Ryan Detrick says the S&P 500 has been higher one year after each of the last 19 midterm years, averaging about 15% gains.
Detrick argues the current bearishness and hedge funds' largest short positions in five years are a contrarian buy signal before a late-October low.
Detrick says money market and cash ETF flows are at record highs over three months, a pattern that has historically marked market bottoms.
Extreme bearishness and heavy cash point to a year-end rally
Detrick argues the market is set up for a year-end rally. Sentiment and cash positioning look as bearish as they have at past bottoms, while earnings are strong and valuations have compressed. A weak stretch into the midterms fits seasonal history, which has favored stocks once the election passes.
Takeaways
Extreme bearishness is a contrarian buy signal. Hedge funds hold their largest short positions in five years, inverse ETF volume is huge, and three-month money market and cash ETF flows are the highest Detrick has seen. He says that much cash has historically marked market bottoms.
Midterm seasonality points to a late-October low. October is often weak, but a late-October low tends to precede a rally. The S&P 500 was higher a year after each of the last 19 midterms, by about 15% on average, and October and November are the strongest months.
Election results matter less than market direction. Democrats will probably take the House, and Republicans have a better chance of holding the Senate. The S&P 500 rose in the last 13 split-Congress periods, and Detrick says gridlock can be good for markets.
The bull market is broadening, not ending. The S&P 500 has gone nowhere for about five months after a 15% rally in April and May, but rotation is underway. Software is recovering, healthcare and staples are rising, and 300 to 400 stocks climb on days tech falls.
Valuations fell while earnings kept growing. S&P 500 valuation is down 15% this year while earnings growth exceeds 30%, and NVIDIA and Amazon look cheapest in a long time. He expects multiple expansion next year. The bears' best argument is AI spending beyond the railroads and the 1990s Internet bubble.
Strong earnings and a Fed pause ahead. Detrick expects one more hike in December, then a pause. About 15% of companies have reported and 88% beat on EPS. He says the consumer is not dead, citing restaurant spending growing 10 to 11% annualized.
Bitcoin and gold replace bonds, not stocks. Carson's tactical models hold about 68% equities, roughly 1.5% in Bitcoin and about 3% in gold, newly added. Detrick says these replace fixed income, and he expects sticky yields with nominal GDP growth of 6 to 8%.
Tap a name to go there · tap a line to see why they are linked