Election Season Promises Volatility & Opportunity

Election Season Promises Volatility & Opportunity

With now less than 50 days until the US Presidential Election, markets and voters are tuning in. After the Fed's decision is announced Wednesday, investors will look ahead to the first Presidential debate on September 26. With Donald Trump gaining in the polls, markets are volatile as traders position themselves for either outcome. 

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Citigroup's political analysis team published a note last week putting the probability of a Hillary Clinton victory in November at 65%. That is in line with the average odds given by bookmakers and prediction markets. Betting on the US election is mostly illegal in the US. In compliance with CFTC regulations, I won't link to or mention any specific sources for those odds I just cited. (Feel free to Google it.) 

Nate Silver's highly-regarded and historically correct fivethirtyeight.com gives Clinton a 59.7% chance of winning (as of Monday morning). Trump's 40.3% is his highest showing since the Republican convention. But for traders, the outcome of the election is only part of the story. The other part is trading (or surviving) the volatility we're likely to see both before and after November 8. 

Fivethirtyeight gives a relatively high 6.4% probability of a recount. Those who recall the 2000 election recount, which lasted through December, may also recall that the Dow had bounced off a six-month low in mid-October into a strong rally into November. The weeks of doubt and drama were marked by a choppy sideways range that led not to a final post-election rally (as in most years) but a less choppy sideways range followed by the first of several slides into the 2001-2003 recession. 

This week, Citi's Chief Global Political Analyst Tina Fordham and her team raised their odds of a Trump victory from 35% to 40%, in line with Nate Silver and more bullish than most overseas bookies. Fordham's group argue that the markets have yet to fully price in a win by the Republican candidate and recommend several strategies to prepare for it.

With the odds creeping up and the debates not begun, som buy-and-hold investors are looking at ways to trade a Trump victory or at least hedge against one. The strategies center around a strong dollar, higher bond yields, a fall in the stock market, and a flight to safety (i.e. gold). That's not exactly a political statement, but it's about as close as market analysts get to making one. 

Republicans may not be thrilled by what Citi is implying about their candidate. Already, analysts have been tracking the way the Mexican peso has moved in inverse proportion to Trump's poll numbers. In other words, when the polls show Trump more likely to win, the peso falls, and vice-versa. 

Citi's analysts appear to think Trump will cause the market to drop and people to flee to safe havens while US exports suffer from both weakened foreign currencies and, if campaign rhetoric becomes policy, efforts to cancel trade agreements with China, Japan, Mexico and others (not to mention build The Wall and make Mexico pay for it). Whether or not you agree, whether or not investors agree, we can all agree that the possibility (40%) means a lot of short-term volatility. 

And volatility means opportunity, if you can trade with limited risk. 

Take gold, for example. Long-term investors may watch gold spot and futures prices looking to buy dips on the expectation that gold will rally if Trump wins. That's several IF-THEN propositions strung together—not a solid basis for a decision. 

In the short-term, on the other hand, you can find up and down trends that can be traded effectively with limited-risk binary options and spreads. Even on days like Monday, when gold futures were rangebound between $1315 and $1320 an ounce, you could flat-market strategies to get a higher return on a relatively small investment than you could have gotten with a conventional trend-following strategy. 

Whatever the odds, the outcome of the election is by no means certain. Even more uncertain is what the markets will do in response (or non-response). But the one certainty is rapid swings between high and low volatility in virtually all the markets. Nadex offers one of the best limited-risk ways to trade that volatility. 


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