Market Direction Mid Week Update©

Market Direction: BEARISH alert issued 10/11/2018

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U.S. stocks ended sharply higher Wednesday, following closely watched midterm elections that saw Democrats take control of the House, delivering a divided Congress, and news that Attorney General Jeff Sessions was resigning at the request of the president.

How did the benchmarks perform?

The Dow Jones Industrial Average DJIA, +2.13%  rose 545.25 points, or 2.13%, to 26,180, while the S&P 500 index SPX, +2.12% climbed 58.43 points, or 2.12%, to 2,813. The Nasdaq Composite Index COMP, +2.64%  jumped 194.79 points, or 2.64%, to 7,570.75. All three indexes ended the day just shy of their intraday highs.

Wednesday’s performance marks the Dow’s and the Nasdaq’s biggest one-day climb since Oct. 16th, while the S&P 500 had it’s best day since Oct. 25

DJIA, +2.13% See: Here’s why stock investors say ‘gridlock is good’ after midterms deliver split Congress

On Tuesday, the Dow Jones Industrial Average rose 173.31 points, or 0.68%, to 25,635.01, the S&P 500 index SPX, +2.12% rose 0.6%, and the Nasdaq climbed 0.64%, or 47.11 points, to end at 7,375.96.

What’s drove the market?

U.S. midterm election results largely fell in line with predictions, with Democrats set to take control of the House and Republicans on track to strengthen their grip on the Senate.

Read: How the midterms made history: Numerous firsts emerge from Election Night results

It remains to be seen how President Donald Trump will approach governing in a divided Washington. In the past he has indicated a willingness to champion typically Democratic policies like price controls on pharmaceuticals, or increased spending on infrastructure. However, the president struck a defiant tone in a press conference Wednesday afternoon, touting the Republicans performance Tuesday as a historic victory, and promising a “warlike posture" toward Democrats if they choose to launch investigations into his administration.

The president did leave open the possibility that he could work with Democrats on a middle-class tax cut, paid for with adjustments elsewhere in the tax code.

Further underscoring the president’s combative post-election posture was the news, released only after the press conference, that Attorney General Jeff Sessions was resigning at the request of the president.

Trump had repeatedly laid blame for the existence of special counsel Robert Mueller’s investigation into potential connections between the Trump campaign and Russian interference into the 2016 election.

The election result undercuts hopes for further corporate tax cuts, but analysts said a potential brake on further fiscal stimulus was viewed as a positive for equities and bonds.

Watch: How a divided Congress could defy gridlock

Investors now turn their attention to a two-day Federal Reserve meeting that wraps up on Thursday. The central bank isn’t expected to make a move on interest rates, but traders will be watching closely for any indications regarding the pace of future interest-rate hikes.

What are the strategist saying?

The market is interpreting last night’s result as insuring that “no big things will get done,” in Washington between now and 2020, Craig Birk, chief investment officer at Personal Capital told MarketWatch. “The market appreciates the relative certainty of the slow legislative agenda.” he said.

Birk warned, however, that the “knee-jerk reaction to political events often turn out to be wrong,” and added that we should expect continued volatility as we better understand how Democrats and the Trump White House will approach divided government.

“As President Trump plans his 2020 reelection campaign, a gridlocked Congress is unlikely to deliver any notable wins to help expand his agenda. Therefore, Trump will likely focus on his broad executive powers to affect trade and national security,” wrote Dec Mullarkey, managing director, investment strategy, Sun Life Investment Management, in a research note.

“The obvious targets are China on trade and Iran with its nuclear program. While both issues demand detailed strategic solutions, Trump’s transactional style so far has been to ramp up pressure ahead of negotiations,” he said.

How did other markets trade?

European stocks SXXP, +1.06%  pushed higher across the board, while in Asia, stocks closed on a mixed note.

The greenback has seen some of the biggest moves in the wake of midterms, with the ICE Dollar Index DXY, +0.01%  slumping 0.3% to 96.08. The yield on the 10-year Treasury note TMUBMUSD10Y, -0.14%  was virtually unchanged, after hitting its highest since Oct. 10 on Tuesday.

Oil prices CLZ8, +0.15% ended at a nearly eight-month low, while gold futures GCZ8, -0.13% ended higher for the first time in four sessions.
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The all-time lows since our initial recommendation to go SHORT this market. Here is how the markets have performed:

Stock Market Direction Recommendation (10/11/2018)
Dow	down 930.60 points a 3.71% gain	10/29/18
Nasdaq	down 406.23 points a 5.54% gain	10/29/18
S&P 500	down 124.83 points a 4.58% gain	10/29/18

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