What Does the Biden News Mean?

Yesterday, we had just completed a lengthy note updating our near-term views on the stock market. After finishing the note, we learned President Joe Biden had dropped his re-election campaign and endorsed Vice President Kamala Harris.

What does this mean for the stock market in our view?

Well, in the original note that we wrote below we felt that it was highly likely the stock would see a correction in the coming weeks. We made that call a week ago and it has been playing out.

Biden dropping out only adds to our conviction of upcoming stock market instability.

The consensus view (which we agreed with) was that if Biden were to face Trump, that (at this point) Trump would likely post a big victory.

On the back of that outcome, we saw a big rally in many areas that would benefit from a Trump administration—crypto, healthcare, energy, small-caps, and others.

Now, the outcome is much less certain.

Can Kamala beat Trump? Do we think that Kamala will be the ultimate Democratic candidate?

We honestly don't know. 

What we do know is that just about anyone OTHER than Biden would have a better chance against Trump. The Democrats ultimately agreed.

That means there is now more uncertainty in the outcome regardless of what happens.

With the stock market already in a correction, it will only add to that volatility.

Ultimately, though, do we think it matters for what happens to the stock market by year-end?

This may be an unpopular opinion, but we really don't think so. Whether Trump, Harris, or any number of other Democrats are in the Oval Office, we still believe the stock market will be higher.

Buckle up and be a disciplined trader and investor in the coming weeks!

Here is the note we wrote PRIOR to the Biden announcement. Again, the announcement only reinforces our views…

Last Monday, we made a big call.

We strongly argued that investors should take profits in their trading accounts. This is the same call we made back on March 21. You can read that note here.

Our call was what we refer to as a “tactical trading call.”

This means that we are speaking specifically to shorter-term trading accounts, ones that hold positions for less than six months.

This would include our trading publications, HX Trader, and HX Income. Prior to our call on Monday, we reduced positions in those publications by three-quarters into Monday's close.

This not only included taking profits but also realizing some longer-term losses. We didn’t want to own those if we thought the stock market would be going into a correction.

Please read our note to understand our reasoning at the time.

It turns out our call was well-timed. Here is the chart of the S&P 500 since the start of 2024…

We have pointed out our two calls for a correction this year with red arrows and included the chart of the S&P 500's relative strength index (RSI).

Since hitting a new high on Tuesday, the S&P 500 has corrected -2.8%, and the NASDAQ has corrected -4.2%. Many of the best stocks have corrected between -10% and -30% across the last few weeks.

The correction is here!

So – what happens next?

Regular readers will have noticed that in recent months, we have moved away from using Bloomberg charts and have created our own custom charts. This is more work (and we are a small team), but they are much easier to read.

We mention this because we want to apologize ahead of time that we are about to share a couple of Bloomberg charts. This one shows the intra-day trading range in the S&P 500 and helps us explain what we think can happen next in the stock market.

We have circled the last couple of times on this chart that the S&P 500 saw a gap down like it did this past Wednesday, July 17.

The first was on February 12. In that instance, the stock market quickly popped back and then churned for about a week before hitting new highs again.

The second of these was after our last big call for a correction, which happened on April 1, about a week and a half after our call.

In that case, the market churned violently before drifting lower and then accelerating into a larger correction. Peak-to-trough, the S&P 500 corrected -5.3%, and it didn't bottom for three weeks. It would be six weeks before it fully recovered and set new highs.

Which is more likely right now?

We can never be sure, but the analogy with the April correction makes the most sense.

The start of April was also the beginning of earnings season, just like the start of July.

We also think that the damage to the S&P 500 in the couple of days after the initial sell-off has been severe. Combined with a big sell-off in the biggest winners, we would be surprised if the stock market would pop right back like it did in February.

Our note last Monday pointed out two points of caution.

The first was a very overbought RSI. Here is the table that we shared in that report…

That is playing out, and the RSI of the S&P 500 below 50 certainly is not as overbought.

We also pointed out the seasonality and how we are entering into the worst time of the year.

One of our favorite research firms – Bespoke Investment Group – shared this great chart…

This chart shows the FORWARD three-month returns of buying the S&P 500 on that date across the last twenty-five years.

This means that if you bought the S&P 500 on that date – how would it have performed three months later.

You can see that the three-month forward returns are positive on almost every date all year.

The worst date? July 14.

When you buy on that date across the last twenty-five years, you would have generated a -2.51% forward three-month return. As the chart shows, that is by far the worst result.

We respect seasonality, which leads us to believe that a quick snapback is a lower-probability bet.

Does this change our intermediate term BULLISH view? NOT AT ALL!

We saw some incredible breadth signals the previous week that leave us more bullish than at any other time all year—for the six to twelve months, but not necessarily the six weeks ahead.

What would we do right now?

We think it is wise to start buying. Just be patient. Layer in and buy some stock you like every other couple of days.

Remember that corrections are as much about TIME as they are about PRICE.

However, this might be one of the best buying opportunities of all of 2024!