Inflation Overshadowed the Real Story Last Week By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - Investor sentiment swings bullish…
- Are tech stocks down for the count?
- The winners of Trump 1.0 are perking up for Round 2…
- The “zero-day panic” is your opportunity…
The inflation numbers were the biggest post-election datapoint last week… So big, they overshadowed something arguably even more important. The American Association of Individual Investors (AAII) released its weekly survey on Wednesday, Nov. 13. Every week since 1987, the AAII has polled individual investors on their forward six-month outlook for the markets. The results showed investors have grown increasingly more bullish over the last four weeks, and are well above the historical average: 
Four weeks ago, on Oct. 23, just 37.7% of investors were bullish on the stock market. The results posted on Nov. 6, polled over the previous week, saw that jump to 41.5%. But the biggest jump higher came this past week, on Nov. 13, with almost 50% of respondents bullish on stocks. That’s just shy of the 52.9% high just before Christmas in 2023. Also interesting is the relative lack of change in bearish respondents. That’s down from 29.9% on Oct. 23 to 28.3% today. So the bears haven’t changed their mind much based on the election. Neutral respondents, though, have cratered well below the historical averages. Almost a third of respondents were neutral in late October, and that number has shrunk to 21.8% today. In other words, those uncertain have largely shifted into the bullish camp. You might be thinking, “So what?” Here’s what. Expectations guide behavior. If you think stocks are going to be higher in six months, the rational thing to do is buy stocks. If you’re neutral or uncertain, the rational thing is to do nothing and stay sidelined in cash. And if you’re bearish, the rational thing is to sell stocks. Over the last month, the number of investors who theoretically would’ve done nothing are now in a position where, rationally, they should be buying stocks. And you don’t need me to tell you that more people buying stocks is bullish. Just as interesting was the special question asked as part of the most recent survey: 
(Note that the format of the AAII’s chart cuts off the top red bar’s percentage, which is 39.9%. I like to think the blowout in optimism was too much for the website’s HTML code.) Nearly 40% of respondents are now more optimistic about the stock market due to the election result… nearly 23% are undecided… and 18.4% are now more pessimistic. More optimism rationally means more buying. So we should generally expect the bull market to continue trending higher over the next six months and likely beyond. Of course, some things will do better than others… One of our favorite things to do here in TradeSmith Daily is to divide tickers by tickers. When you do this, you can find out how one stock, sector, or market is performing against another. It especially helps in revealing market rotations… when one trade becomes unpopular and another takes its place. Take, for example, large-cap tech stocks (QQQ) against the benchmark S&P 500 (SPY): 
QQQ led the market higher since the start of 2023, coinciding with the AI boom. That outperformance peaked in July and has since stalled out, with the ratio falling below its 200-day moving average and struggling to reclaim it. Here’s another interesting ratio setup… the ratio of small-cap tech stocks against the value-oriented small-cap S&P 600. 
Tech, and especially small-cap tech, is becoming a pretty miserable trade. We’ve covered the reasons for this in the past. High-interest-rate environments are tough on small caps in general. If you’re a small-cap tech company with heavy R&D costs and a long way to go before you hit profitability, the future is even more bleak. Add to this the fact that Republican administrations don’t tend to be great for tech stocks as much as Democrat admins. Conversely, industrials and small caps are the big winners. There will be some anomalies in tech. Tesla, for instance, has performed extremely well since the election – though that may be somewhat related to CEO Elon Musk’s very public support of the winning candidate. (Disclosure, I own TSLA.) But the bigger point here is that tech is, at the very best, a narrow trade. The winners will be fewer and further between going forward. So if you’re going to invest in tech, make sure you’re choosy. Finally, a chart I cannot help but share. Just look at how bitcoin is beating the pants off of tech right now: 
Bitcoin has outperformed almost everything save for Nvidia this year. But when compared to the broader tech sphere, we can see just how strong it is. It’s currently charting close to new all-time highs when compared to the Nasdaq 100, and has been gaining ground since late last year. New relative highs are almost as bullish as new nominal highs. So that just underscores my point that if you’re shunning the bitcoin trade, you’re shunning some of the simplest market outperformance you can get. - After the election, I made a request to our research team…
As we’ve shown you time and again, we have strong reason to think small- and mid-cap stocks will do well under the next Trump administration. Some of the reasons, like the path of interest rates, are unique to the current environment. But others, like the incoming president’s economic policies, also favor this thesis. With that in mind, I asked our research team to uncover the best-performing stocks of the last Trump admin, which we measured from Nov. 8, 2016, to Nov. 3, 2020. (Of course, Donald Trump both took and lost office in the following January. But the elections dates are a better measure of investor reactions.) Next, I went through and isolated stocks that started the Trump admin as a small- or mid-cap size and ended in large-cap territory. Finally, we sorted the list by the amount of market cap added. Here are the results: 
Now, we should all understand that 2016 was a different time than 2024. And the bubble that began in 2020 as a result of the Federal Reserve’s massive quantitative easing campaign certainly contributed to a lot of this growth. But we can look at a few of these stocks and see that they’ve “woken up” in the couple weeks since the election. Take SQ, for example, which had the largest market cap growth we found. That stock is well off its 2021 highs. But after the election, likely due in part to the rise in bitcoin prices, the stock started to show signs of life and is now at its highest point since 2022. 
We’re going to dive into this list and see if we can find any shared factors. In the meantime, keep the list on hand and watch these stocks as we head into the end of the year. - Zero-days options shouldn’t be controversial…
The last two years has seen a lot of pearl-clutching about what are called zero days to expiration (0DTE) options. Technically, any option can be a zero-days option if it has less than one day until expiration. But on major indexes like the S&P 500 and the Nasdaq 100, there are now daily options listed that you can trade. Anyone who’s ever held an option knows how volatile things can get on the day before expiration. And ever-reliable economists have espoused concerns that “the growing size of the 0DTE segment may lead to sharp market swings as large as $30 billion, particularly in the current low-liquidity environment,” as JPMorgan Chase put it in a 2023 report. The trend certainly is picking up steam. One study showed that the majority of retail options volume now takes place in contracts set to expire in five days or less. That means people are highly favoring the short-term direction of markets to find their fortunes. In such a chaotic world, it makes sense. And it also presents a choice for you. You can either ignore 0DTEs and their immense profit potential… or you can learn how to harness this potential for yourself. Given the impact these 0DTEs could have, we tasked Jonathan Rose of our corporate partner Masters in Trading to teach our readers just that. Jonathan applied his favorite options-trading mechanism to this new corner of the market – to rave reviews from his community. You can hear more about the beta test here and sign up for more information from Jonathan about his new One-Day Winners strategy. There’ll be a live strategy session next Tuesday, Nov. 26, about the Black Friday trades Jonathan has planned… But before that, Jonathan will be preparing you with other video briefings – just the basics to get you started trading these options responsibly (yet lucratively). Click here to get on the list. To your health and wealth,  Michael Salvatore
Editor, TradeSmith Daily | 
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