“Exhaustion selloff or relief rally”
By Peter Kenny, Chief Market Strategist for Global Markets Advisory Group and Independent Market Strategist, Kenny & Co. LLC
In mid-August, in Kenny’s Commentary and on Bloomberg Radio, I suggested that the stock market, as measured by the S&P 500 ( ^GSPC), would reverse lower and, in the process, shed between 5% and 7% by election day. As of yesterday’s closing, the S&P has given back 4.85% since the August 15 close of 2186 (its 52-week high).
In fact, the S&P 500 has posted nine consecutive daily losses over the past two weeks—the first such occurrence since 1980. Though daily losses over the nine-day stretch have been incremental, the accumulative effect of this reversal in prices has begun to mount on investor outlook. In the process, we have seen both volume and volatility rise. Volatility, as measured by the S&P Volatility Index ( ^VIX) has nearly doubled in that period. On August 15, the VIX closed at 11.81. On Friday, the VIX closed at 22.52.
Without question, the primary driver of concern for investors is increasingly being driven by the US presidential election process—not the interest rate narrative or Q3 corporate earnings results. With just a few days before the historic election results, the race has tightened dramatically. Once considered an impossibility, a Trump presidency, though still only 35% probable, has surfaced—much to the obvious discomfort of many in the financial industry. Trump’s ascendancy has fueled tremendous trepidation on Wall Street, as has been evidenced by recent equity market action. The climb of Trump’s odds has been inversely reflected by slipping equity prices.
Look for the nine-day selloff to gain meaningful inertia on Monday if polling continues to suggest that Trump’s voters have emerged from the ranks of the undecided (keep an eye on the IBD poll), and look for that momentum to fuel a meaningful reset lower in coming days if Trump is elected. Tuesday and the days immediately following could well present investors with an opportunity to cash in on an exhaustion selloff that could well take the S&P 500 another 4% to 5% lower in the near-term. In the event Hillary Clinton can turn back the Trump tidal wave, markets will reverse higher on Tuesday staging a relief rally. In all this chaos and confusion, there remains opportunity.
Opportunity is knocking
It is precisely at moments like these that opportunity presents itself, regardless of who wins the White House. The next resident of the White House, regardless of party, will have a clear mandate to invest heavily in US infrastructure. Think steel and cement. Seasoned investors should look no further than US Steel ( X). On Friday, the ninth day of the longest selloff in U.S. equity markets since 1980, US Steel jumped $0.66, or 3.44%, on surging volume. Steel posts a P/E of -2.03. Not pretty. However, when—not if—the federal infrastructure spending plan takes shape in coming months you can be sure that coming quarters will likely reflect a more attractive P/E.
Aggressive investors made that point under the radar on Friday. Another candidate for outperformance in the coming days of infrastructure investment is Martin Marietta Materials (MLM). On Friday (again in a down market), MLM gained $3.85, or 2.04%. MLM’s P/E is a considerably more expensive 30.25. However, given the near certainty of massive Federal spending on infrastructure, MLM could well see margin expansion, not to mention price appreciation in coming quarters.
Published on Yahoo Finance – November 5, 2016
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