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Nasdaq Hits Correction Mode, Dow Touches 200-Day Moving Average In Volatile Friday Trade

If there were any doubts left about whether the market would be “risk-on” or “risk-off” going into the election, Friday’s selloff pretty much iced it. The toggle has switched to the off position.The late-week meltdown ignited after earnings from four of the five FAANGs that were mostly positive, but perhaps lacking in the guidance department (see more below). Combine that with the resurgence of COVID-19, the Senate adjourning with no more progress on a stimulus package, and the culmination of a long and contentious election season, and it’s no wonder investors seem ready for a break. Even before FAANG earnings officially put things on ice, many investors showed signs of risk aversion ahead of the election. That made itself pretty clear with selloffs on Monday and Wednesday. Major indices suffered their worst week since March, and now people are openly making comparisons between this pre-election skid and the one we saw heading into the 2016 election.As noted this morning, keep an eye on futures Sunday night into Monday, and especially on Tuesday night as returns come in. Election night 2016 was a wild one for the futures market, featuring a steep plunge when it initially looked like results might be contested, followed by a meteoric rally when it became clear there’d be a victor without much fuss or muss.A wild ride could play out this time if things look testy by late Tuesday night. Or, if it looks relatively smooth, stocks could get a lift. It’s arguably not so much who wins, but whether there’s a chance of a long, drawn-out chaotic fight for a winner.Late Rally Back; A New Policy From The Fed A fierce recovery effort at the very end of Friday’s session might put Monday’s open into more solid territory. A late-breaking news item from the Fed about 40 minutes before the close also potentially contributed to the late rally. The Fed said it’s reducing minimum loan sizes for smaller businesses that want to use the Fed’s lending program. It’s also easing restrictions on debt for companies already using the program. The Fed called these moves “two important ways to better target support to smaller businesses that employ millions of workers and are facing continued revenue shortfalls due to the pandemic.”Basically, the Fed is trying to inject more money into the economy–something Congress and the White House haven’t done with a stimulus since spring–which would possibly drive up economic growth expectations. The idea could be that this might help small businesses bridge the gap between now and any fiscal stimulus.Strong Data Raise Hopes For New Week There are other signs things might improve once the election excitement fades. Economic data have been solid lately. Gross domestic product (GDP) for Q3 came in above estimates yesterday, and initial jobless claims have finally started to ease a bit. New home sales for September were a bit subdued, but that’s the only data all week that looked below average.The problem is that the good news is hitting a wall of worry centered on the election, COVID-19, and lack of a stimulus. Until we get those behind us (and it could be a while), risk premium in the market might continue unravelling as we saw this week. Technically, a lot of damage got done on the charts this week. The Dow Jones Industrial Average ($DJI) retested its 200-day moving average (before settling above it–see chart below) and the SPX took out its 50-day and 100-day moving averages. There appears to be potential technical support near the SPX 200-day moving average at around 3130, but that’s still a long way down, so perhaps look for bulls to defend the psychological 3200 handle if things fall further.But if you’re following corrections, the Nasdaq (COMP) has fallen 10% from its all-time high. The SPX is down 8.7% from its peak, so it’s close but not all the way into correction territory.CHART OF THE AFTERNOON:…