Wednesday's Market Minute: The Next President Has An Uphill Battle With Stocks

The massive rally in stocks that's holding seems to suggest investors can be confident that a final result of the presidential election is around the corner. Coming into today, the U.S. stock market looked poised for a relief rally. Big, important stocks and the indices as a whole came into this week after a sell-off that left them sitting on strong support — places where technicians would expect a bounce. VIX was dialed up to near 40, and options data showed traders were buying downside hedges and far out-of-the-money puts on the S&P 500.

What comes after all of this positioning is unwound is, of course, harder to figure out with a divided Congress and still no obvious plan for stimulus. In other words, bulls still have some major obstacles. That's because the bear case for the stock market right now is incredibly simple, and quite compelling: quarantine created a hyper-bullish scenario for tech-stock valuations that will deflate the more the economy reopens and creates new ways to invest in growth.

The simplest explanation for why we're down 7% from the highs and why buy-the-dip was struggling pre-election is because investors were trading high-growth tech stocks for recovery plays, and it's hard for recovery plays that are still dealing with COVID complications to carry the S&P 500 to new highs when mega-cap tech is deflating.

In short, without a gigantic stimulus, the stock market remains in a trap: enough economic recovery to chip away at tech valuations, but not enough for recovery trades to replace tech.

Photo by Aditya Vyas on Unsplash