk-off asset, have declined more than stocks.

  • Of course, we haven’t seen inflation like this since the 1980s

  • Of course …..

You get the idea. There’s no shortage of risk and concern out there. There never is.

Things that have never happened before happen almost every day in the stock market.

Always, always, always manage risk.

But don’t forget about the upside potential.

Moving on. Here are some factors that could lead to a sizeable bounce.


Election Cycles

Looking at the average mid-term election year, and specifically what happens over the next two quarters, we can see that it is not uncommon to have a dip followed by a significant bounce.

Twitter avatar for @EddyElfenbein
Eddy Elfenbein @EddyElfenbein
September 30 of the mid-term year has historically marked the low point of the presidential election cycle. From there until July 19 of the pre-election year, the Dow has gained more than 19%.
Image
3:38 PM ∙ Sep 26, 2022
13Likes4Retweets

The fourth quarter of the mid-term cycle and the first quarter of the pre-election year are, on average, the best two performing quarters.

J.C. Parets at All-Star Charts has done some great work on this. He writes-

“This summer’s low is historically THE dip to be buying in the 4-year cycle.”

Twitter avatar for @allstarcharts
J.C. Parets @allstarcharts
Based on seasonal trends, in the entire 4 year cycle, this is the best time to be buying stocks. But why should we care tho? allstarcharts.com/chart-of-the-d…
Image
12:35 PM ∙ Sep 21, 2022
136Likes31Retweets

Seasonality

Since 1993 September has been one of the worst months for $SPY. But the fourth quarter, October-December has been the strongest 3-month period.

Sentiment-

It’s hard to find many bulls out there. The mood is sour and I’m not hearing from too many people that are optimistic about the stock market. But what does the real data show?

Some comments on the American Association of Individual Investors (AAII) survey-

Twitter avatar for @sentimentrader
SentimenTrader @sentimentrader
Mom and pop have given up. This week joins just 4 others in 35 years with more than 60% of respondents being despondent in the AAII survey. One year returns after the others: +22.4%, +31.5%, +7.4%, +56.9%. But, of course, this time is different.
Image
11:42 AM ∙ Sep 22, 2022
1,023Likes264Retweets
Twitter avatar for @MarkRitchie_II
Mark Ritchie II @MarkRitchie_II
Just looked at the entire history of AAII Sentiment survey. Only 3 other times in history has bears been this high 10/9/90, 10/9/08, 3/5/09. Two of them nailed major lows, the other (10/9/08) was the middle of the Lehmann meltdown which led to a major low in March 09'...
Image
1:14 PM ∙ Sep 22, 2022
191Likes23Retweets

The market is oversold

Only 3% of SP 500 stocks are above their 50-day moving average. That’s not bullish. But it does lend a hand to the case for a bounce.

Positioning -

People aren’t just bearish in the surveys. They’re putting their money where their mouths are too. Put volume is at never before seen levels. Climaxes like this don’t tend to persist and can be contrarian indicators.

Twitter avatar for @jasongoepfert
Jason Goepfert @jasongoepfert
Full-on crash mode. Retail traders spent $18 billion buying put option protection last week, a record. They're holding $46 billion worth of index futures net short, a record. Leveraged traders are betting on very, very bad things happening very, very soon.
Image
12:51 PM ∙ Sep 24, 2022
7,939Likes1,825Retweets

Relief from the rising Dollar

Finally, a chart I’ve shared many times. With this update, there is a potential reversal candle forming and a slight bearish RSI divergence. We’ll need to see how the week finishes. A downward move in the dollar will be required if we’re going to see higher stock prices.

So, will this week mark a bottom? As we’ve just seen, there is data to support that case. While we can never know with any certainty what will happen next. Studying these patterns and tendencies can help us stack the odds in our favor.

As always, follow charts and your rules, trade smart, and manage your risk.

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***This is NOT financial advice. NOT a recommendation to buy, sell, or trade any security. The content presented here is intended for educational purposes only.

Andrew Moss is an associated member of T3 Trading Group, LLC (“T3TG”) a SEC registered broker/dealer and member of FINRA/SIPC.  All trades placed by Mr. Moss are done through T3TG.

Statements in this article represent the opinions of that person only and do not necessarily reflect the opinions of T3TG or any other person associated with T3TG.   

It is possible that Mr. Moss may hold an investment position (or may be contemplating holding an investment position) that is inconsistent with the information provided or the opinion being expressed.  This may reflect the financial or other circumstances of the individual or it may reflect some other consideration.  Readers of this article should take this into account when evaluating the information provided or the opinions being expressed.

All investments are subject to risk of loss, which you should consider in making any investment decisions.  Readers of this article should consult with their financial advisors, attorneys, accountants or other qualified investors prior to making any investment decision.   

Please Note: short puts are synthetic longs, and short calls are synthetic shorts

Options symbols are denoted as follows:

Ticker, Date, Call/Put, Strike Price

Example: VXX1218C30 = VXX 12/18 Call with a $30 strike

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Mid-Week Market Update

www.trading-adventures.com
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