Stocks started slowly on Tuesday morning, but have regained their momentum and continue to run up as we get closer to election results. The Dow Jones continues to lead and has taken out the highs that were hit before the Fed interest rate decision last Wednesday. Small caps are lagging and still off those pre-Fed levels, and big cap technology is improving, but still struggling. Tesla (TSLA) is a big name that is having problems now.
I believe optimism around the election is helping fuel the action -- that it is the match that lit the flame. But now we have momentum and fear of missing out that is creating the fire. Breadth is running two-to-one positive, and we have about 90 new highs to 200 new lows.
The problem with this action is something that we have seen quite a few times this year. A big rally into a news event sets up technical conditions to sell into the news. We have seen it this year several times on the Fed, consumer price index news, and employment reports. The market expects good news and then is disappointed when it is not as good as expected.
Currently, the expectations of a "red wave" of Republican victories are high, but we should also expect the unexpected -- such as delays in vote counts. If the market continues to run up Tuesday, then there will be a much higher risk of a selloff tomorrow, even if the news is perceived as "good."
As soon as the election news is out, we will immediately start looking ahead to the consumer price index report on Wednesday morning. That report has burned the optimists several times, and there is plenty of danger once again.
I don't want to sound too negative, as we have some good action in individual stocks, and technical conditions are improving overall. One theme that I am concerned about are the poor reactions to some of the earnings news from small companies. We have seen some very cautious guidance, and even good reports are getting punished. Good examples are what's happening now with the stock of ShockWave (SWAV) and, recently, Lantheus (LNTH) .
Worries about a recession are building, and we are starting to see more evidence that one is coming. Unfortunately, the election is not going to be able to stop the economic momentum that is already in place.