Macro Strategy Weekly: Midterms Could Spark a Rally? But Three Bigger Risks Remain

Weekly Report: Key Views

Hello everyone, and welcome to another edition of our Macro Strategy Weekly. Each issue features market strategy insights from selected contributors with relevant professional expertise. We also track how their views perform each week. Here is a preview of this week’s key ideas:

1. Divided Government Could Restrict Policy Progress and Reduce Uncertainty

Following the Republicans’ loss of their majorities in both chambers of Congress in the midterm elections, Trump will face greater constraints and more negotiation over policy during the following two years. This may reduce policy efficiency, although it could also limit the market impact of unexpected measures and create a more stable environment.

2. AI Investment Is Driving a Valuation Reset, With Limited Evidence of a Technology Debt Crisis

The current AI investment boom should be distinguished from the 2000 dot-com bubble. Today’s large technology companies generate substantial revenue and should retain the ability to service their debt as long as their core businesses remain healthy. Current pressure therefore points mainly to a valuation correction, with limited evidence of a concentrated debt crisis. Technically, the Nasdaq’s 20 month moving average near 26,000 marks the long term trend boundary. Holding this level and rebounding strongly could create a buying opportunity. A sustained breakdown would threaten the longer term advance and raise the risk of a bear market.

3. Gold Faces Further Downside Below $4,000, While Any Rebound Depends on Rate Hike Expectations

Gold’s break below the key $4,000 level has increased the risk of further declines. Profitable short term options strategies should not distract from the bearish price signal. The next move will depend largely on Federal Reserve rate expectations. Gold could rebound strongly if the market begins pricing out a December hike. Without such a shift, excessive optimism remains unwarranted.

4. US Equities Need a Short Term Recovery, but Medium Term Correction Risk Is Greater

US equities may rebound or consolidate over the next one to two weeks, although a larger decline remains possible over the next one to two months. The main warning is a bearish engulfing pattern on the Nasdaq’s monthly chart, while the October record high may represent a bull trap. However, after three consecutive weekly declines, the index has reached its initial downside target at 28,500. Technical support also remains near 27,200, limiting the appeal of aggressively chasing the market lower.

5. The Democratic Sweep Was Largely Priced In, Opening a Post-Election Rebound Window

The midterm election result and Nvidia earnings are the market’s two major catalysts. With the election now concluded, attention shifts to how investors absorb the result before Nvidia’s earnings become the next directional catalyst. Ahead of the vote, the probability of a Democratic sweep was close to 70%, suggesting that the outcome was largely reflected in prices. Its confirmation may therefore produce consolidation followed by a modest rebound instead of another sharp decline. This remains a short term recovery opportunity and does not signal the end of the broader risk period.

6. Key Support and Nvidia Earnings Will Determine Whether the Rebound Becomes a Sustained Advance

The lower boundary of the S&P 500 trading range near 7,300 aligns with its 200 day moving average, making it a critical support zone. The Nasdaq and Semiconductor Index long term trendlines are also important. Consecutive support failures could trigger CTA selling and amplify pressure from weaker free cash flow among major AI companies. Nvidia earnings will then provide another test of technology growth expectations. A significant earnings beat could support a lasting bottom, while results in line with or below expectations would increase the risk of a deeper correction and shift attention toward the S&P 500’s 20 month moving average.

7. Switch Strategies Based on Market Reaction and Watch Volatility, Bonds and the Dollar

With the midterm result now known, investors should base their next move on the market’s closing reaction. A confirmed break below key levels across major assets would favor a straddle strategy and long VIX exposure. A muted reaction or a return to the previous trading range would favor deeply out of the money sell put strategies. Across asset classes, Treasury inflows and the correlation between AI stocks and TLT approaching negative one suggest that bonds may provide the main safe haven during a technology selloff. The US dollar could rebound, while gold may remain exposed to further downside.

This Week’s Report:

The S&P 500’s Long Term Trend Remains Supported, While Sector Valuations Stay Divergent and Rate Pressure Intensifies

As of the October 29 update in US Eastern Time, the S&P 500 ETF (SPY) stood 5.60% above its 200 day moving average, widening by 0.38 percentage points from 5.22% on October 27. This indicates that the medium to long term trend remains supported. Among the 11 sectors, seven traded above their 200 day moving averages and four traded below. Energy (XLE), Health Care (XLV) and Information Technology (XLK) stood 17.21%, 16.09% and 11.44% above their averages, respectively, maintaining strong trend positions. Financials (XLF), Consumer Staples (XLP), Materials (XLB) and Consumer Discretionary (XLY) were 6.01%, 4.45%, 2.89% and 0.53% above their averages. Consumer Discretionary moved back above its average but remained close to it. Communication Services (XLC), Utilities (XLU), Industrials (XLI) and Real Estate (XLRE) traded 10.43%, 2.62%, 1.82% and 0.63% below their averages, respectively.

Overall, the S&P 500 remains above its 200 day moving average, and the distance widened from October 27. The number of sectors trading above their averages increased from six to seven, indicating broader market support. Energy, Health Care and Information Technology remained the leaders, while Financials, Consumer Staples and Materials provided additional support. Consumer Discretionary’s recovery above its average also offered a positive signal for market breadth. However, Communication Services moved further below its average, while Industrials, Utilities and Real Estate remained below theirs, showing continued sector divergence. Investors should watch whether SPY holds above its 200 day moving average, Consumer Discretionary maintains its newly recovered position and the lagging sectors continue to improve. These developments will determine whether market support is becoming broader and more durable.

Valuations: Modest Rebound, While Sector Divergence Remains Pronounced

As of the October 29 update in US Eastern Time, Health Care (XLV) traded at 32.84 times earnings, the highest absolute valuation among all sectors. It was classified as elevated relative to its five year history and expensive over both the 10 year and 20 year periods. Real Estate (XLRE) ranked second at 30.78 times earnings but was classified as undervalued across the five year, 10 year and 20 year periods. Information Technology (XLK) ranked third at 30.58 times earnings.

At the aggregate level, SPY traded at 24.06 times earnings, up modestly by 0.13 from 23.93 on October 26. It remained fairly valued relative to its five year history, elevated over the 10 year period and expensive over the 20 year period.

Rates: Equity Bond Yield Spread Remains Negative as Valuation Pressure Intensifies

As of October 29 in US Eastern Time, SPY’s P/E ratio of 24.06 implied an earnings yield of approximately 4.16%. The latest equity bond yield spread stood at negative 1.18 percentage points, implying a comparable 10 year US Treasury yield of about 5.34%. The negative gap widened by 0.36 percentage points from negative 0.82 percentage points on October 26. It was also 2.30 percentage points below the 10 year average spread of positive 1.12 percentage points.

@Ivan_Gan: Post-Midterm Outlook: Republican Setback Brings Policy Gridlock and Lower Uncertainty

Following the Republicans’ loss of both chambers of Congress, Trump’s policy agenda over the next two years will face greater constraints and prolonged political bargaining. This could reduce uncertainty from abrupt policy actions and provide a more stable market environment.

$E-mini S&P 500 - main 2612(ESmain)$ $SPDR S&P 500 ETF Trust(SPY)$ $S&P 500(.SPX)$ $Cboe Volatility Index(VIX)$ $Micro E-mini S&P 500 - main 2612(MESmain)$

The current AI boom differs significantly from the 2000 dot-com bubble. At that time, few technology giants generated meaningful profits or even substantial revenue. Today’s leading technology companies are investing in AI while operating highly profitable core businesses. As long as those businesses remain healthy, they should retain the ability to service their debt, limiting the risk of a concentrated debt crisis.

$Invesco QQQ(QQQ)$ $NASDAQ(.IXIC)$ $E-mini Nasdaq 100 - main 2612(NQmain)$ $Micro E-Mini Nasdaq 100 - main 2612(MNQmain)$

Technically, the October weakness in US equities has reappeared. The Nasdaq broke below the middle Bollinger Band discussed in previous reports two weeks ago. Volatility remains manageable, but the 20 month moving average near 26,000 will be critical support. A sustained break below this level would interrupt the longer term uptrend in US equities and could even signal the start of a bear market.

$Dow Jones(.DJI)$I $E-mini Dow Jones - main 2612(YMmain)$ $Micro E-mini Dow Jones - main 2612(MYMmain)$ $Micro E-mini Russell 2000 - main 2612(MRTYmain)$

$Invesco QQQ(QQQ)$ $ProShares UltraPro QQQ(TQQQ)$ $SPDR S&P 500 ETF Trust(SPY)$ $iShares Russell 1000 ETF(IWB)$

On the final day of October, gold broke below the critical $4,000 level and then fell sharply, signaling the risk of further downside. Gold remains highly sensitive to Federal Reserve rate hike expectations. If the market begins pricing out a December hike, gold could rebound strongly. If rate expectations remain unchanged, excessive optimism is unwarranted.

$Gold - main 2612(GCmain)$ $E-Micro Gold - main 2612(MGCmain)$ $1-Ounce Gold - main 2612(1OZmain)$ $Smart Gold ETF Units(GLD.NZ)$ $Silver - main 2612(SImain)$ $E-mini Silver - main 2612(QImain)$ $ProShares Ultra Silver(AGQ)$

Macro Strategy Summary:

With the midterm election concluded, the nonfarm payrolls report becomes the main remaining event risk this week. The election outcome was broadly expected, so the market impact now depends on how investors reposition after the result.

1. The short dated sell put strategy on the Nasdaq continued to perform well last week. Deeply out of the money strikes could be placed more than 15% below the market, while option volatility remained attractive. The strategy will continue this week, with strikes set at least 15% below last Friday’s closing level for a wider margin of safety.

2. Gold has broken below $4,000, so investors should follow the trend instead of rushing to buy the dip. Last week’s weekly $3,600 sell put position closed safely for a profit. Selling the $3,500 put appears more appropriate this week. The $3,300 to $3,500 range is an important support zone, and investors should watch whether gold reaches it directly.

$United States Oil Fund LP(USO)$ $Marathon Petroleum(MPC)$ $WTI Crude Oil - main 2612(CLmain)$ $E-mini Crude Oil - main 2612(QMmain)$ $Micro WTI Crude Oil - main 2612(MCLmain)$ $Natural Gas - main 2612(NGmain)$ $E-Mini Natural Gas - main 2612(QGmain)$

@程俊Dream: Monthly Reversal Alert for US Stocks: Crash Ahead or More Range-Bound Battles?

The bottom line is that the market may rebound and consolidate over the next one to two weeks, but it faces a larger correction over the next one to two months. From a longer term perspective, there is still insufficient evidence that the nearly 20 year bull market has ended or that a new bear cycle has begun. After sufficient correction through time or price, the established upward trend is likely to reassert itself. The Nasdaq remains our main reference. Although the S&P 500 and Dow show slightly different patterns, the Nasdaq continues to provide the clearest signal in a technology led market.

The clearest medium term bearish signal for US equities is the reversal engulfing pattern on the monthly chart. A similar structure appeared in July. Although the market reached a new high in October, the probability of a bull trap now appears high. Identical monthly patterns are uncommon, but the chart shows several comparable warning signals. Most were followed by corrections lasting one quarter or longer.

Macro Strategy Summary:

The main focus this week is how markets absorb the midterm election result and whether Trump announces any major policy initiatives. Across asset markets, investors should also watch for signs that long duration Treasury yields are stabilizing.

For specific trades, half of the Nasdaq short position was filled at 30,100 last week. This week, the remaining short limit order at 31,000 will be cancelled. The stop on the existing half position will be lowered to 29,500, while the target remains unchanged at 27,250. If the index rebounds, we will look for another opportunity to establish short exposure.

Euro futures made a marginal new low last week before rebounding quickly. A short term recovery remains possible, although its potential size is highly uncertain. The pending orders will therefore be adjusted to limit sells at 1.1290, 1.1430 and 1.1490, with one third of the position allocated to each level. The stop is set at 1.1580 and the target at 1.0900.

A new gold order will be placed this week. Sell at a limit price of $4,205, with a stop at $4,330 and a target at $3,830.

P. S. Once a trade reaches its first target, the stop will automatically move to the entry price. Any adjustments after execution will be provided in future updates.

$Euro FX - main 2612(EURmain)$ $EUR Index(EURindex.FOREX)$ $USD Index(USDindex.FOREX)$

@Owen_trading room: Why I See an Opportunity for a Rebound in U.S. Stocks Despite Ongoing Risks？

US equity indexes are approaching critical technical levels, strength in technology stocks is weakening and safe haven capital is beginning to seek alternatives. The next move will depend on more than the scale of the recent decline. Two major events will determine the outlook: the market’s response to the midterm result and Nvidia’s earnings.

$Tradr 1.5X Short NVDA Daily ETF(NVDS)$ $NVIDIA(NVDA)$ $S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $E-mini S&P 500 - main 2612(ESmain)$ $Invesco QQQ(QQQ)$ $NASDAQ(.IXIC)$ $E-mini Nasdaq 100 - main 2612(NQmain)$ $Dow Jones(.DJI)$ $E-mini Dow Jones - main 2612(YMmain)$ $Micro E-mini Dow Jones - main 2612(MYMmain)$

With the November 3 vote completed, the market is now digesting the election outcome. Nvidia’s November 17 earnings report will become the next major directional catalyst once the election impact fades.

The Democratic sweep was largely priced in before the vote. Its confirmation therefore need not trigger another aggressive selloff and could instead produce a recovery after expectations are realized. However, a short term rebound and the removal of medium term risks remain separate issues. The true dividing line is whether major assets can hold their key technical levels.

Ahead of the election, Goldman Sachs’ model placed the probability of a Democratic sweep near 70%. The result therefore did not surprise the market. Investors had already adjusted their positions, so the outcome confirmed a repeatedly traded expectation instead of delivering an entirely new negative catalyst.

The Semiconductor Index has already broken sharply below its previous structure and is showing a clear topping pattern. However, its long term trendline continues to provide support and preserves the final possibility of a rebound.

The S&P 500 has also fallen below its previous trading range. Attention should now focus on the area around 7,300, where the lower boundary of the previous range converges with the 200 day moving average.

The Nasdaq is also testing its long term trendline and the effectiveness of that support.

These developments show that the market is no longer simply oversold and waiting for an automatic rebound. It is now at a critical crossroads.

The most important post-election signal is whether these key levels remain intact at the market close. A muted reaction and a return to the previous trading ranges would preserve the possibility of a short term recovery. Consecutive support failures across major assets would indicate that the expected rebound has failed and that downside risk is increasing.

Macro Strategy Summary:

Taking a single directional position remains highly risky in this market. With the S&P 500 near the lower end of its trading range, investors could consider a QQQ straddle to capture either a rebound or a downside breakout.

With the election result released, a market close below key support across all major assets would justify using a straddle to capture volatility expansion and positioning for a further rise in VIX.

A muted market reaction or a rebound into the previous trading ranges would call for promptly closing long VIX exposure and related straddles, followed by a shift toward deeply out of the money sell put strategies.

Investors could consider sell put positions at extremely low strikes. Nvidia puts with strikes below $194 remain worth watching, with expiry set about one week out but before the company reports earnings. If Nvidia falls below the selected strike during that period, the position should be stopped out immediately.

$NVIDIA(NVDA)$

Follow-Up on Last Week’s Strategy Results