Why today's headwinds could set up a major stock rally in coming months

As US stocks (^DJI, ^IXIC, ^GSPC) brace for the coming fourth quarter, All Star Charts chief options strategist Sean McLaughlin sits down with Ines Ferré to explain how the markets could be on track for a major rally in the coming months after the midterm elections and what that means for options trades.

you guys have a a chart out basically showing that for the seven months starting October 1st, that's historically the best time to be in stocks in a four-year election cycle to own stocks. So, in plain English, what does that mean? Why should investors look at that?

So what that means is, in the four-year presidential cycle, if you look at stock market returns over the last 50 years, you will find that over the next seven weeks or next six, I'm sorry, next seven months, that has been an average return of 18.3% for the the S&P 500. And so, with that headwind, and you think about where the market is positioned right now. We have consumer sentiment at some of the worst levels we've seen since COVID, right?

We have a stock market that's had every piece of bad news thrown at it. We've got bonds basically crashing, interest rates rising like crazy. Oil high. We have geopolitical risk, we have war, we have uh, I mean just all this scary headline and we have consumer sentiment at the low. And so, if this headwind that we're in right now has not completely crashed the market, well, we got earning season coming up and if we get any glimmer of good news, I think, I think the market's going to be caught off sides and we could have a really significant rally over the next three to six to nine months.

So, as an options trader, how do you position yourself?

So, one of the ways that I position myself is I want to be in the leaders. And I think if we have another leg higher in the bull market, it's going to be led by semiconductors. And who's the biggest bully on the block in the semiconductors? It's Nvidia. And right now if you look at that chart in Nvidia, it's been basically consolidating since the middle of May. So four months, building strength, building energy and I think that this thing's ready to go. And so I want to position aggressively long. And so what I'm thinking I want to do is as an options trader, I looked at that chart and I see the implied volatility at the lowest levels it's been probably all year. And so as an options trader we say, oh, well call premiums are cheap. I could if I want to keep it simple with Nvidia trading, I think it's in like 230 right now, 235.

I looked at the January 250 calls, I could position, if I want to keep it simple, I can position in those for about 1050 a contract. I haven't looked at the prices in the last hour, but somewhere around $10.50 per contract. If I want to keep it simple, get exposure to the semiconductor space, exposure to the biggest name for 1050, that's my risk. That's the most I can lose.

So, you're bullish. I mean, this market to me seems like it's been jittery, I would say, or maybe nervous, nervous as they've seen these uh yields going higher. If you've got the cost of capital that's increased, you've got the 10-year that's high, the 30-year going higher. Do you not see risk in that?

I absolutely see risk, but again, I go back to well, the market has had every reason to sell off and it hasn't sold off yet. And it's it to me feels like it's running out of time. Like if you're not going to do it now, then the path of lease resistance appears to be higher.