Street Vision: Volatility as a Constant

Stocks began the first 2 days of November right where they left off October, with big intraday swings on the Market Averages, and a very weak technology sector leading the downside action.

On Friday, despite a very impressive October Jobs report, a sharply higher opening failed to hold, as disappointing earnings from Apple Inc (^AAPL), and a volley of comments that tempered optimism on China trade talks were too much for stocks to extend their rebound rally from the prior 3 days.

The recent theme of Social Media and Internet Content Delivery companies bearing the brunt of the selling was in full force Friday, as investors continue to have zero tolerance for sloppy earnings reports, or top line revenue shortfalls.

Companies with triple digit valuations and/or those with outsized gains year to date are particularly vulnerable, as investors continue to de risk within the Equity Asset Class. In the case of Apple Inc (^AAPL), some were particularly irked by their decision to discontinue monthly sales metrics on individual product lines.

There were positives to take from both Fridays fail and the entire week. We did have net gains on the week for major market averages ranging from +2.4% for both the DJIA and S&P 500 to +4.4% for the Russell 2000.

While the S&P 500 (^SPX); 2723 -0.6%, had a 2% swing from high to low, it rallied off the 2700 benchmark at the lows after failing to get through near term technical resistance at the 2750 – 2760 level. The 200 day moving average is at 2765 and the S&P 500 has only closed more than fractionally above it twice since October 10.

Keep an eye on those near term support and resistance levels this week.

The lows last week held well above the really ugly lows from the prior week on both an intraday and closing basis. Given the 3 to 5 days of high volume that accompanied those lows, the longer they hold on any further market selloffs, the more investors will gain confidence that those lows will hold through year end.

The Advance/Decline stats were also encouraging on Friday as the broad market outperformed the market averages. Declining issues trailed advancers by slightly less than 3 to 2 at the NYSE, and despite the sharp selloff in high profile technology names, it didn’t spillover to the rank and file of the 3000 stock NASDAQ universe as advancing issues actually beat decliners by 100 issues.

On a day where the NASDAQ Composite (^IXIC) was -1%, and the even more tech centric NASDAQ 100 (^IXNDX ) -1.5%, the adv/decl stats are a positive divergence that we will watch closely this week.

Finally, the calendar may benefit investors this week. With the Midterm Elections tomorrow, equity markets may get some relief that regardless of the outcome in the House of Representatives, the uncertainty will be lifted.

Additionally, the market has felt at times over the last few weeks that it was responding to the ebb and flow, or more appropriately the roller coaster anxiety swings regarding the Midterm outcome. Typically, I dislike mixing political and market forecasting, but it’s obviously the Elephant in the room so here’s my view:

The Republicans will gain 3 to 5 seats in the Senate. That’s the easy part, and it will be closer to 5 than 3.

The House of Representatives is very tricky, but I have a very contrarian forecast from the narrative that most political pundits have united around. There has been a meaningful shift in sentiment over the last 3 to 5 days that has gone largely undetected that will aid in the Republicans holding their majority in the House, albeit with a much narrower margin than they currently have. When the dust settles their margin somewhere between 220 – 215 and 225 – 210.

I’m not just throwing darts. There is a massive ABC – Washington Post survey/poll that hit over the weekend. It’s a 25 question multi-tab survey of over 1,000 registered voters, broken down by every demographic imaginable. Here’s the key takeaway: The Generic Poll gives the Democrats a 7-point advantage. That margin is NOT enough to flip the House.

Additionally, inside the detail there is one critical metric.

Among independent women (by party affiliation) the advantage to the Democrats is +2……that margin among independent women was +30 a week ago. That is not a typo! Party preference by independent women in the Generic Poll declined from Democrat +30 to Democrat+2 in 1 week. The margin among women was a major part of the narrative supporting the Democrats taking control of the House and it has evaporated.