Riots Don't Matter But...

Riots and protests don't have any kind of lasting effect on the market, most will agree.  But then why do people get so bearish when they see the news coverage of the riots?  Its because people are emotional, and expect the market to follow that emotion.  The market is swayed by buy and sell orders, and in this day and age, most of that is HFTs hunting for paper flow to front run. 


If the market goes down this week, which I expect, will it be because of the riots?  Or because it reached extreme overbought levels, with over 90% of stocks above their 50 day moving average?  I am sure when it goes down, its going to be people saying civil unrest and riots finally brought a selloff.  But I would argue that its because the market has passed the thrust off the panic bottom phase, and entered a choppy topping phase. 

We are in that bear market topping phase, where the conflict between fundamentals and technicals causes choppy trading and eventually leads to the market rolling over and going back down to where it was at the panic phase. 

I could easily see a move down to SPX 2950 within the next 10 days and still not expect the market to have made the final top of this bear market rally.  I am sure any move below 3000 on the SPX would be accompanied by a lot of bearishness, considering the news flow and focus on the riots and looting. 

But we will soon reach the peak of the riots, and it will be forgotten like so many other irrelevant news stories that scared investors in the past.  The only very minor tangential effect the news flow could have is on the November election, but even then, I don't think it changes the results.  Its too far away from November, and people will have mostly forgotten about these riots by then. 

The economy is the most important factor in voters' decision making, and the coronavirus economy is still going to be weak with lots of unemployment in November.   So that is a huge negative for Trump who is facing an uphill battle to get re-elected under such weak economic conditions. Putting his signature on stimulus checks is not going to change peoples' opinions about him and the weak economy. 

But unlike what most people believe, a Biden win and Democratic sweep of the Congress would not be a bearish outcome for stocks.  Looking at all the spending and stimulus that Pelosi and the mainstream Democrats want to do with Trump in the White House, imagine the amount of spending that they would want to do with Biden in the White House.  And all that things equal, higher government spending not fully offset by tax increases raises GDP, and that is usually bullish for stocks. 

The worst possible scenario would be Biden winning and Congress being controlled by the Republicans, similar to the early Obama years.  That would mean fiscal stimulus would likely be blocked by the Senate/House, and this time, with rates already at zero and the curve near zero out to 10 years, the Fed won't be able to rescue the stock market through the bond market channel, and would have to outright buy stocks if they want to rescue it.  

The volume was extremely low yesterday, surprising considering it was the first trading day of the month, and with the riot news out there.  Its actually not a bullish setup in the short term, as I've seen a few low volume tops after an extended rally off a panic bottom.  Plus the put/call ratios remain low and overall, investors are complacent.  However, hedge funds are still not fully embracing the rally, so its not yet an all clear to go all in short.  We may chop around the SPX 2950-3100 level for a few weeks before it finally cracks much lower.  You rarely get perfect setups on the SPX but odds are in favor of the shorts here.