Market headed for post-election rally?

As voters head to the polls, traders are voting with their cash as key cyclical stocks perk up for the first time in months.

By Anthony Mirhaydari Nov 6, 2012 2:52PM

Photodisc/SuperStockThe financial markets have been a bit of a dead zone over the past three months after surging in September on the back of aggressive monetary policy stimulus. Over the past two weeks, the major averages essentially flat-lined as everyone awaited the decision of the American people on Election Day.

 

Yet now, as people head to their polling places, Wall Street is coming back to life in a way that hasn't been seen since last summer. Key economically sensitive, cyclical groups are springing. Semiconductor stocks, left for dead since July, are surging. Core industrial stocks are breaking out.

 

By all indications, we're on the cusp of a post-election rally.

 



 

The chart above says it all. The Morgan Stanley Cyclical Index ($CYC), which includes names like Caterpillar (CAT) and Ford (F), is pushing up and over its September high. This comes despite an ongoing slowdown in manufacturing activity at home and overseas. The JPMorgan Global Manufacturing PMI contracted for its fifth consecutive month in October.

 

 

Data out of the eurozone look particularly bad, with the Composite PMI (including services and manufacturing) pointing to outright recession and a 1% drop in GDP.

 

So why the rebound in the face of all this? After all, major policy hurdles including the fiscal cliff of tax hikes and spending cuts worth 5% of GDP will need to be cleared in Congress after the election. Bipartisanship may be hard to find after a hard-fought election and razor-thin vote-count margins.

 

We also have ongoing tremors of trouble in Europe, with Greece's coalition government fraying at the prospect of approving additional austerity measures Wednesday and China kicking off its leadership transition with the National People's Congress on Thursday.

 

The corporate sector is already struggling this earnings season, with cost cutting no longer an easy avenue to earnings growth, given subpar revenue growth.

 

My hunch is that the market is pricing in an upset victory by Romney.

 

For one, the polls in the battleground states are within the statistical margin of error.

 

Two, polling organizations have been oversampling self-identified Democratic voters, given the blowout we saw in 2008. For instance, the latest national poll from Rasmussen Reports, which is fingered as a Republican-leaning pollster, has Romney over Obama 49% to 48%. But that result is padded, given Rasmussen's assumption that 39% of voters will be Democrats and 37% Republicans.

 

New results from Gallup show that while the Democratic-Republican split in 2008 was 39%-29%, it has flipped to 35%-36%. Include learning voters, and the split is 46% Democrat and 49% Republican.

 

Add it all up, along with some polling suggesting Pennsylvania and its 20 Electoral College votes are in play for Republicans for the first time in decades, and we could be on the cusp of an upset.

 

 

Whatever the cause, this appears to be a tradable medium-term uptrend. I am dumping my remaining shorts and adding new positions Industrial Sector SPDR (XLI), Freescale Semiconductor (FSL), ON Semiconductor (ONNN), U.S. Steel (X) and the Direxion 3x Semiconductor Bull (SOXL) to my Edge Letter Sample Portfolio

 

Disclosure: Anthony has recommended XLI, FSL, ONNN, X, and SOXL to his clients. 

 

I found these positions with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)

 

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

25Comments
Nov 8, 2012 3:25PM
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Markets down 3% since... good call so far.
Nov 7, 2012 10:44AM
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Post-Election Buys and Avoids
Now that the election is over, and life goes on, institutional and retail investors must align or in some cases re-align their portfolios.

read more
http://www.goldmanresearch.com/Daily-Blogs/post-election-buys-and-avoids.html
Nov 7, 2012 10:10AM
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What makes anyone think the market will go anywhere but down with the increase of the capital gains tax by 50% and the dividend tax by 200% mandated by Obamacare to begin on January 1, 2013? 
Why do you think George Lucas sold ILM? Do journalists possess the same financial illiteracy of the majority of Americans that can't even manage credit card debt? 
Nov 6, 2012 10:57PM
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Anthony,

Thanks for sending me your "Edge Letter" monthly performance  -- it's actually very impressive.  Now, I understand why your comments were so contradictory.  I actually admire you for having the courage to print your comments, much less your predictions about these "roller coaster" markets. Truthfully, I'm just frustrated about the financial markets, the economy, the presidential election, and a few other things!  Consequently, I humbly retract my unwarranted and disrespectful remarks about you, both personally and professionally!  My best wishes for a healthy and profitable life.

Moreover, I still have a lot of bitterness and contempt "stuck in my craw" for financial advisors and investment advisory/money management firms since my investing fiasco with Fisher Investments. Fraudulent "investment experts" like Ken Fisher and his unscrupulous firm, Fisher Investments, are the primary reason that your profession has such a putrid reputation!
Don Moore

P.S.
Anthony, at least you had the courage, conviction, and courtesy to answer my comments and to defend your position, which you did quite well.  And without any hesitation, you furnished me with the performance data (statistics) of your investments over the past year (% annualized returns), as I had requested.  I NOW CHALLENGE KEN FISHER to post the performance data, especially the % annualized returns, for the portfolios of Fisher Investments Private Client Group and his mutual fund, the Purisima Total Return Fund (PURIX).  This information would be readily available to Mr. Fisher since over 90% of all his clients are invested in the same exact stocks (portfolios), regardless of their age or risk tolerance!  Come-on Ken, don't be ashamed to show us your "outstanding investment expertise" or according to your ole buddy, Steve Forbes, your financial investment performance as one the greatest investment "GURUS" of modern times!
Don Moore
Nov 6, 2012 7:33PM
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The markets are in sell off mode and nobody or any news event wont change it!!  Plain annd simple
Nov 6, 2012 6:43PM
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This guy has to come up with some new kinda spin everyday he works just to put this column out!

The market is rigged!Just look at the Libor Scandel to figure it out. Oh thats right, they dont like to about the real issues on here!You see nothing on the Libor Scandal in our media!Bankers are getting busted in Europe right now but I wish it was here too.Our government needs replacing with term limits set for all!!!

Nov 6, 2012 6:34PM
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The market will go anywhere Wall Street tells the market to go. The whole thing is manipulated, most of all -- the people. The Free Market Economy is dead. Capitalism is dead. "Supply and Demand" has been replaced with "In Time Delivery" which, if you've been paying any attention to the gasoline situation in New York and New Jersey these days, means "we'll get there when we are good and ready". And inflation? Can you say "if you have to ask how much it costs, then you can't afford it." Now, can you say it in Chinese?
Nov 6, 2012 6:12PM
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Untraceable funds given by anonymous donors have been given the name "dark money." These donor groups have been able to exploit gaps between election authorities and the IRS, enabling millions of anonymous dollars to be spent on political campaigns.

The 2012 presidential campaign has seen spending by outside groups on political ads reach an unprecedented level, much of it on political ads, the most vicious of which are often funded by so-called dark money: untraceable funds given by anonymous donors. Unlike super PACs, the groups receiving the bulk of that cash, so-called "social welfare nonprofits," are allowed to keep their donors secret forever.

Well, at least that had been the case until this past Friday, when a Montana judge granted a request by ProPublica and PBS Frontline to release the bank records of one such group, the Western Tradition Partnership, on the grounds that citizens have a right to know where the campaign cash was coming from.

ProPublica and PBS did the heavy lifting, so we'll what that means:

"It was the first time that a court has ordered a modern dark money group's donors to be made public, firing a warning shot to similar organizations engaged in politics."

Nov 6, 2012 6:12PM
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It would be VERY short-lived. The only RALLY worth having right now is-- career restoration. We are dangerously imperiled by a lack of revenues, not a spending problem. Way too many Red States don't have the stuff to survive through next year. Recovery will take money we cannot afford to borrow or pledge to wealthy fools. The only alternative is to earn our way out. Collapse the import platform style business and tax those who shipped jobs overseas. Start with Romney-- he owes plenty.
Nov 6, 2012 5:51PM
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you again - I knew immediately it was you prediciting something based on graphs - you are rarely close about anything - your job is simply to bring in investors. You make up good stuff - you should run for president
Nov 6, 2012 5:41PM
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I agree with Don Moore.  When I first read your columns I was under the impression that you knew what you were talking about, but as time goes by and as Don pointed out, two days ago it was "get out of the market and lie low" and today it's "good news".   What do you use to make your market predictions?  A Magic 8 ball? 

Nov 6, 2012 5:40PM
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We could also argue the point that it is now not necessary; as many inferred it was,  to maintain positive market sentiment by the administration and fed in that the election is over.  So if you agree as such as many did the market was propped up as an Obama policy going into the election. They may let laisse faire again return and in my opinion that would reduce the overall market value.  JMHO
Nov 6, 2012 5:33PM
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I won't put $1 in the market as long as Obozo is president!!!
Nov 6, 2012 5:33PM
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Get ready for tomorrow's Market Crash ! SMART MONEY HAS LEFT THE HOUSE ! TAKE TAKE YOUR MONEY AND RUN !
Nov 6, 2012 4:46PM
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The odds heavily favor an Obama win (see Nate Silver's fivethirtyeight.com).  Romney's chances are similar to pulling an inside straight.  I can't imagine traders are placing big bets based on such poor odds.  Historically, when the incumbent wins, markets gain over the next two months.  I believe the market is anticipating such an outcome with some certainty today.

 

If your explanation is correct, then a Romney loss should be followed by a good sized sell-off.

Nov 6, 2012 4:31PM
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Anthony, MAKE UP YOUR MIND!  Yesterday, in a MSN Money column written about your pre-election "market prediction" (as seen on a MSN video interview with you), you stated, and I quote, "With so much unpredictable political risk, the smart trading strategy to avoid any post-election volatility, Mirhaydari suggests, is to get 'NEUTRAL', perhaps by moving some money into cash or bonds until the market has digested the outcome of the election."  Today, less than 24 hours later, your position is, "Whatever the cause, this appears to be a tradable medium-term uptrend.  I am dumping my remaining shorts and adding new positions..."  Anthony, I've NEVER been a big fan of your column anyway -- your insights, comments and market "predictions" vacillate like the wind, changing radically from day to day; it's impossible to interpret what your position really is on any subject!  I'm sorry, but you have lost what little credibility you had with me as an "investment expert." Maybe you should pursue another career?

You are constantly mentioning your newsletter "Edge Letter Sample Portfolio."   Where can I find a recent copy of that newsletter, and does it give the statistics of your investment performance (% annualized returns)?
Don Moore
Nov 6, 2012 4:24PM
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Its only up today, because if obama wins its going to tank hard.
Nov 6, 2012 3:37PM
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Hi Anthony;  I agree it would be wise to cover your shorts but for no more than 48 hours.  I still feel a negative sentiment and don't truly believe we have cycled through the last downswing.  I am very firm in my belief we will see 11,500 before we see 13,500 again.  Try as you might the river always runs downstream.  Your money as they say, but the smart money in my opinion is still with a continueing correction downward.  JMHO
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