11-19-24: Something Else is Worrying the Market

by Ivan Martchev

November 19, 2024

I have to admit that I expected better retention of the post-election gains, which actually started the week before the election. If you bought at the lows on Wednesday, November 6^th, when we knew the result, all those gains disappeared by Friday, November 15^th. True, there was substantial appreciation of the major stock indexes on the night of the election, which more or less is all we have left to defend this week.

Given such a surprising unwinding of the post-election rally, I thought harder about what else may be bothering the market. A successful hedge fund manager, famous for his expertise in futures markets, likes to play out an interesting exercise on a regular basis to help his trading strategy. He figures out a possible path for the market beforehand and then compares his written speculations to what actually happened.

I think that this is a great idea to do on a regular basis. With that in mind, here are some observations.

The NASDAQ 100 (NDX) is home to the most profitable tech companies on the planet. One could say they are the envy of the world. They had been wildly outperforming the overall market, until July, when the yen carry trade unwound and other issues caused a very sharp sell-off. Then, we saw some rotation out of technology into the value part of the market, so the NDX had not made a fresh all-time high since then, but after the Trump election victory it did so, then it sharply reversed and gapped down last Friday:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This creates a very interesting trading pattern, which some traders call an “island reversal.”

NDX represents the cash market for its stocks, trading from 9:30am to 4:00pm EST. If those were NDX futures, such gaps would be barely visible, as the futures market is only closed weekends and one hour a day, 5-6pm Mon-Fri.” Outside of that single hour (“black hole”), there is active cash trading for 23 hours.

Still, any cash market gaps indicate buying pressure on the way up and selling pressure on the way down. Right now, we see selling pressure in the NDX. I didn’t think we would see that kind of selling last week, so I asked around to get some independent input. Here is one plausible explanation I got from a trader, who saw the unsustainable parabolic nature of the move the week before. He actually explained it to me personally, in detail, ahead of time, which I somewhat dismissed at the time, then saw it happen: “The market went parabolic, and sentiment got too giddy. Then rates backed up and triggered profit taking as Powell was somewhat hawkish. Biotech got crushed on policy fears and then AMAT didn’t deliver.”

Specifically, there was significant selling into strength before Powell even spoke last Thursday and the futures never reacted negatively, as Applied Material’s (AMAT) reported earnings after hours, and not in any meaningful way. So, I wondered, what if something else is bothering the market? What if it is more about President-Elect Trump himself, whose victory was the original reason for the market surge?

The only thing President Trump has done so far is announce some of his cabinet picks (they still have to be confirmed by the Senate). I think these picks show that he means to shake things up a lot more than he did in his previous administration as he will not run again, and he feels he got hamstrung by COVID in 2020 and needs to get the job done on trade policy and better functioning of the federal government.

Those issues are in need of serious, highly necessary policy changes, in my view. By being aggressive on those fronts, though, he will spook some people, so I expect a rise in volatility as he takes office in 2025.

Now, I must ask, what if he is spooking people already? Markets anticipate ahead of time, and if they see huge swings in tax and trade policy, which they cannot calibrate reasonably well, that could trigger a sell-off and a bigger reason than Powell’s vague remarks last week or Applied Materials’ earnings report.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

You can see markets fearing Trump in the US Dollar Index (above), which was up a lot the week of the election and up a lot last week. In fact, the US Dollar Index has been up for seven weeks in a row, which means the currency market anticipates a dramatic change in U.S. trade policy. It also has to be noted that the surging dollar has generally been viewed as a defensive trade and been associated with times of weakness in share prices, but until last week the weakness was in global markets – until it hit home.

I know that a complete reversal of the Trump rally would be a red flag, as November is the strongest seasonal month of the year. The NASDAQ 100 Index should not spend any time below the red line drawn on the first chart, at the lows for November, which opened the month at 19,955 but closed on November 1 above 20K. Any trading below 20K for more than a day or two that leads further down tells me that: 1) November at that point is a negative month, and 2) the market is even more worried. This has not yet happened as I write (on Sunday), but I am trying hard to think like a hedge fund manager. I always thought one should learn as much as possible from successful people, so this is my attempt to do so.

This week, Nvidia reports on Wednesday (tomorrow), and if the market is down before the report and we have a blow-out report – like they are selling off all their GPU chip sets as fast as they can make them – it stands to reason it should rebound (“should” being the key word). I don’t know what it will do ahead of time, but I know there is a red line at 20K on the NDX that will tell us a lot about this market sell-off.

Navellier & Associates does not owns Applied Materials, Inc. (AMAT), in managed accounts. Ivan Martchev does not own Applied Materials, Inc. (AMAT), in a personal account.