Certainty = Higher Prices

There is a price to be paid for being certain about an event.  Now that we see the reaction after the midterm elections, a sizable number of investors were waiting to buy until after the election results came out.  This is what happens after events like Brexit and the 2016 US presidential election (big move lower overnight after Trump elected) where you had knee jerk selling and then a big rebound.  The midterm elections ended up as expected, which is enough to ramp the SPX futures up almost 1%. 

It is not just equities that investors were waiting to buy.  Bond futures are also considerably higher despite the big move up in SPX futures.  I still get a sense that the Fast Money crowd is leaning bearish, although after today's market reaction to the elections, they will be quickly moving back to the bull crowd.  The bulls have the advantage for the next few trading days, as the migration from those on the sidelines come in to provide buying power for stocks.  I am still long, but I will be looking to sell in the coming days after the rally matures a bit more.  There are still quite a few equity underweight fund managers that need to jump back in to keep up with the indices. 

I am not ruling out a move back up to the January highs of SPX 2870, but I will sell before then.  I don't have enough confidence in the long term picture for stocks to try to catch the last bit of the up move.  A rally to 2820 and I will eagerly sell my holdings and wait to put on shorts.  I am especially going to be intrigued if there is a trade deal with China, which would be the good news knee jerk rally that would be a great time to short. 

Big picture, this is shaping up to be part of the topping process, as the leaders start to fade and defensive sectors start to outperform. The recent weakness in energy stocks is notable because they are one of 3 sectors, along with financials and utilities, that historically perform the worst in the last 3 months of  a bull market.  Financials have been lagging all year and utilities, which usually are bond substitutes, have been surprisingly resilient despite higher rates. 

The biggest thing that stuck out to me over the past few months of action is the underperforming tech leaders in the FANG group.  I am keeping track of the FANG+ index, which includes the hottest and most popular tech names, and the chart clearly shows those stocks topping out. 

Over the last 3 months, SPX is + 3.1% and the FANG+ index is - 3.47%.   The FANG underperformance has gotten worse in the past 2 months.  This definitely rhymes with 2000 price action, when the Nasdaq topped out before the SPX.  Without the leadership from the growth names, I have a hard time picturing a sustained rise in the SPX. 

Short term, there is nothing to do if you are already long.  I would wait a few days to let this rally mature a bit more and wait for higher prices to sell.  For those in cash or looking to short, patience is needed.  The fund managers are still migrating back to equities and it will take a couple of weeks for them to get all back on board.  Plus the wave of stock buybacks will be huge this month, so the market should grind higher for now.