The Dow Buys the Rip and Sells the Dip

The Dow Buys the Rip and Sells the Dip

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

I don’t know who the president will be…

Then again, maybe you don’t either.

I’m writing this on Monday morning, long before the votes have been fully cast, counted… or recounted.

Shake-ups over the past week have made the race look a lot tighter.

One notable poll out over the last week has Kamala Harris winning swing-state-turned-red-state Iowa. Some even fresher polls have Donald Trump leading every swing state.

Models and projections are all over the place. I’ve even seen a few projections that call for an Electoral College tie, which would ignite all sorts of insanity that could even lead to a Trump-Walz or Harris-Vance White House.

Even the betting markets, which we’ve seen as a purer measure of confidence, have tightened as the election draws nearer…

Trump’s betting odds on Polymarket have sunk from a high of 67% down to 56% in the span of a week. Harris’ odds have reversed in equal measure, currently at a 44% chance of victory.

It’s easy to get wrapped up in this stuff. The presidency feels incredibly important to the stock market.

But the truth is, the president isn’t in the driver’s seat. Earnings are.

This chart shows you everything you need to know…

Ninety-five years of data shows that while Democrat presidencies have an edge over Republicans on forecasting positive-returning years – 57% vs. 43% – the real driver is earnings growth. When S&P 500 company earnings were positive, that correlated with a positive stock market more than two-thirds of the time.

Through bull markets, bear markets, quantitative easing and tightening, technological innovations, world wars, and all the other chaos… positive growth is the prevailing, consequential factor.

So in terms of your portfolio, maybe it doesn’t really matter who will sit in the White House next year. Maybe it’s even better to just ignore it entirely and do this instead…

Here’s a great method to help spot growing earnings and momentum…

On our TradeSmith Finance Dashboard, the homepage for all TradeSmith subscribers, there are two tools worth noting.

The first is our Most-Searched Tickers tool. This simple screen shows you what TradeSmith’s 60,000 or so other users are looking for in our database.

I like to pop into that screen every so often to get a feel for what our users are most likely trading. Here’s what the list looks like right now:

There’s a few names on here you might expect, and a few you wouldn’t.

For example, I’m not surprised at all to see Nvidia (NVDA), Super Micro Computer (SMCI), Novo Nordisk (NVO), and Advanced Micro Devices (AMD). Clearly, the two big themes of the bull market – semiconductors being the “picks and shovels” of the AI trade, and weight-loss drugs – are still top of mind.

But then there’s the oddballs: Evercore (EVR) and Howmet Aerospace (HWM). The former is a $10.3 billion investment banking advisory company, just recently breaking large-cap territory. And the latter is a $41 billion aerospace component maker.

Why these companies are on our users’ radar, I can’t say. But we can use a few methods to determine whether our users are on the right track.

My quick “sniff test” to see if any stock is a buy is to run it through Jason Bodner’s Quantum Edge system – another Dashboard tool exclusive to Quantum Edge Pro subscribers.

This system uses a composite of fundamental growth metrics – including but not limited to company earnings – as well as technical momentum measures like money flows.

The system flashes a buy signal with a score between 60 and 85 – above that, and things start to get a little too hot and prone for a pullback.

Evercore scores exceedingly well, especially on its Technical score:

And Howmet, too, shines, with balanced Fundamental and Technical scores in the low 70s.

These are two great picks to keep on your watchlist – so kudos to our savvy TradeSmith users for seeking them out.

And if you’re looking to access the Quantum Edge system for yourself, go here to learn how.

The Dow shake-up shows a changing of the guard for tech…

About a month back, we looked at the ever-disappointing Intel (INTC).

Intel, despite being a semiconductor company with more than a 60% share of the CPU market, hasn’t performed well in the 21st century. Today’s price is the same as it was back in 1997.

The latest lump on Intel shareholders is that it got kicked out of the Dow Jones Industrial Average – a small club of the most important industrial stocks in the U.S.

And what replaced it? None other than the golden child semiconductor company, Nvidia.

There were signs this would happen over the past few months. For one, NVDA split its share price 10-to-1. That doesn’t sound like the kind of thing that matters for an index, but it does.

The Dow is a price-weighted index, so stocks with high share prices, especially in the four-figure range and especially volatile stocks in the four-figure range, have the potential to move the index quite dramatically.

Intel’s performance lately has also left a lot to be desired. As we covered back in September, the company’s recent earnings report sent the stock down more than 34% over a few days. Even with its recovery since, the stock is down by more than half in 2024.

The Dow has a hard enough time staying relevant, with a very small index of only 30 names and plenty of unsexy, old industry stocks like 3M, Procter & Gamble, and Verizon. Major tech laggards like Intel don’t help much.

We can’t help but observe, though, that the Dow is adding Nvidia near its all-time highs and dropping Intel at a 27-year low.

Nvidia is impressively profitable, though how sustainable that is may be questionable. Intel has been a terrible trade for a long time, but it’s also still incredibly dominant in the CPU market.

At least for now. Nvidia announced on Monday that it’ll enter the CPU market in a big way in 2025. The timing is pretty poetic, and this may in fact be the most useful news of the whole ordeal.

The takeaway, to our eyes, is simple. The Dow, as an index, is struggling to stay relevant as much more efficient and broad-based benchmarks like the S&P 500 and Nasdaq 100 soak up all the capital in the room. Adding Nvidia probably won’t change much to help its cause.

If you’re indexing at all, sticking to the S&P 500 and Nasdaq 100 has been a pretty good trade and should continue to be. Just look at the performance comparison between the three (Nasdaq, S&P 500, and the Dow) over the last 10 years, and you’ll see why:

What’s far more interesting to us is NVDA entering the CPU market. That opens up a whole other revenue stream for one of the most well-capitalized computer companies in the world, if it goes well, and that’s something to watch very closely.

In defense of doing nothing

There’s a lot of value in not trading during times of chaos.

Monday’s session was fraught with volatility. Treasury yields surged, the S&P 500 fell a quarter of a percent, the Nasdaq fell even more, and crude oil spiked almost 3%.

It’s all decidedly “risk off” behavior. That’s to be expected… both from a seasonal perspective, as we’ve been showing you, and just rationally speaking. The biggest economy in the world is about to make a big decision about its next leader between two candidates who couldn’t be more different.

It makes trading extraordinarily difficult. So difficult that trying to force trades is tempting… but probably not the right move.

Trading is one of few, maybe the only pursuit in life where the amount of work and time you put into it doesn’t correlate to positive results. Indeed, it’s the only pastime where you can work all day and lose money for your effort.

So speaking less as an analyst and more as a human being right now, know that it’s OK to just sit back and let the chaos unfold.

Keep your cash sidelined and enjoy the show. No matter what happened last night (or hasn’t happened yet), the sun will rise, and the exchanges will open at 9:30 a.m. ET.

Of course, we’ll be back your way with some postelection insights later this week – so don’t miss out.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily

Get Instant Access