Ok...Was THAT The Bottom?
1.) NASDAQ - On Oct 26 I asked if the Tech correction was over. I commented yesterday that I was a bit early in that possibility. However, last night brought some very interesting Nasdaq futures action after the mid-term elections were called. Democrats took the House and Senate. Some will think that's great...some will think that's the end of the world. I honestly don't care. It's never a good idea to mix money and politics. I simply want to look at the facts and how markets respond. Leading up to this election, sentiment toward AI was at its worst. On top of that, hedge fund managers were warning of a market crash, and that the "market was broken" (Ackman). Overnight, Nasdaq futures fell as much as -2.5% (S&P futures were down -1.4%) before recovering all their losses and trading slight higher this morning from last night's close. Meanwhile, the VIX (S&P 500 volatility index) was negative the whole time, despite the selloff in futures. The VIX opened at 19.20 and is down to 17.85 so far this morning. Nasdaq futures came very close to its late July bottom. That was the spot the market staged a strong August recovery. What's also interesting is that overnight, Nasdaq futures breached their 200 day moving average, which is an area many traders will stand in and buy. This is constructive price action and it leads me to believe we may have seen the market bottom for the rest of 2026 during last night’s after-hours session. That said, it will still be important to watch important market constituents like Nvidia. I'd still like to see the Nasdaq futures get back above that shaded area too.
2.) MID-TERMS - Ok...the election nonsense is behind us now for another couple of years. Markets can now re-focus. History is always an important guide when considering how markets might behave after events like this. Bottom line, as you can see below, is that the S&P 500 has risen in every post-midterm November - April season since 1950 with an average return of +14.8%. Of course, there are many who want to compare this period we are in now with more devastating historical periods like 1930 or 1938. That's fair. The 1930 period produced a -11.5% loss and the 1938 period produced a -17.1% loss. To be very fair, today's market structure is very different from those periods. From technology and speed, participants, liquidity, regulations and safety nets and, more importantly, to monetary policy. I don't like the Fed. I'd rather see markets function without them. But that's not the world we live in. The 1930s operated under the gold standard with limited Fed flexibility and frequent bank failures. Today, current markets trade in a fiat system with a highly active Federal Reserve, quantitative tools, and explicit financial-stability mandates. It's a very different world.
3.) LEVERAGE - Warren Buffett once shared a line from his longtime partner Charlie Munger - "There are only three ways a smart person can go broke: liquor, ladies, and leverage." Buffett explained that Munger only included the first two because they started with the letter L. They saw the real problem was leverage. Borrowed money lets you make a bigger bet. When you're right, that's fun. When you're wrong, you find out why Munger wasn't worried about the liquor. Today's markets include a lot of funds that double and triple the daily moves of popular stocks and indexes. A huge amount of that action has been in technology and artificial intelligence - think Nvidia (NVDA), Micron Technology (MU), and the companies making the chips powering AI. Some of those funds have been tortured...with semiconductors (SOXL) losing almost half its value in October. Now we're seeing the leverage coming back to reality. That's a good thing! Due to big tech, the S&P 500 slipped about 1% in October. But give every company an equal weight, instead of letting the biggest names dominate, and the index gained about 5%. In other words, the average stock was doing better than the famous index. That's a lot of green for a stock market supposedly falling apart. The demand for puts, contracts used to protect against declines or bet on them, jumped back up toward March levels. That is positive since, again, when those contracts get unwound, dealers end up buying futures. More fear, more stocks going up: That's worth paying attention to. Maybe what we're seeing in the leveraged market is what the market needs to reset the bull. Has it been enough? We'll see. We still need to keep a close eye on the market levels I mentioned yesterday along with how the big names are acting.
