Everyone and their mother is saying that the markets will sell-off post-elections. Does this mean we will sell off, or could it mean that it will skyrocket higher, since the market does whatever it can to maximize pain for everyone?
Its going the other way as well, everyone is anticipating more of a rally to at least 1200 on the SPX and 1250 by the end of 2010. The rubber band is being stretched to its limits on both ends.
From: "Greg Roy" wealthinsideralliance.com On May 6 of this year we had a "flash crash" in the stock market. The Dow fell over 1000 points in a matter of minutes. It did recover and close the day only down about 400 points, but investors everywhere were wondering how it happened and what caused it? I have a video today to share with you that is very pertinent to not only what went on during the flash crash of May 6, but also how the next stock market crash will likely unfold. Joe Themis starts out by saying that the economy today is very much like the economy of the 1930's. He recognizes that real organic growth simply isn't taking place, and that the miniscule positive we see in the GDP is merely a purchased result of stimulus money. Joe then proceeds to describe how the stock market structure has changed in the past decade. We no longer have market makers who would commit money and smooth out - to a degree - the imbalances in buy and sell orders. In speaking directly about the flash crash Joe says, "High frequency traders are a by-product of a market structure that has an internal flaw, and it's a HUGE flaw... it needs to be addressed... The reason why there was volatility that day (May 6, 2010) was because they walked away... they had no obligation to stand there... that was the prudent thing for them, but it wasn't the prudent thing for the investor. We're relying on these guys now to provide liquidity because there is no longer a specialist system, there are no longer over the counter market makers like there used to be, so if you're my main liquidity provider and you decide to take a walk down the block, well now I've got a problem because there's no one there, and that's when we got that vacuum when we plunged over 1,000 points that day. Which was easily predictable, OK, and it will happen again, there's not a doubt in my mind." Joe then goes on to talk about the difference between the flash crash this year and the crash of 1987. He states that in 1987 the markets were overwhelmed by selling and that the specialists were trying to stem the decline, but were simply over run by too much selling pressure. In the flash crash this year, it wasn't that the market was over run by sellers, it was simply that the bids disappeared. That's a very scary thought. What he is saying, and I agree with his point, is that there are no buyers for stocks at these inflated levels. All it takes for the Dow to drop 1000 points is for the HFT guys to stop bidding. The only reason that stocks remain this high is because the high frequency traders are still passing stocks back and forth amongst each other. On May 6 we saw what happens when they decide that they don't wish to place bids. What if something happens (such as recognition of systemic risk over the mortgage crisis) and all of them decide they want to sell? I'll tell you: a crash in the stock market like never before seen in history. Sell to who? Who will take the other side of the trade when the HFT guys recognize that the market is about to fall and they all rush to the exits in a fraction of a second? There is nobody there to take the other side of the trade. It's coming, and like Joe said, there's not a doubt in my mind that it will happen. The only question is when. I believe that it happens right after the elections. This multiple trillion dollar mortgage disaster is going viral. Most investors do not yet recognize the systemic threat that it poses, but by the way that this story has been developing in the last 3 weeks, I believe we are mere weeks away from the point of widespread recognition. When that recognition point arrives, I think you'll be able to see what happens when the high frequency traders not only walk away, but actually decide to sell stocks. It will be a disaster. We will trip the NYSE circuit breakers in my opinion, and probably more than once. May 6 was just a sneak preview. The real show will happen shortly after the election, which is next week.
I am expecting a selloff immediately (within a few days -- ten or less) after the election. But it could be short lived. I have been long into the election and am lightening up or hedging through the election as I'm sure many other traders will be also. Longer term I believe the market will remain tied to the dollar. If the dollar rallies the market should drop, and vice versa. At the moment we don't have any indication that the Fed is interested in a stronger dollar.