Morning Notes

Trading patterns and option term premia suggest the big volatility buyer in Tech is back.  You can also see this in post-earnings stock price behavior the last two days.

Equities are higher again today as markets bake-in a Biden and McConnell outcome. Trump still has a path to 270 and a certain GOP Senate majority waits for final results of Georgia. State law requires a candidate take

Markets generally prefer a balance of power in Washington.  Expectations for Republicans to retain a narrow Senate majority largely de-risks assumed potential headwinds from higher tax rates and increased regulations under a Democrat-sweep scenario. 

Better-than-expected Q3 reports from Tech companies mostly see a sell-the-news reaction as investors slowly shift away from growth/momentum toward cyclical/value sectors.

Any election scenario that doesn’t involve a weeks-long contested outcome should result in an initial equity market rally. Rotation into cyclical/value sectors at the expense of Tech is more likely under the Democrat sweep scenario, while other scenarios probably result in a more broad advance.

Equities will likely remain under pressure until the election is completed.  Markets apply an uncertainty discount to upcoming events and will prefer the certainty of almost any outcome next week.  The question is whether that result comes on Wednesday or later.  

Many sell-side strategists have recently warmed up to the Democrat sweep scenario based on expectations for massive fiscal spending. But the initial market reaction to a Democrat-sweep might be cooler than anticipated because it’s the consensus view and eventually includes higher tax rates and regulatory

Yesterday, the S&P 500 broke our near-term support level at ~3400 and currently testing secondary support at ~3295.  A number of popular CTA triggers exist at this level and a break below could lead to increased selling pressure. 

The contested election scenario has reemerged as the primary risk, given we’re one week out with no fiscal stimulus and rising US case counts. The VIX Index remains elevated and lifting to levels consistent with those from September 3-8.

This week is the busiest week of Q3 earnings season with ~33% of the Russell 1000 reporting. Just over 25% of S&P 500 companies have reported thus far, with 84% beating consensus by an average of +17.2%.