The Risks Of Tomorrow’s Runoff Elections Scare Off Investors

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The Risks Of Tomorrow’s Runoff Elections Scare Off Investors
<a href="https://pixabay.com/users/JamesDeMers/">JamesDeMers</a> / Pixabay

Commenting on the risks of tomorrow’s runoff elections and today’s trading Gorilla Trades strategist Ken Berman said:

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The Risks Of Tomorrow’s Runoff Elections

Even though the New Year kicked off in a clearly bearish fashion on the street, today’s session hasn’t changed the positive outlook for the year.  With the risks of tomorrow’s runoff elections suddenly being very real, a lot of investors reduced their positions today, and despite the Dow’s new all-time high, the year might kick off with a pullback.

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Real estate stocks, industrials, utilities, and tech stocks were hit the hardest today, as investors priced in the risk of a Democratic sweep, and sold the most vaccine-sensitive issues. While most of the key sectors finished in the red, materials and energy-related issues managed to gain ground in the face of the selloff. The defensive healthcare and consumer staples sectors also held up well while financials were helped by the uptick in Treasury yields in the hectic environment.

The Coronavirus Vaccine's Effects Are Still Marginal

While the vaccine push continues to gain steam globally, its effects are still marginal, and the pandemic will be with us for several months. Even though the reported numbers have been inconsistent across the globe due to the holidays, the virus continues to quickly spread in the U.S. and Europe alike. The emergence of the new, more active strain now led to a national lockdown in the U.K. but the variant is already present in several other European countries, with the U.S. also confirming its presence today.

GOP Only Needs One Seat

The GOP only needs to win one of the two seats that are up-for-grabs on tomorrow’s elections to maintain its Senate majority, but the outlook for the vote has changed substantially in recent weeks. The odds of a Democratic sweep have been steadily increasing according to polls and prediction markets, the early-voting patterns also point to a closer-than-expected race, and the President’s call for challenging the November results could also hurt the Republican candidates. Most analysts agree that a Democratic sweep would pose a risk for stocks, but with all the positive trends in mind, it’s unlikely that bulls will have to deal with anything more than an orderly correction in stocks. 

While the runoff elections will likely steal the show tomorrow and lead to choppy and cautious trading on Wall Street, investors will also have a couple of important economic releases to consider. The ISM manufacturing PMI is expected to edge lower to 56.6, which would still be an encouraging reading in light of the global deterioration in the sector. The Wards U.S. vehicle sales number will be out during the day as well, while the overnight session will be highlighted by the German retail sales report. Stay tuned!

Stocks Start Year In A Bearish Fashion As Runoff Elections Loom

Headlines

  • Stocks finished broadly lower amid the rising political tensions surrounding tomorrow’s runoff elections in Georgia
  • The runoffs are too-close-to-call according to the latest polls, despite the slight edge of the Democratic candidates
  • Gold hit an almost two-month high in the wake of the risk-off shift while the Volatility Index (VIX) surged higher by double-digits
  • The Chinese, Italian, and Spanish manufacturing PMIs all missed expectations, hinting at a slowdown in the sector
  • The U.K. will enter a national lockdown due to the new strain of the COVID-19 virus

Market Wrap

Index G/L Current level Year-to- date 50-day 200-day
Dow -383 30,224 -1.3% 29,350 26,776
Nasdaq -190 12,698 -1.5% 12,103 10,546
S&P 500 -55 3,701 -1.5% 3,591 3,241
Russell 2000 -29 1,946 -1.5% 1,803 1,512

Decliners outnumbered advancing issues by a more than 3-to-1 ratio on the NYSE today, with 107 stocks hitting new 52-week highs and 4 stocks hitting new 52-week lows, while volume was slightly above average.

Price Action Gauge ******** (reading for 01/04: 53)

With today’s session together and the recent relative weakness of small-caps in mind, price action clearly deteriorated on Wall Street, but while a short-term correction is possible here, the long-term trends are in no danger.

Oversold/Overbought Gauge ******** (reading for 01/04: 45 Color: green)

The large-cap benchmarks are getting close to neutral territory according to the most reliable momentum measures thanks to the relatively quiet consolidation of the past few weeks, but they remain slightly overbought and there is plenty of room for today’s pullback to continue.

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