The presidential election casts an increasingly dark shadow over the stock market

The presidential election casts an increasingly dark shadow over the stock market

21 September 2020 from Carlsquare

With the spread of the Corona virus in the United States, presidential candidate Joe Biden wins against incumbent President Donald Trump in the polls. Although the stock market can theoretically accept that Joe Biden will win despite expected tax increases, speculation is high that Donald Trump, even though losing the election, will choose to remain president.

It feels a little bit that we are describing the situation in a developing country and not in the world´s largest democracy. But few have forgotten the battle between Bush and Gore in the 2000 presidential election that caused the stock market to fall by just over six percent.

The picture above shows how close the candidates are to each other in the opinion polls. It also appears that Trump was in the public eye all the way to election and that he himself seemed both surprised and unprepared once he won the election over Hillary Clinton in 2016.

What followed was the largest stock market rise in modern times. Regardless of the wall of negative comments that exists in the mass media, Trump is popular from the stock market´s point of view as his large tax cuts have both increased GDP in the United States and, above all, stock market prices. Trump has thus topped the massive support that Fed has given. From the stock market´s perspective, Joe Biden is negative since he wants to raise taxes. This always means increased uncertainty in the event of a change of power.

The picture above is Laura Dern in the notable film Recount which describe the legal drama surrounding the presidential election in Florida in 2000. Although the voting machines have been replaced since then, Florida is still a key state and with a Trump supporter as governor, anything can probably happen this time as well. It was not until December 12, 2000, six weeks after the election, that the outcome of the election was decided in court. In retrospect, the verdict has been criticized as the election was so even that if the election result had been in city by city instead of the entire district, Al Gore would have won over George Bush.

This story remains an unhealed wound in American politics, so there are strong reasons why the US presidential election this year must be won by a wide margin in order for the looser, whether it is Trump or Biden, to admit defeat. The risk is instead very high that it will be claimed that the election has been manipulated triggering demands that it should be redone. Trump has already started waving about this in his Tweets if he loses…

In the options market, this is reflected in the fact that volatility is expected to rise until election day and decline thereafter. Note, however, that it does not fall immediately after election day, but that the curve is extended until December, which means that the market is pricing in a troubled election.

Also note that the Fed meeting did not provide any support to the stock market. There is plenty of speculation about what the Fed communicated to the market last time. Our interpretation though is that they said as little as possible to avoid being accused of supporting any party. From a purely political point of view, it would be very interesting if we got a stock market crash now ahead of the elections. Everyone knows that the Fed would go in and purchase to support the market if the landslide becomes serious. But how long will they wait to not end up in a political storm?

The Nasdaq index has given a sell signal in the MACD. The index also closed Friday’s trading below MA50 as well as Fibonacci 23,6 for the second day in a row. The next level on the downside is made up by MA10 which is currently trading around 10 427:

The FANG companies were leaders when the stock market rose. They tend to be leading in the downturn as well. The long trend line is being tested.

The tech companies have turned downwards. The Apple share below has even delivered a sell signal in the MACD. Note that Apple falls with the lower Bollinger Bands (i.e. two standard deviations from the 20-day moving average). That´s about as much a stock can plummet in orderly fashion without panicking. Also note that the stock fell below MA50 on Friday. It will soon reach the long trend line which is the last remaining strong support ahead of the support around 99 to 100 USD.

The Facebook share continues to fall. Next level on the downside can be found around 243 USD where MA100 meet up:

Amazon is also getting closed to MA100 serving as next level of support on the downside:

Note how Google closed Friday’s trading below MA100 but pretty much right at Fibonacci 38.1. A break to the downside and the next level is made up by MA200 just above 1 400 USD:

The S&P500 index is a little more resilient than the tech companies, but nevertheless tested the lower Bollinger Bands. Note how important the MA50 is in the rising trend and that the S&P500 closed below this important level on Friday. At the bottom, the MACD breaks the zero-level, which means a strong sell signal. The index is oversold in the short term, but bulls really needs to gather strength now if a negative trend is not to be established in the earnest.

Swedish OMXS30 index has been performing the strongest during the last three months when the US stock markets as fallen:

OMXS30 is trading above the 1 800-level suported by a positive and increasing momentum. The previous top from February seem to be the target. However, note how a scary looking doji (indicating uncertainty) was created on Friday:

German DAX index is having difficulties closing the gap from February. However, the index is supported by a rising MA20 and MA50 on the downside.

EUR/USD is consolidating as rising MA50 is supporting the currency pair from underneath:

Bitcoin has bounced nicely of Fibonacci 23.6 and MA100 and has retaken both EMA9 and MA20. Now MA50 serves as first level of resistance followed by the falling trendline:

Legal notice

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

04/10/2022 05:56:35


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