Over the weekend, American history was changed forever when a lone gunman attempted to assassinate Former President Donald Trump at a campaign rally in Butler, PA.
The bullet barely missed Trump’s head, barely grazing his ear. But tragically, one rally-goer was killed and two others were seriously injured.
DISCLAIMER: When horrible things happen in the world, it’s important to remember that we don’t root for bad news events to make money. That’s bad karma — it goes against my beliefs. However, as traders, we must understand the world as it is, not as we wish it to be…
The reality is: An event as monumental as this will have wide-ranging implications on the stock market, the political landscape, and the world at large.
We can’t ignore it.
Whenever something massive happens in world news, I get incredibly curious about how financial markets, individual sectors, and different stocks will react.
These reactions can give us valuable clues about near-term direction, market sentiment, and future trends.
With that in mind, let me break down what I’m seeing in the markets following this earth-shaking event.
It’s time for my Tuesday Market Outlook…
The Spread Between IWM and QQQ
Above is the year-to-date spread between iShares Russell 2000 ETF (NYSEARCA: IWM) and the Invesco QQQ Trust (NASDAQ: QQQ) as of last Thursday, July 11.
Following the release of the June Consumer Price Index (CPI) report last week, there was a significant sector rotation.
IWM, the ETF representing Russell 2000 or small-cap stocks — which has been underperforming major growth companies for years now — experienced a substantial inflow of money.
Funds moved out of the giant behemoth stocks — the so-called “Magnificent Seven” — and flowed into IWM.
If you had held this pair in a Money Link trade, you would have been down 21.5% until last Thursday. However, after that day’s price action, you would only be down 15.1%.
What’s particularly intriguing is the one-day return for being long on small caps versus QQQ or the NASDAQ…
Last Thursday, this spread reached 5.8%, marking the largest one-day spread for this pair … ever:
This could signal the start of a more significant trend. Whether it indicates increased bearishness or a broader rally, it’s definitely something to watch, especially as we head into earnings and election season.
Keep an eye on these movements, as they could offer valuable insights for future market behavior.
The Trump-IWM Correlation
Next, I found a significant clue that ties into both the low inflation scenario that led to this IWM/QQQ divergence and Donald Trump’s potential re-election.
This Bloomberg chart shows the likelihood of Trump, President number 45, becoming President number 47:
The white line represents the odds of Trump becoming President again.
Currently, the odds are at 67% for him to win the presidency in November.
Meanwhile, the blue line at the bottom represents the IWM, which moves in tandem with Trump’s election odds.
The chart shows almost identical dips in both Trump’s probability and the IWM’s performance.
When Trump’s odds went over 50%, the IWM started to rise significantly. This tells me that IWM’s performance is closely correlated with Trump’s re-election odds.
If you think Trump is going to win in November — which betting markets believe has a higher probability of occurring after the tragic events of last weekend — then you should probably be bullish on IWM.
As we get closer to election season, it’s essential to keep an eye on these clues. History might not repeat itself, but it sure does rhyme.
Pay attention to what small caps do as the election approaches. Stay up-to-date on the news, change is the only constant right now.
Let’s keep our eyes on the market, stay informed, and make some great trades as the market rebalances.
Stay safe out there,
Jeff Zananiri
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