Election Day is here! Can you believe it? Doesn't it feel like folks have been talking about it for a year? Or is it two years?
I can honestly say that I have no idea how the election will turn out. And if you told me how it would turn out I wouldn't have any idea how the market would react to that result. What I can tell you is what the indicators look like.
Using one metric Monday's rally with good breadth managed to take a step into short-term overbought territory. You often see me use the "what if" for the McClellan Summation Index when the market is falling. I calculate what sort of breadth numbers we need to see to get the Summation Index to halt its decline. When it needs more than +2,000 advancers minus decliners on the NYSE we have stepped a toe into oversold territory. When we get to +4,000 we are extremely oversold.
The inverse applies as well, although I am not sure I have ever seen it get to -4,000 (extremely overbought). The good breadth numbers over the last week and change have taken this indicator to where it now needs a net differential of -2,300 advancers minus decliners to turn the Summation Index back down. That's a good thing in that there is a good cushion should we get a pullback. Short term it puts the market into short-term overbought territory.
The green circles represent those -2,000 readings. Sometimes we have seen sharp declines (see March of this year). Sometimes we have seen short, inconsequential declines (see August 2017) and sometimes we have seen chop before resuming the uptrend (see July of this year). I never know which will be the case.
If we move to the intermediate term Oscillator, the 30-day moving average of the advance/decline line, we see that we are still in oversold territory. This should be supportive of the market.
There was another change on Monday. Despite a morning decline in the market (and my beloved small caps lagging all day!) the number of stocks making new lows was the fewest since August 31. The 10-day moving average of stocks making new lows is now rolling over. I'll admit that in prior instances it peaked and rolled over immediately and this time it has spent quite a bit of time attempting the roll over, but typically once it heads down it should be supportive of the market.
I do not know how the market will react to the election results. I do know that one metric has dipped a toe into overbought territory and my own short term Oscillator will do so late this week/early next week. So a pullback is possible but the intermediate-term indicators are still oversold, which means I still think a pullback will lead to another rally.