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The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's headlines

1. Markets rip higher post midterms

2. More like a green wave than a blue wave

3. Chart of the Day: S&P 500 market structure flashes warning signals

Markets Close

Dow
26,180.30 +2.13%

S&P
2,813.89 +2.12%

Nasdaq
7,570.75 +2.64%

VIX
16.52 -17.03%

Bitcoin*
6,717.74 +0.80%

EUR/USD*
1.1403 -0.13%

*Currency markets and Bitcoin trade 24 hours, the figures here indicate movements between 9am and 4pm ET

#1 U.S. Markets Rip Higher post Midterms
It hasn't even been a day since the U.S. midterm election results were tallied, but investors couldn't wait to start buying stocks again. The results of the elections were as expected, by and large, but the pent-up anticipation exploded into a sea of green that began in European markets, and extended across the pond. The Nasdaq, which has been the punching bag for the markets since August, rebounded 2.64 percent, while the DJIA and the S&P 500 each closed up around 2.12 percent. For a day, at least, investors either ignored or looked beyond the challenges facing stocks for the foreseeable future as U.S. markets posted their biggest one day jump following midterms since 1982.

As a reminder, those challenges include:

Slowing global growth

Slowing global growth
A tariff war
Rising interest rates
A ballooning deficit
Inflation

There are many more, but these have been the five horsemen of the apocalypse investors have been having nightmares about since August. Apparently, we slept well last night, and woke up ready to put money to work.

Why it Matters: There is no telling how long this post-election euphoria will last. There is plenty of historical precedent that tells us that markets usually perform better after midterm elections, and that the November to January months are usually the best for stocks.

Ryan Detrick from LPL Financial shares this chart which shows a 10.7 percent average return for the S&P 500 from October lows to the end of the year following a midterm election. In fact, since 1946, the S&P 500 Index has been higher 12 months after every midterm election! 18 out of 18 times, that has been the case. For all you presidential historians out there, Dwight D. Eisenhower's first term results, post midterms, take the trophy, as markets posted a 33 percent return 12 months after the midterm elections in 1954.

It's even better when Congress is split, if you can believe that.

Historical trends like this are important, but it only takes one instance to break the trend. No one can say if it will be different this time until it's different this time. Remember, most investors expected markets to tank and a recession to ensue if Trump was elected president in 2016. It still might happen, but the prevailing wisdom at the time was dead wrong.

What's Next: At least two more years of the Trump presidency, but under different circumstances. At his press conference today, he sounded like a president ready to work across the aisle to fulfill his agenda (when he wasn't berating CNN's White House reporter).

Trump talked about cooperating on trade, infrastructure and lowering the cost of prescription drugs as key to continuing economic growth.

Health care stocks were the first out of the gate today as investors bet on the improbability of Trump repealing and replacing the Affordable Care Act. Look no further than the XLV ETF, which popped almost 3 percent today, for a temperature check on investor sentiment.

Trump may get the bipartisan support he wants for infrastructure spending, which the country badly needs, but the rising deficit will loom in the back of politicians' minds if they choose to support it.

#2 - The Green Wave
Many political pundits were expecting a blue wave to sweep over Washington, assuming Democrats would win the House and potentially more Senate seats than forecast. That, of course, didn't' happen. Instead, a green wave swept over the nation as marijuana was legalized in Michigan for recreational purposes, and in Missouri, for medical purposes.

Here is our story from today.

Marijuana stocks lit up on the news, especially Tilray, which was up as much as 30 percent this afternoon. It ended the day up 21 percent on a wild day of trading. Does it really deserve a $10 billion market cap? Absolutely not. It lost tens of millions of dollars already this year, but it is the poster child of the marijuana stock mania, and that's what happens in manias.

Why it Matters: More than 30 states have legalized marijuana for one use or another, and many of them have decriminalized possession up to certain amounts. We know you know of the mania surrounding marijuana stocks and the industry itself, and it's important not to get caught up in it. But the one-two punch of more legalization and decriminalization, plus the resignation of Attorney General Jeff Sessions, who was on a mission to stamp it out, may be enough to put a sturdy base under the industry.

It's still a Schedule I narcotic, according to the Justice Dept, which is kind of funny if you have been to DC lately where marijuana use is not illegal and widely used near our federal buildings, but the industry is not waiting for the Feds to change the rules. Multinational tobacco, health care and beverage companies are sniffing around the marijuana industry and are making deals or planning to. It's on!

What's Next: Emboldened by the midterm votes and by Canada's recent legalization, expect more companies to test the public markets and for more acquisitions in the cannabis patch. Many investors have likened the legalization of marijuana to the end of prohibition in the 1920s. Whether it will be that big remains to be seen, but the stage is set for more green waves to roll in.

Chart of the Day: S&P 500 market structure flashes warning signals

The BofA Merrill Lynch Global Research team sent out a couple of charts (shown below) that should raise some concerns about the recent structure and integrity of the markets. While markets in the past week and on Wednesday have shown a sharp, extended rebound from late-October lows, it's still instructive to see what really happened under the surface amid October's highly volatile market moves.

BofAML points out with the chart on the top that there was a significantly lower percentage of S&P 500 stocks that were above their 200-day moving averages during the October low than was the case during the market lows in both February and April. To put it simply, more S&P stocks were underperforming during the October plunge than in the other S&P 500 drops earlier this year, and even since 2016. This rather worrisome statistic is reinforced by the chart on the bottom, which shows that many more S&P 500 stocks hit new 52-week lows in October than at any other time since early 2016.

So what does all of this mean and why does it matter? Not to sound alarmist, but these charts are suggesting that the scary correction and volatility in October may have been much different underneath the surface from similar declines this year. Though the S&P just barely touched correction territory (defined as a 10% or larger decline from the most recent peak) in October, the underlying stocks within the index performed significantly worse overall that month than at other times in the recent past.

Does this mean the bull market is coming to an end and we should all run for cover? Probably not, but at the very least, we should all be a little less complacent and a little more wary that the underlying structure of the market could be pointing to more potential weakness on the horizon.