Now, it is important to keep in mind that the election is influencing stock, foreign exchange, and bond prices. In fact, people have been using the USD - MXN (Mexican Peso) exchange rates as a proxy for the election. The Peso would weaken every time Donald Trump seemed to be pulling ahead, but it would strengthen when Hillary Clinton seemed to take the lead. This influence on the capital markets is justified by the uncertainty of the election. Investors are not willing to take big bets until they have a better grasp on the future.
Lets take a look at the S&P 500:
What are the headwinds for the S&P 500? Besides the election, earnings are also holding the index back. High valuations, on an absolute basis, is causing more people to keep there cash, rather than buying stocks. The fear of buying into an expensive market is worrying. However, on a relative basis, the S&P is not that expensive. With interest rates so low, the stock market could have higher valuation. Using regression analysis, the P/E ratio could be somewhere around 22, rather than the 18 it is at currently. The historical average P/E is not as useful in these abnormal market conditions.
Next, we will take a look at the NASDAQ Composite Index:
recently moved past the range, and is testing the support. Also, the momentum readings are similar, in that there is none. Investors are likely waiting for the election, before putting more money to work.
Now, lets look at the transports. This index has been used as a leading indicator for a long time, and can give some insight on the direction of the market.
The transports are a good leading indicator because companies need to transport materials and goods to customers. So, if the transports are making money, it means companies are transporting their goods. What we are seeing in this chart is a correction. The blue dashed line was the uptrend, then it broke down and followed the red dashed line. Now, there is a bullish formation called an ascending triangle. The ascending triangle has a flat top, with an angled bottom support. This is bullish because the support keeps moving up, which means more an more people are willing to buy at higher prices. Now, it may be a bullish formation, however, it is still possible for the index to break downwards.
What makes this chart great, is that it shows, just like the previous two indices, that the market is waiting. This pattern shows, that people are bullish, but they are waiting for a catalyst to really push the index up. Could the catalyst be the election?
Conclusion
For the moment, it seems that investors are waiting for a catalyst before they start moving into the markets. Even though normal valuation metrics put the market in an expensive range, it is important to realize that we are not in a typical market environment. On an absolute basis, the market is expensive, however on a relative basis, stocks have some room to grow. With low and negative interest rates around the world, the stock market could see a big gain as people are looking to put their cash to work.
What is that catalyst? Well, it seems to come down to two options, earnings and the election. Now that oil has stabilized, earnings are on pace to be positive for the first time since the first quarter of 2015. Which, could finally put fears of a recession away, for now. Without the fear of a recession, investors could be willing to put their sidelined money back into the markets.
The other catalyst could be the election. When the election is over, analysts, and investors will finally be able to change their expectations of the future. They will have a better grasp of future fiscal policies, and economic plans. Which of course, means they can implement their plans and strategies accordingly. Really, the catalyst is more likely a combination of the two. A strong quarter of earnings, and a more certain future could be great for the markets going forward.
