The S&P 500 could fall at least another 7% without stimulus bill, BTIG says

Published Wed, Oct 7 20208:35 AM EDT

(This story is for CNBC Pro subscribers only.) President Donald Trump abruptly halted stimulus talks until after the election, causing a sudden drop in stocks on Tuesday. BTIG believes the sell-off is nowhere near finished. Julian Emanuel, BTIG's chief equity and derivatives strategist, said the S & P 500 is vulnerable to a test of its 200-day moving-average of 3,113, which is about 7% below Tuesday's close of 3,360.95. The moving average is a widely watched momentum indicator. "Tuesday's events open up the potential for immediate downside to the SPX 200 DMA (3,113) and reinforces the idea that the outcome of the Election is likely to be unclear, contested or both," Emanuel said in a note on Wednesday. Trump's declaration to end stimulus negotiations caught Wall Street by surprise as the market had risen on hopes that a second deal could be reached before the election. The move sparked a particularly steep sell-off Tuesday in stocks sensitive to the economic recovery, such as airlines and retailers. Emanuel said the weakness in the stock market in the period before Election Day could hurt Trump's chances of reelection, if history is any guide. "Trump and his opponents know history – when the market has been higher in the 90 days prior to the Election, the incumbent has won 85.7% of the time," Emanuel said. "Conversely, when the market is down in September and October cumulatively prior to an election (3,500 is the level to watch), the incumbent party has lost on 6 of 6 occasions." Former Vice President Joe Biden leads Trump in six swing states after the first presidential debate and following the president's diagnosis with Covid-19, according to a new CNBC/Change Research poll released on Tuesday. Emanuel said while the pullback could create a buying opportunity, investors should expect more wild moves in the market between now and the election. "While weakness between now and Inauguration Day (1/20/21) is likely a buying opportunity – with low rates, eventual further stimulus and medical progress on the Virus supportive elements for 2021 – we are reminded that in a period of elevated volatility and uncertainty that the long run is made up of a series of short runs which are frequently gut-wrenching," Emanuel siad.

U.S. President Donald Trump speaks at the White House after returning from hospitalization at the Walter Reed Medical Center for coronavirus disease (COVID-19) treatment, in Washington, October 5, 2020, in this still image from video posted on Trump's Twitter page.

@realDonaldTrump | via Reuters

(This story is for CNBC Pro subscribers only.)

President Donald Trump abruptly halted stimulus talks until after the election, causing a sudden drop in stocks on Tuesday. BTIG believes the sell-off is nowhere near finished.