Trading Nation

Two traders debate what the fourth quarter will bring for stocks

What will the fourth quarter bring for the market?

Fourth quarter trading begins Monday with some big events looming:
an uncertain presidential election looming and a potential rate hike from the Federal Reserve.

With the S&P having risen a modest 5.5 percent year to date, one strategist says investors are not adequately prepared.

"I think what people are not prepared for is a strong rally into the fourth quarter," Dennis Davitt, chief investment officer at Harvest Volatility Management, said Thursday on "Trading Nation."

This is what's called the "pain trade" — the theory that a popular trade or investing strategy will backfire on investors when they are caught off guard.

The XLU, the ETF that tracks utility stocks, is up about 14 percent this year. In Davitt's eyes, the market could suffer overall if such a hot sector saw a massive sell-off by the end of the year.

"But I'm looking for that money to be reallocated into more passive-like investments and for the economy, as well as the stock market, to go higher into the fourth quarter," he said.

By this time last year, the S&P was down a little over 6 percent. And by this time in 2014, the S&P was up about 7 percent. In both years, the last quarter ended higher.

Ultimately, the election is weighing as an uncertainty on the market that some say is akin to the uncertainty facing the "Brexit" referendum in June. After the surprise U.K. vote to leave the European Union, global markets fell sharply, and subsequently rallied as it proved to be a mere temporary drawdown.

"The election will be the most overrated reaction, probably equaling Brexit," Davitt said.

"I think 50 percent of the people will be unhappy and use that as an excuse to sell stocks the following day."

And then once again, added Davitt, it will provide another buying opportunity.

Such a sell-off in hot trades like utilities or energy stocks could certainly materialize, according to Max Wolff, chief economist at Manhattan Venture Partners — but only if Hillary Clinton, the Democratic nominee, wins the election.

"There's every reason to believe the unbelievable thing could happen — that people could continue to add risk, to buy stocks," Wolff said Thursday on "Trading Nation."

But ultimately Wolff sees the S&P falling, citing poor earnings growth and companies buying back their own shares faster than investors are buying; this, according to Wolff, is "the reason the stock market looks good."

"I don't think it lasts forever. I think we'll run out of steam there before New Year's Eve."