Be Very Wary Of This Stock Market Election Move Today – Mike Swanson (11/07/2018)

Many people have been predicting a big rally to occur after the election.

Well we had the election yesterday.

The Dems took the House – and that means my bet on the election has paid off.

But they barely took it.  The “red wave” met a “red wall” as some are saying.

The election is not a real defeat for Donald Trump, because it demonstrates that he has now remade the Republican Party.

It is no longer the party of Dwight Eisenhower and Ronald Reagan, but of Joseph McCarthy and Donald Trump.

The guy in this picture with Trump is Roy Cohn.  He worked with Joseph McCarthy as his right-hand-man and taught Trump the tactics his former boss used to create a movement.

Trump’s tactics mobilized his followers to stop the blue wave and take a few extra Senate seats.

I live in a gerrymandered Congressional district that saw a double in the number of Dem voters, but a 50% increase in Trump voters from 2014 that beat them out.

As for this morning’s stock market action I don’t buy stocks based on news or chase gap ups.

I also do not think the stock market is out of the woods.

And that’s why we must focus on technical analysis instead of news chasing when it comes to investing.

In fact so many people have been predicting a big stock market election rally that what this gap up does is give them a chance to buy the rally they have been waiting for and get trapped.

Yesterday’s action shows that the DOW is now doing better than the S&P 500 and the Nasdaq.  The DOW has managed to go back above its 150 and 200-day moving averages, while the latter two indices still remain below theirs.

We are still facing what is likely to be a key moment in the stock market this month as three risks are growing for the stock market as I wrote Monday.

But since the DOW is the strongest index it might be best this morning to look at it to get an idea of what is happening.

First here is a chart of the DOW.

The DOW’s daily stochastics are now almost above the 80 overbought level.

This still looks to me like a bounce that will fade – maybe not starting today, but sooner than people think as so many are predicting a huge rally for the rest of the year.

It seems likely to me that the next drop in the stock market will start with a reversal day in the DOW in which the DOW goes up 100-300 points and then closes red.

I drew three circles on the chart above as past examples of such days.

Now most stocks are simply languishing.  Most of the tech stocks were down yesterday despite the 173 point up day in the DOW.

The DOW is 30 stocks and a look of what went up and down inside the DOW tells us what is happening.

Here are what are now the top performing stocks in the DOW:

Despite the October stock market drop KO, MCD, and PG all made new highs.

Meanwhile here are three of the weaker DOW stocks now

Of course, these three are major big-cap tech stocks.  And I’d note that Apple also has simply sold its earnings and is now a broken stock too.

So when we look at these charts we can see that the DOW is acting stronger than the other indices, but we shouldn’t conclude just from that info that the stock market is in great shape, because when we look at what the individual stocks inside the DOW are doing we learn more.

What we learn is that this is a market shift happening in which defensive stocks are acting best and big cap tech stocks remain in serious trouble.

Stocks like Coke, McDonald’s, and Procter & Gamble are considered to be defensive stocks because their earnings don’t suffer so much in a recession.  People are still going to drink Cokes when they lose their jobs and still go to McDonald’s – if not go there more – and will continue to take the prescription drugs their doctors tell them to take.

But they won’t buy Ipads and Iphone gadgets!

Apple announced last week that it will no longer report the number of phone units it is selling in its earnings reports anymore.

This is not to say we in a recession, but to say that this remains a stock market after the October drop in which defense is the best strategy.

For hedge funds that may mean shorting big cap tech and going long defensive plays in pair trades.  In fact, I have both long and short positions in my seven position portfolio.

For others, it may mean raising some cash or putting in stop loss orders ahead of a possible drop.

And for all investors, it should mean going to fundamentals of trading and market analysis.  That means trades with a strategy and game plan.  The era of just throwing money at the market without any plan at all and expecting to make money is over.  Things are changing.

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