Market Insights: Wednesday, November 6th, 2024

Market Overview:

Following Donald Trump’s election victory over Kamala Harris, US stocks soared, marking record highs across major indices. The Dow Jones Industrial Average (^DJI) surged approximately 3.5%, adding around 1,500 points to close at a record, with its strongest performance since 2022. The S&P 500 (^GSPC) rose by about 2.5%, exceeding the 5,900 mark, while the tech-heavy Nasdaq Composite (^IXIC) advanced 2.9%, also reaching a new peak. Treasury yields responded with the 10-year note (^TNX) climbing 13 basis points to 4.43%. Bitcoin followed suit, rallying to a new record alongside a stronger dollar, as Trump's win reignited the "Trump trade." Notably, Republicans regained control of the Senate, while House control remains uncertain. Analysts anticipate that Trump’s policies may favor the financial sector, fueling a substantial pre-market rally in regional banks. The S&P Regional Banking ETF (KRE) rose over 11% early on Wednesday, and the Russell 2000 (^RUT) outpaced all other indices, advancing more than 5%. Tesla saw a significant boost, jumping over 14%, partially due to CEO Elon Musk's public support for Trump. Meanwhile, the Federal Reserve began its two-day rate policy meeting, with markets nearly unanimous in expecting a 25 basis-point cut announcement on Thursday.

SPY Performance:

The SPDR S&P 500 ETF Trust (SPY) closed at $591.04, marking a significant 2.65% increase after hitting an intraday high of $591.93. Trading volumes surged above the average to 62.09 million shares, reflecting heightened market interest in the wake of election results. Key resistance lies at $590, with a potential rally extending towards $595 if bullish momentum persists. A fallback to $585 or $580 remains possible on any signs of profit-taking. The considerable range of movement underscores an elevated sentiment shift, yet the upward trajectory remains constrained until the $590 level is decisively surpassed.

Major Indices Performance:

All major indices displayed impressive gains, with the Russell 2000 leading the pack at a remarkable 5.79% surge, indicating robust confidence in smaller-cap stocks. The Dow and Nasdaq followed with increases of 3.57% and 2.93%, respectively, while the "Magnificent Seven" tech stocks showed broad-based strength, apart from Meta. Tesla was notably the standout, soaring 15%. This rally reflects market optimism surrounding anticipated financial deregulation under Trump’s administration, with financials, industrials, and tech leading sectors. Caution, however, remains warranted as sentiment could shift swiftly on further economic updates.

Notable Stock Movements:

Energy stocks experienced modest declines as crude oil fell by 0.26%, affected by dollar strength and reduced supply concerns. Gold prices declined sharply, down 2.71%, as investors pivoted toward risk assets and away from safe-haven assets. The cryptocurrency market saw Bitcoin surge nearly 9%, reaching above $75,000. Bitcoin’s resilience and performance amid regulatory discussions hint at sustained institutional interest. Meanwhile, Tesla and other electric vehicle stocks surged on speculation that Trump’s policies could offer favorable regulatory conditions.

Commodity and Cryptocurrency Updates:

Amidst a bullish equities landscape, oil prices saw minor declines as investors shifted toward risk-on assets. Gold saw a considerable dip of 2.71% as appetite for safe havens waned post-election. Cryptocurrencies, especially Bitcoin, rallied significantly, with Bitcoin up nearly 9% and closing above $75,000, buoyed by strengthened demand for decentralized assets in the face of policy uncertainty. The cryptocurrency sector appears well-positioned for further growth as institutional demand supports Bitcoin's trajectory. We expect prices to exceed $100K in the coming months.

Treasury Yield Information:

The 10-year Treasury yield surged to 4.435%, climbing 3.74%, a move that can present headwinds for equities if yields persist above the 4.3% threshold. However, the Fed’s anticipated rate cut could temper yields and shift sentiment toward equities, particularly within rate-sensitive sectors. Investors should remain attentive to yield fluctuations as an indicator of market risk appetite, especially amid tightening economic conditions and evolving fiscal policy under the incoming administration.

Previous Day’s Forecast Analysis:

Yesterday’s forecast anticipated either a very constrained market, or the volatility and range that actually presented today. We stated since everyone was anticipating a large trend move, perhaps the market would do the opposite. We stated the range was the largest we had seen all year and to be prepared to hop on any trend and to ride it for all the marbles. We stated to avoid any thoughts of mean reversion trades and to favor longs from support. Trump’s victory spurred a substantial rally, even beyond predicted ranges. The forecast did recommend long entries above $575, which proved accurate overnight as the election unfolded. But SPY quickly escalated beyond that level by the open. With the close above $590, sentiment is now decisively bullish. Volatility has peaked as the election’s resolution has added clarity, supporting the forecast’s longer-term outlook for an upward bias.

Market Performance vs. Forecast:

Wednesday’s market dynamics adhered to the forecast that bulls had the advantage and to ride any election trends that developed. Certainly the magnitude of the gains exceeded our expectations, which is why we often state, for these events, trade what you see. With an established close above $590, bias shifts toward sustained bullish action. The rapid reversal underscores the importance of adjusting to evolving conditions; this rally, while powerful, still requires cautious optimism as the week unfolds.

Premarket Analysis Summary:

As of 7:56 AM ET, SPY was positioned at $589.92, with upward targets at $590 and $595. The market’s outlook suggested a continued climb as long as SPY remained above $585, although we stated any rejection of $590 should be monitored for a possible retracement toward $580. Given the heightened volatility, traders were advised to exercise caution with short-term trades as the market continued to digest election and policy developments.

Validation of the Analysis:

Wednesday’s election-driven rally showcased the need for adaptability in dynamic market conditions. The model’s support level at $575 was exceeded, affirming the forecast’s upward range preference. The decisive move past $575 confirmed the bullish outlook, although the extent of gains presented somewhat of an outlier. Caution was advised, which was warranted as much of the move came during the evening hours. By the open the market had reached $590 and made new highs. A quick pullback to $585 and it was right back to $590 at the close. Traders were urged to favor tactical entries at support while monitoring resistance at $590 which played out to the letter.

Looking Ahead:

SPY’s trajectory could explore a wide range from $583.50 to $597.25, as election results and the anticipated Fed rate cut tomorrow are poised to influence sentiment. A sustained advance above $590 could lead to a further rally, whereas any pullback toward $585 may signal short-term profit-taking. Traders are encouraged to monitor for a sustained move in either direction, given the week’s high-stakes economic and political events. $585 to $593 may emerge as a range for several days to give the market time to digest today’s gains.

Guidance for Traders:

Traders should prioritize a cautious approach, with limited position sizes after a move like this. Longs are favored but high risk given the size of today’s move. Shorts are ill advised until several support levels are broken. This includes $585 and $580. The outcome of the FOMC meeting will likely add fuel to today’s fire and until clarity emerges, we recommend avoiding aggressive entries, with risk-management protocols emphasizing nimble reactions to price changes.

Market Sentiment and Key Levels:

The primary support is positioned at $585, with further backing at $580. Resistance remains at $590 and $593, which is a level likely to draw significant market attention. Any sustained  move above $590 may encourage additional bullish sentiment, especially given $600 is a big round number that the market would love to overcome. A dip below $580 could signal a significant retracement.

Expected Price Action:

Barring new developments, SPY is projected to range between $585 and $595 with a bullish bias. The anticipated high-impact events suggest volatile price movement, with rapid swings likely around key levels. Traders should anticipate opportunities for trending longs from support. Shorts should only be considered from $593 and above and only for quick hits. We do not believe the market is ready to pull back at this time. Of course this can all change with a few ill-timed words from Chair Powell so once again, trade what you see and look for entries from failed breakdowns off support.

Trading Strategy:

Thursday will start much more muted with sideways price action until the Feds release their rate cut decision. We don’t love the set up long or short at these levels and would prefer to see more price discovery before committing any substantial resources. Until then we will be looking to scalp longs from $585 and $580 with exits at $590 to $593. Caution remains essential, as the market digests recent gains and key levels present potential reversal points. With increased volume likely, swift adjustments to evolving price patterns are paramount.

Risk Management and Warnings:

Given current uncertainties, strict risk management and cautious entries remain essential. The election’s outcome and Fed meeting create a high-risk environment; traders should prepare to adjust positions based on developing trends and maintain controlled position sizes.

Model’s Projected Range:

The model projects a $583.50 to $597.25 range, another massive range reflecting optimism as Call interest dominates. A trending day is likely but not until FOMC interest rate policy is released. Early in the day we expect choppy sideways price action favoring the longs. After FOMC observing price action at the $590 level will be crucial to assessing the sustainability of this bullish momentum. Our model wisely did not redraw the trend channel the last four days and in fact price is right back where it started a week ago…back in the bull trend channel from the September lows. Price once again is riding the lower channel so watch these levels the next few days for clues of what is likely to follow.

Market State Indicator (MSI) Forecast:

Current Market State Overview: The MSI is currently in a Bullish Trending Market State with price closing above resistance. The range is average and there are extended targets above indicating a fairly strong bull trend which will likely move prices higher overnight…the exact same set up as last night. The MSI rescaled higher in the premarket as it became apparent Trump would emerge victorious and stayed in this state the entire day. In the afternoon session extended targets began printing which implied the herd was still long, pushing prices higher into the close. MSI support is $590 and $584.57.
Key Levels and Market Movements: The MSI began rescaling higher prior to the open with price immediately reaching MSI resistance and staying there until the open. At the open price sold off to MSI support near $585. There were no extended targets and one could have entered a quick, mean reversion short. Not a favorite trade for us on such a strong bull day but longs too at the open were high risk. We did manage to take a long off MSI support at $585 on a failed breakdown back to $590. Again most of the price action came overnight and the MSI was actually quite helpful to those who ventured into these waters given it updates in real time.   
Trading Strategy Based on MSI: The MSI's current state suggests the bulls are in complete control with price moving higher overnight, particularly with extended targets above. We advise caution given the size of today’s move when combined with a looming FOMC decision. Tomorrow will likely be choppy until 2 pm ET and provide two-way trading opportunities. But any shorts will be short lived so we favor the long side and advise being ready to flip your strategy after Chair Powel speaks. Tomorrow is another trade what you see day and there is no better way to do that than using the MSI.

Dealer Positioning Analysis:

Summary of Current Dealer Positioning: Dealers got hit today with plenty of ITM options that cost them dearly. Currently Dealers are selling $591 to $600 and higher strike Calls while also selling $579 to $590 Puts. We state often when Dealers sell Puts, price has a very high probability of moving higher. Given the quantity and range of Puts they are selling, Dealers do not believe prices will move below $579 on Thursday. To the downside, Dealers are buying $578 to $570 and lower strike Puts in a 2:3 ratio to the Calls/Puts they are selling, implying a very bullish view of the market for tomorrow. Dealers positioning was moving to bullish yesterday and today Dealers they are all in on this bull trend.  
Looking Ahead to Friday: Dealers are selling $592 to $600 and higher strike Calls while also selling $580 to $591 Puts in size, implying the Dealers believe the market can only move higher by Friday. They showed their hand yesterday with their strong desire to participate in today’s rally and are continuing to broadcast the same heading into this Friday. To the downside, Dealers are buying $579 to $560 and lower strike Puts in a 1:1 ratio to the Calls/Puts they are selling. They have been reducing their protection the last two days and today, while fully hedged as required, they clearly are showing us price will compound on today’s gains after a favorable FOMC report. We stated yesterday “Dealers still appear to be positioned for higher prices and less volatility than might otherwise be typical” and that proved to be very precise.

Recommendation for Traders:

With markets surging on the heels of Trump’s election win and the anticipation of a Fed rate cut, traders are positioned for what could be a pretty wild few days. The convergence of political clarity and potential monetary easing suggests heightened optimism, making nimble trading essential. As Dealers signal the all clear for higher prices, a strong indicator of a bullish tilt, this may also mean swift price reversals if momentum stalls. We recommend monitoring premarket updates closely and considering shorter timeframes for entries to capitalize on rapid moves without holding excessive overnight risk. Despite the positive sentiment, traders should maintain a flexible approach, with a preference for long positions above $585 and only modestly considering shorts near $590 to $595 until post-Fed clarity. This environment rewards discipline and an adherence to strict risk management. Staying informed and prepared to adapt to unforeseen volatility will be key, as election and policy impacts continue to ripple through markets.

Good luck and good trading.