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Week Ahead: Stocks, Dollar To Fall On Post-Election Profit-Taking; Gold Higher

Published 11/08/2020, 07:00 AM
Updated 09/02/2020, 02:05 AM
  • Stocks closed lower on Friday after their strongest week since April
  • Dollar triggers signals of a continued downtrend
  • Gold technicals pointing toward another rally

Even before the US presidential election was officially declared for Joe Biden on Saturday, investors were already signaling on Friday that they favored the impending power split between Democrats in the White House and a divided Congress, which would ensure that tax cuts and deregulation—strong tailwinds for some of the biggest market gains in a decade—remain in place. The S&P 500 edged lower on the final day of the trading week, but the broad benchmark gave up less than 0.05% at the close.

Friday's down day ended a powerful four-day rally that provided equities their biggest weekly gain since April, after the dead cat bounce that followed the March bottom, adding $1.5 trillion to the value of shares.  As well, tech stocks continued to outperform, with the NASDAQ indices gaining every day last week, climbing at least 9% over the course of five days.

Selling The News But Buying The Expectation

According to one narrative, the broader market declined as Biden neared winning the presidency because indices were pricing out a Blue Wave that hadn't occurred. On the other hand, the much-anticipated, massive virus relief package the Democrats were touting isn’t going to be so easy to pass with the current political divide. In the final analysis, Friday’s decline conveys the feeling of selling the news of a Biden win while the preceding rally may have been on the rumor, or expectation.

Economic releases last week offered some good news: the American economy kept growing despite continuing to hit record numbers of COVID-19 infections, after the US became the first country to top 100,000 new coronavirus cases in a day. The world’s largest economy created 638,000 new jobs in October, beating estimates that ranged from 503,000 to 600,000. Unemployment declined to 6.9%, better than the expected 7.7% and down from 7.9% in September—the lowest for this metric since the pandemic began.

Though the better-than-expected jobs market didn’t seem to help the broader equity market, the tech-heavy NASDAQ indices appear to have been boosted by the stronger hiring in technology fields. Still, many economists warn that the jobs market is much worse than one Nonfarm Payrolls release suggests.

A broader measure, the U6 Unemployment Rate, which includes those who stopped looking for work or compromised by taking part-term work, fell in October, but remained much higher overall at 12.1%. Economists consider this the real unemployment rate. In the final analysis, using this metric, roughly 10 million jobs—almost half of the 22 million that were been wiped out when the coronavirus hit the economy—have not yet been recovered.

Fundamentally it's not completely clear why investors would have sold off risk ahead of the weekend after such robust gains during the week and an end to the election uncertainty in sight, but technicals could offer a reason why stocks would pause at this point.

SPX Daily

On Friday, the S&P 500 found resistance for the second day at the top of a symmetrical triangle. The price developed a high-wave candle, strengthening the bearish view.

Yields surged after the news that the labor market improved more than expected, including the 10-year note, whose yield bounced back above 0.8%.

UST 10Y Daily

Technically, rates already found support by the bottom of a rising channel on Friday, supported by a golden cross, from where the yield rebounded.

The dollar fell for a second day. It's decline corresponded to the two days Treasuries were sold off.

DXY Daily

On Friday the greenback hit its lowest point in over two years. Speculation the Fed will increase QE turned traders bearish on the global reserve currency. 

The dollar extended a downside breakout to a continuation H&S, signaling a resumption of the downtrend since the March high. The 100 DMA pressured the peaks of the pattern lower. The MACD’s failed rally mirrored that of the shoulder to the head, and the RSI found resistance by its broken uptrend line.

Dollar weakness boosted gold, which will further strengthen if investors seek to find a store of value other than the USD amid continuous central bank intervention.

Gold Daily

The yellow metal appears to have finally geared up enough momentum to return to rallying, after having bounced off the top of a bullish wedge, forming a short-term rising series of peaks and troughs. The price also cut through the 50 and 100 DMAs, after the 200 DMA seemed to support the wedge. The MACD provided a second buy signal along with the two troughs, and the RSI completed a H&S bottom.

Bitcoin, which is currently trading over $15K, didn’t benefit from the boost gold received from the weaker dollar and the expectation of looser monetary policy. The cryptocurrency fell for a second day.

To be fair, unlike gold, which has been treading water, Bitcoin has been moving higher for five weeks straight, its longest weekly winning streak since May 2019.

Oil was buffeted by multiple headwinds, including Libya’s crude production coming back online after a civil war. The African nation's output has surpassed a million barrels a day, even as lockdowns keep a lid on demand. As well, a Biden presidency is seen to potentially bring Iranian oil back into the market.

Oil Daily

From a technical perspective, WTI is a downtrend, trading within a falling channel, after a bearish wedge. The RSI shows that momentum is falling as well.

The Week Ahead

All times listed are EST

Monday

4:25: Eurozone – ECB President Lagarde Speaks

5:35: UK – BoE Gov Bailey Speaks

20:30: China – CPI and PPI: the first is expected to remain flat, the latter to show a miniscule gain.

Tuesday

2:00: UK – Claimant Count Change: predicted to have jumped to 78.8K in October from 28.0K.

5:00: Germany – ZEW Economic Sentiment: seen to drop to 40.0 from 56.1.

10:00: US – JOLTs Job Openings: anticipated to decline to 5.590M from 6.493M.

20:00: New Zealand – RBNZ Interest Rate Decisionexpected to remain steady at 0.25%

Wednesday

2:00: UK – Manufacturing Production: the previous reading came in at 0.7%

Thursday

2:00: UK – GDP: anticipated to surge to 15.8% from -19.8% QoQ.

8:30: US – Core CPI: seen to remain flat at 0.2%.

8:30: US – Initial Jobless Claims: came in last week at 751K.

11:00: US – Crude Oil Inventories: showed a drawdown of -7.998M in the previous week.

Friday

8:30: US – PPI: to fall to 0.2% from 0.4%

Latest comments

Gold commodity dropped 4.6% and the miner GOLD dropped more than 6.5%%. Also dollar did not fall, it risen 0.6% to 92 *** This article is totally killed!
Your subject, Dollar to fall on Post-election profit-taking does not make any Sense
anyhow, thanks, and you now have written this time about the gridlock, suggest you look at the weekly charts, (selloff is 'nothing' on Friday)
Pinchas spewing negative forecasts once again. Rarely correct. Be aware.
In this situation, this is where you want to be in the NASDAQ short term. The technology stocks offer growth in a environment with low growth at best. and that’s the bottom line. With the fed that is their forever. Buy qqq calls
biden = tech regulated not so fzst boi apple iphones sales declining, amazon can they go bigger? we saw earnings that this is possible top same for netflix lockdowns give people reason to buy a subscription after it ends :), big tech is a bubbme look the long charts they broke a uptrend and they are like 1500-2000pt above their channel, same happend in dotcom guess whats next
I’m already sitting 100% in solar, since under Biden my tax dollars will just be supporting those businesses ahead of the free market desire for them.
This election has made a great case for bitcoin.
There is no case for bitcoin...ever. Lol, lets fight fiat currency with more make believe fake “money”. The whole things a joke.
I would much preferer digital gold:)
i mean youre not wrong. What is the difference between bitcoin and GLD as far as tangible assets? Good point Hagerty!
everyone is good at post-analyzing. we sold most assets that could imply any risk because no one knew what will go on during weekend, when the election results will be announced and what the streets will witness. This is to answer your question "why traders (AND INVESTORS) sold the risk". We are still waiting to see trump-biden supporters conflicts to calm, legislative issues to calm before deciding exactly how to act. Meanwhile, we prefer to hold couple directions and cash in hand.
Oh and "Fundamentally it's not completely clear why investors would have sold off risk ahead of the weekend"  how about the market had just gapped up 4 days in a row, it will not last.  Seriously how long have you been doing this?  That question shouldn't have been asked.
Hard to disagree with, but also afterwards 😅.. direction wasnt that clear friday imho
A split government is not a sure thing at all and if they can steal the presidency in corrupt precincts I am sure they can steal the 2 Senate run offs very easily.  Don't underestimate the level of evil and corruption this party is capable of when they sense power is within their reach.
Exactly...the ever-adoring media immediately jumps to excuses for Biden “profit taking” lol.
Gold ready to make new high
So when the supreme court rules against fraudulent joe biden then what will happen to the markests ??
Biden will never be president.
Go back and tell Putin that you failed. The Supreme Court does not decide US elections, the states do. Even if they did, there is no way the six pre-Trump justices would ever undermine the state election results simply because a candidate didn't like the results.
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