The markets posted their biggest weekly percentage gains since April as investors set their sights on a Biden win with a Republican-dominated U.S. Senate. This creates a gridlock in Washington and, as the CIO of Bank of America (BAC) puts it: "Gridlock = Goldilocks." A Republican-held Senate will mean no tax hikes and no outsized fiscal stimulus package which, in turn, would lead to more monetary easing and a weaker US dollar. The result is a stock market poised to trade higher.
Last week, we experienced the beginning of this potential leg up, as a downtrend reversal on Wednesday pushed the S&P 500 back above its key 50-day moving average, with a positive RSI and Stochastics confirming a new uptrend.
DAILY CHART OF S&P 500 INDEX
Recently-beaten-down Technology stocks were the biggest winners as the possibility of no hike in corporate taxes pushed the sector up almost 10%. Within Tech, Semiconductor stocks rose over 12% amid a backdrop of increased chip demand due to the rollout of 5G, increased data center usage and streaming media that's keeping locked-down households entertained.
Graphic chip maker Nvidia (NVDA) is one of the leading Semiconductor stocks, led by strong sales in graphic processors for gaming PCs as well as data centers. The stock broke out of a cup-with-handle base today as analysts raise earnings estimates going into their 3rd quarter report later this month.
WEEKLY CHART OF NVIDIA CORP. (NVDA
Today's base breakout posted a bullish outside day on a daily chart, as the price had a higher high and a lower low than yesterday. Historically, this serves as a part of a continuation pattern in the direction of the last few price bars, which is upward. This, coupled with NVDA's base breakout, puts the stock in a strong buy zone.
Next up is Alliance Data Systems (ADS), which has an entirely different chart. The stock is in the throes of reversing a 3-year downtrend following this week's break back above its 200-day moving average on heavy volume.
DAILY CHART OF ALLIANCE DATA SYSTEMS (ADS)
The company captures and analyzes purchase transaction data for over 140 credit and reward programs centered mostly on retailers. Their focus on brick-and-mortar companies going into the pandemic hurt ADS; however, cutbacks in operating expenses and a shift to targeted marketing among clients helped them post-Q3 results that were 53% above estimates.
J.P. Morgan (JPM) placed a $90 price target, while analysts elsewhere upgraded the stock and are calling for 49% growth next year. Last week's action has the shorter term 10-day (green line) and 21-day (purple line) simple moving averages poised to bullishly break above the 200-day (blue line) simple moving average. This would form a golden cross and, while it's a secondary signal, it's historically positive.
Many other areas of the market will also continue to do well if a gridlocked Washington comes to pass. Software and Healthcare stocks come to mind, as do select Retailers that have successfully pivoted to digital sales. With earnings season more than half over, ferreting out the next set of winners will, fortunately, be easier.
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Mary Ellen McGonagle - MEM Investment Research