Wall Street Positioning for Year End Rally

As Quarterly reporting begins in earnest – 100+ S&P500 firms are releasing numbers this week – we expect the Street to begin positioning itself for a post election rally. So far, earnings results have been decidedly mixed, with some good results (Texas Instruments (TXN) and IBM) and some not so good numbers and/or guidance (Sandisk (SNDK) and GM). Economic figures are a similarly mixed bag of good and bad, confusing the long-term picture for stocks.

We suspect that most of the time, it’s not the headlines that are driving the markets, but rather a complex mix of internal factors: fund flows, sentiment, money supply and valuation concerns are often primary movers. These interrelated elements can make it appear that markets are ignoring both good news and bad as they wend their way through their intricate cycles and tipping points.

Where are we now in the cycle? Seasonal factors lend a slightly Bullish tone. If you “sold in May, and then went away,” then your next buy point is Halloween. Further, we take the somewhat contrarian view on the election and markets: We do not think it is nearly as significant to stocks as most. Historically good performance of equities under divided governments (think Reagan & Clinton) should alleviate concerns for those who fear an incumbent defeat.

Further, we note that this has been a particularly rancorous and nasty partisan campaign. Once the attack ads leave the airwaves, we expect the country to breathe a deep sigh of relief, and get back down to the business of buying iPods, doing home renovations, and selling tchotckes on eBay – regardless of who is occupying 1600 Pennsylvania Avenue.

Right now, some markets look technically healthier than others: Nasdaq, taking a page right out of the TA textbook, traded down to the gap created on the first day of Q3. Once that gap was filled, the Nazz took off for higher levels. Meanwhile, SPX is the next best looking chart, as it put in a double bottom at 1105 late last month. It is now trying to build upon that decidedly modest base, with mixed success.

The Dow remains the most troublesome of the 3 indices. Its recent low was the first not below the prior three bottoms of March, May and August. However, it may be premature to presume that last weeks numbers will be the worst for seen this month. In July, the Dow struggled to after finding a higher bottom, rallying before making a new low. A replay of that scenario is a very realistic possibility at present.

Traders looking to get long for a year-end rally should consider the relative strength of these indices, and note that the Nasdaq remains the strongest of the markets.

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