Let me repeat — I don’t believe the set up going into the U.S. election now is similar to how it was in 2016. Here, I will show you the differences between the two periods.
One difference is sentiment, but let’s begin with some of the indicators.
The 30-day moving average of the advance/decline line, which I view as an intermediate-term overbought/oversold oscillator was sitting at negative 300 and had been declining since early August, with nary a bounce (arrow on chart). That’s how oversold we were heading into that 2016 election.
This time around, we had that sort of oversold condition in mid-to-late September, but now we’re hovering at the zero-line, so it is just not comparable in terms of oversoldness.
Look at the McClellan Summation Index in 2016. As we headed into that election, it was around negative 300 and hadn’t seen an uptick since late July. That was three months of relentless selling/declining stocks.
The current situation shows the Summation Index had been heading south since mid-August, but it lifted in late September, forgoing that pent up oversoldness. It is simply not present today. In other words, many stocks have already rallied, unlike 2016 where they had not.
On the sentiment front, there is the Investors Intelligence bulls. I have noted several times in recent days that with bulls at 59.6%, it is easier to be cautious than bullish. But look at where we were in 2016 (arrow on the chart); bulls were at 41.6% as we headed into the election. There was a lot more room for folks to get bulled up than there is today.
The AAII Bulls in 2016 were at 23% (arrow on chart). Today they are not overly bullish, but they are at a multi-month high of 35.7% This, too, is different.
The National Association of Active Investment Managers (NAAIM) saw their exposure to the market at just shy of 60% in 2016, down from 98 in August.
Their current position is down from the extreme reading over 100% two weeks ago, but at 87% I think we can agree, it’s not as though they are terribly bearish and under exposed to the market.
Finally there is the put/call ratio. It finally got to 1.11 this week, but look where the 10-day moving average was as we headed into the 2016 election: 1.2. Do you realize how many high readings we had to see to get the ten day moving average up that high?
Today that metric, even with Monday’s high reading of 1.11 finds the ten day moving average at .83. Again, there is a very different sentiment picture that has developed now than there was in 2016.
I am not here to predict the election winner. I didn’t know who would win back in 2016, either, but I did know that the market was poised to rally no matter who won. I simply do not think that is the case this time. This time, I think there is a real possibility that we could see the market head down in November, rather than up.
Someone will surely ask what can the market do to change that? Should the market continue downward with no rally before the election, we would be so grossly oversold on a short-term basis that we’d have to look for a post election rally. And if we sold off enough to get all those intermediate-term indicators oversold that quickly (not usually doable) or we sold off enough to get sentiment super bearish in the next week, then I would look for more than a short-term rally. But right now the set up just isn’t the same as 2016 in my view.
As for Tuesday’s market, we really should have seen more than Nasdaq rally, and we didn’t. We remain short-term oversold and as long as that’s the case, I will think we can rally short term, especially since now the McClellan Summation Index needs a net differential of positive 2,400 advancers minus decliners to turn back up and once it needs positive 2,000 it is oversold short-term.