Some statistics on the before/after elections performance of markets. Via Doug Short.
Today the S&P followed the time-honored pattern of post-election selloff. Of the 16 presidential elections since the middle of the last century, the close before the election has been a gain 13 times. The day after the election has posted a gain only six times. Today’s 2.37% post-election selloff was the second worst in 60 years, the worst being the -5.27% gut-wrencher the day after Obama’s first victory.
Earlier today: As I type this, about 90 minutes after the US equity markets opened, the major indexes are selling off. The S&P 500 is down over two percent. In my S&P 500 daily update for yesterday, I pointed out that Election Day or the day before prior to 1984 (when it was a market holiday) have usually recorded gains, at least as far back as the middle of the last century.
But what about the day after elections? The pattern of “second thoughts” appears to be the norm. Here is a table showing the 16 Election days starting with Dwight Eisenhower’s 1952 win over Adlai Stevenson. It’s the same table I posted yesterday, but this version adds the S&P performance for the day following the election.
Guest post by Vix and more.
The table below summarizes what I consider to be all the significant pullbacks since stocks bottomed in early March 2009. Note that the current pullback is the third largest in terms of magnitude as well as peak-to-trough duration, which stands at 41 days as of today.
For those who may be interested in a graphical overview of the same data, A Look at the Pullbacks of the 2009-2012 Bull Market should help to put the current pullback into better perspective.
For those who are wondering just how low the SPX might fall if stocks were to replicate the 21.6% decline from 2011 or the 17.1% pullback from 2010, a comparable decline in percentage terms would put the SPX at 1115 and 1178, respectively.
A few points on the situation rocking the markets. Guess what, the US (and the German) decoupling just got crushed today. By Peter Tchir of TF Market Advisors.
It is a global economy. Europe is a mess. China is struggling. Whatever strength the U.S. economy had earlier this year has now dissipated. The theory that somehow the U.S. can “decouple” is taking a serious beating, and the even less realistic view that Germany could “decouple” is also being torn to shreds.
The current crisis has its roots in Europe and Europe needs to address it. European finances and debt are far too interconnected to make a Greece exit anything but a nightmare for Europe. Governments and the ECB have lent too much money to Greece, and to Ireland, and to Portugal, and to Spain, and to Italy. All the “backstops” and “firewalls” have the same governments and central banks lending more money. The plan is flawed and creates contagion. Greece may eventually leave, but not until Greece and the EU have done a lot more preparation and planning. In the meantime currency devaluation risk, even more than solvency risk, is putting the entire Spanish economy in jeopardy, with Italy not too far behind. This has to be addressed immediately.
Biderman on the sell in May theory. It was proven right in 2011 and 2010. Is this time different?
In 2010 the US stock market peaked at the end of April and then sold off until the Fed announced QE2 several months later. In 2011 the stock market peaked at the end of April and sold off until the Fed announced Operation Twist several months later.
This will be the third year in a row that stocks have started selling off in May. I predict the drop will continue until the Fed announces the next version of stock market stimulus; probably in August at the Fed’s Yellowstone confab.
Why stock prices did not peak at the end of this April was that in April 2010 and April 2011 there were decent inflows into US equity mutual funds and US ETFs. This April there were outflows not inflows from both US equity mutual and Exchange Traded Funds.
Remember all there is in the stock market are shares of stock, 80% of all stock being owned by intermediaries such as mutual, exchange traded, pension and hedge funds. Since the start of October, which was right after the FED announced operation Twist, stocks are up by 25% or so. Video below.
Biderman on QE to Infinity!
Then, in May 2010 and again in May 2011, the stock market started a sell-off that lasted several months. Will that happen again this year? I actually do think we are at the start of another stock market decline.
Why? Because the ups and downs of the stock market are all due to the actions of the Federal Reserve. It is their money we are playing with.
Before the Fed took over control of the stock market, new money for stocks used to come from the amount of wages and salaries and other income not spent, also called savings. But no, not anymore.
In March 2009, the Fed announced an $800 billion QE1. Stock prices, which were cut more than half to a $9 trillion low from a $22 trillion peak in 2007, soared back to $17 trillion by April 2010, recouping 70% of the top to bottom decline in stock market prices.
On the other hand, how did the overall economy do during QE1? Nowhere near as well. While stocks recouped 70% of the decline, taxpayers after tax income, including capital gains, barely rose by the end of QE1.
QE1 ended in March 2010, From May 2010 stock prices dropped from $17 trillion, to just over $15 trillion by August 2010. Then in August 2010, the Fed announced stimulus package two, a $600 billion QE2. Stocks took off again and peaked at just over $19 trillion at the end of April 2011; two months before QE2 ended.
Biderman- Buy Gold, short the Euro as it will reach par with the USD. The top in equities is in, but the big sell off is not happening until later in April. Full video below.
After the latest rallies, the market is feeling increasingly complacent. As we approach the holiday season, liquidity is drying up and people are looking forward to the “slow” Christmas trading. One should not forget though, the problems won’t go away because Santa is coming. If vol continues to be depressed over the coming weeks, it might be a golden opportunity loading up for early 2012 action. Don’t forget, the Vvol is very high indeed, so the theta bleed is not too bad…
Guest Post by Macro Story.
This chart speaks for itself. Investors are not buying at the money puts as measured by the vix nor out of the money puts as measured by the implied volatility skew.
That was fast. More than 10 points down in 10 minutes. The channel we outlined some days ago is intact. The bulls can’t take it higher, nor can the bears take it lower. Perfect set up for frustration. Base case is intact. Let’s see what Santa brings. Quick SPX Charts update;
Long post today so I’ll keep the commentary to a minimum. The liquidations, the global risks, the stress within credit markets are still there and growing. The vast majority of market participants will not believe this move lower. They will play the bounce, they will buy the dip. If short be patient here. Don’t let late day rallies shake you out of positions. If looking to go long be patient as well.
What happened into the close today has happened before. The ES (SPX futures) was trading weaker to the AUD by 30-50 basis points until the last hour of trading where it wiped that premium out and ended the day trading in parity. The ES in the long term is still rich to AUD and countless other assets classes.
Interesting to note today the RUT (Russell 2000) was weaker by 50 basis points all day including into the close as further evidence that these late day rallies are more HFT and intraday trader related versus anything else (i.e. put a bid into the ES and hope other asset classes follow automatically).
With the Markets confusing many, both bulls and bears, below is a good piece of what to expect. We are in bear territory, but the bounces will be brutal, and people will trade based on greed and fear. These last day’s “bull”, has probably a little more to go, before we once again reverse down. Another Greek weekend coming up…
In November of 2007 as our risk ratio indicator was plunging into what should have been a “buying zone” of extreme bearishness, the buy/sell timing indicator was just beginning to initiate a “sell” signal, warning that prices were moving lower. As a result, each successive turn UP of the risk ratio indicator remained short lived as investors were sucked into short-term rallies that ultimately failed. It wasn’t until May of 2009 that both the risk ratio indicator and the buy/sell timing indicator gave“longer term” investors an all clear signal to move cash back into risk based assets.
Today, we are witnessing exactly the same set up. The risk ratio indicator is at levels that are bearish enough to warrant a rally. However, with the timing indicator on a clear “sell” signal, that rally should be sold into. ….
Full article here.