Stock Market Outlook in the Coming Weeks
The next several weeks promise plenty of news and market volatility, with numerous issues / uncertainties on investors' minds including:
US Presidential election outcomeÂ
Lack of a new stimulus bill out of Congress (highly unlikely prior to the election, even though some lawmakers are still holding out hope of a deal - this also seems even more unlikely given the Democratic uproar over the President's Supreme Court nominee, the confirmation of which is to be completed before the election)
Course of the COVID-19 pandemic as we move into the winter in the US and as other countries in the world begin to see a resurgence and some countries are forced to take lockdown measures again
Persistently high unemployment (rate of improvement has slowed over the past several weeks)
Sluggish economic recoveryÂ
Continued flow of IPO's (9 next week) which causes investors to sell other stocks (mostly tech stocks) to buy, which can drive down the market if selling is concentrated in the FAANG group as we have seen with the recent market pull-back
Some analysts are predicting more volatility in the coming weeks and perhaps some further declines in the major stock market indices as stocks sell off due to the numerous uncertainties. However, once we are past the election and more fiscal stimulus is available, the markets are expected to stabilize and continue to march higher with the economic recovery, perhaps led by sectors that have lagged in the most recent runup including "traditional" cyclical stocks such as industrial / material companies. The S&P 500 (SPY) shows a very noticeable break from the rising trend since the March lows (see chart below). This could be an indication that a further decline can be expected before the selling is done, possibly as much as another 10% to 20% downside, according to some analysts. Considering how much and how quickly the markets have recovered from the March lows, that would not be surprising.
Similarly, the NASDAQ (QQQ) shows a similar pattern and faces similar downside risks, as shown below:
It may be wise to hold some cash to take advantage of the bigger dip if and when it comes. Individual stocks poised to benefit the most from the economic recovery should be held with a time horizon of at least four months (January) to allow for election and fiscal stimulus resolution, not to mention possibly a COVID-19 vaccine and more data on how the recovery is doing. Investors may even be able to look forward to a "Santa Claus Rally."  As mentioned above, "traditional" cyclical stocks seem poised to benefit from a rotation and better performance as the economy recovers, since they have not seen the same post-March rally as technology stocks.
It may also make some sense to make some small short-term bets in further declines in the indices either by buying puts or selling call credit spreads over the next four weeks or so.
Another great idea for capitalizing on the coming volatility, which is expected to spike significantly during the month of October (historically a month that has extremely high volatility) is an exchange traded fund that tracks 1.5x the VIX index, the ProShares Ultra VIX Short-Term Futures ETF (UVXY). As you can see, the VIX recently started to trend back up slightly but has been on a general downtrend from March as you would expect due to the recovery in the market.
In summary, a short-term bearish and long-term bullish strategy appears to be the best way to approach the current stock market environment over the next few months. There are several ways to play this as discussed above.
Of course, you will need to do your own homework and invest where you feel comfortable. I'm not recommending any particular stock or strategy and full disclosure, I do own / manage positions in the stocks mentioned above.  Stay safe, healthy and positive. Â
I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.
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