Elections and Markets.
How will the election affect the market? I try to keep off politics in this blog, but ignoring what is happening in the lead up to the election is like ignoring the elephant in the room; everyone knows it’s there and it is awkward not to mention it, so here goes. I will try not to offend anyone!
Trading on the Election
It’s not perfect, but there is a website called PredictIt where users can trade shares on the outcomes of political and financial events. According to ChatGPT:
Overall, PredictIt is considered a reasonably accurate tool for forecasting political outcomes, but like any prediction tool, it has limitations and should be used in conjunction with other sources of information.
I’ve chosen this because it is actually people trading, putting their money where their mouth is, if you like, not saying what they think the interviewer wants to hear or what they think is socially acceptable. As an ex-statistician, I know how surveys can be skewed by the selection of the sample, the phrasing of the question, the context and many other things, so I think this measure is as good as any.
SPY Chart & Trump V Biden
Some notable dates here are:
13 July: Assassination attempt on Trump
19 July: Global IT Outage
21 July: Biden drops out of race
Let’s compare it with the SPY Chart. Notice:
15th July – Height of Trump’s popularity, 69 cents V Biden 24 cents
16th July – The peak of the market at $564.86
SPY Chart & Trump V Harris
Some notable dates ere are:
- 13 July: Assassination attempt on Trump
- 19 July: Global IT Outage
- 21 July: Biden selects Harris
You can see that since 16th July the lines are practically mirror images of each other. And comparing this chart with the SPY chart gives us an insight into why it is behaving as it is.
Trigger Warning
Some people are finding the next 2 paragraphs offensive as they discuss the current candidates Please skip to the next heading if you are likely to be offended.
What can we deduce?
It is hard to say for certain. How much is due to uncertainty and how much is expectation who can say? Certainly, while Biden was still in the race everyone knew what they were getting. They had had terms of both Biden and Trump, and so knew what they were voting for. That has all changed. Now we have a dark horse in the race.
Harris was never high-profile during her vice presidency. She was widely viewed as a DEI hire (an opinion bolstered by Biden’s speech when he announced her selection) and known more for her inappropriate giggling than any policy decisions. We have no idea about her platform or policies as she has not elucidated them nor given a press conference, yet now she is riding high in the polls.
What’s the market going to do?
I don’t know. I was reasonably certain before Biden withdrew and was replaced by Harris, but now I really have no idea.
We have no precedence for a sitting president getting out of the race so late, or of having a candidate selected rather than voted in (yes, I know that the nomination is now confirmed, but even that is unprecedented). As I mentioned last week, perhaps it is time to take away some of your leverage until the dust settles.
Protecting your Downside
I had a query from a reader this week about protective puts, and I thought that other people would be interested in the answer.
John suggested a SPYG DITM trade with the following parameters:
SPYG: $80
Call: strike $40, expiry 6 months, cost $4,020
Put: strike $40, expiry 6 months, cost $370.
I will have to use today’s prices which are a little different, but let’s look at the strategy.
SPYG: $81.26
Call: Strike $40 Dec 2024: $42.60 (cost $4,260)
Put: Strike: $40, expiry Dec 2024, $0.65 (cost $65)
Let’s see what protection we get from this. Technically it is a ‘synthetic long stock’ strategy and it mimics stock ownership, as in it creates a synthetic position that behaves like owning the underlying stock. The graph below shows the value of the position at 30 days before expiry are:
In this graph, the bottom axis is the price of the underlying (SPYG), the left axis is the profit / losss and the purple line is the value of the position 30 days before expiry.
In other words it behaves exactly as the call would, until SPYG drops to $40 when the put kicks in.
So the maximum loss we can make is around 4K – but note that SPYG has to drop 50% to $40 for us to get any advantage from the put.
If we bought a ATM put then it would protect our downside – but an $81 put costs $2.95 (cost $2, 950).
But let’s looks at what it does for us:
Yes, it limits your downside: the most you can lose is $455. But SPYG now has to reach $86 before your position moves into profit, and it has cost you $7,210.
Plus as SPYG moves up it is only protecting you under $81 so if it move up strongly your put will be worth very little and you will have to buy one at a higher strike.
Protective Puts
That’s my problem with protective puts: yes, they are insurance against losses, but they also limit your profits greatly. I prefer to maximize my upside when the bull is running, and rely on ITM to get me out before I suffer major losses if the market turns bearish.
To the markets
Well, a bit of a sideways week, which was only to be expected after the recent rise. Clearly, the July / August dip was just a common-or-garden bear trap. It wasn’t a dead cat bounce.
As always, you can only be sure after the fact.
SPY Charts
SPY is approaching its all-time highs, and it remains to be seen whether this will provide resistance or SPY will sail right through it. My guess is that there will be some consolidation at the $550 – $565 level before it breaks through. The 200 day SMA is now at $510 and in a nice steady trajectory.
On the longer term chart we can see that the current uptrend is still holding.
SPYG Charts
SPYG is still below its all-time high, and looks like it too is moving into a period of consolidation.
And on the longer term chart you can see how it bounced off support at the high of Dec 2021. OptionGear is still not letting me use the drawing tools so I can’t draw in the trends. I re-purposed an arrow as the uptrend, and will have to redo this chart from scratch, will do next week.
QQQ Charts
QQQ is not yet back to its high of early July, and may be meeting resistance at the high in late June. We’ll have to wait and see.
And on the longer term chart we can see it is back into its trading channel.
VIX Charts (Volatility)
The VIX is behaving itself, and is back below 20 after it’s big spike.
ITMeter
The week ahead . . .
The market has calmed down a bit after Jackson Hole, and this week is going to be dominated by NVIDIA’s earnings, due Wednsday after market close. Let’s have a look at it’s chart:
Of course, it has adjusted data as there was a 10-1 split, but you can see that it has recovered from its slump and is now approaching its all time high. I am curious to know what the earnings are – my guess is that they will be good, but I am tempted to put a strangle on, but lets look at how that would play out:
NVDA is currently trading at $129.45.
The 125/135 strangle would cost $1,170.
To get into profit NVDA would have to rise above $147 or fall below $113. That’s a rise of 13.5% or a fall of 12.7%.
Yes, either are possible; but likely? I think I will pass.
The futures
The futures look pretty neutral, but it is almost 12 hours to market open.
Fingers crossed for a good week!
Heather
26 Responses
Hi Heather. I appreciate your insights into what is going on with the markets with a presidential race going on. I thought the same thing that the markets were swaying and reacting to what was going on politically. Being female myself, I was not at all offended. I look forward to reading your blog every Monday. Your blog has been the best source of information that I can rely on that is not biased one way or the other (or have an agenda). Thank you for all you do! It really is appreciated!!
Hi Charity – nice to hear from you again!
Yes, I was just trying to look at the facts as objectively as possible, I definitely dont have an agenda other than trying to make money in the markets and share that with people.
It’s funny – I think that most women who made it on their own without the benefit of quotas and DEI resent the fact that all women in positions of power / influence now have their competency questioned as people suspect – with cause in many cases – that they are hired so that the employer can ‘tick the box’. Which is a shame for all those competent and talented women who would have made it on their own.
But thank you for commenting – really appreciated!
x
h
I also found it highly offensive. People see what they want to see and that you think she is a DEI hire and known for her giggle is ridiculous. Kamala’s record in California as a prosecutor, DA, and Attorney General is fantastic. As a senator, she was brilliant in hearings. But to focus on her giggle. Come on. I know I wouldn’t like it if someone focused on something that superficial about me. Would you?
Similarly, tying the volatility in the market to the recent ebbs and flows of markets is pretty silly. It has far more to do with the latest labor statistics and the likelihood of rate cuts. If you wanted to correlate the market movements to the candidates fortunes, one could just as easily correlate last weeks rise to the overwhelming success of the Democratic Convention. Like I said, people see what they want to see.
Hi Jeff (is everyone called Jeff today?)
If you find an alternative point of view ‘highly offensive’ then probably this blog isn’t for you.
I am commenting on what I see as an outsider (i.e not a U.S. citizen) from reading the U.S. press – OK, mainly the WSJ and Bloomberg, but others as well. At no stage did I say that this was MY opinion, but a prevalent opinion from reading the press. Certainly, the facts cannot be argued with: the lack of press conferences and policies, the frequency of inappropriate laughter, the disjointed ‘word salads’ (the term from the press, not my words).
We have no idea what we are dealing with here, no information to go on other than the ‘vibe’.
If you think that linking the movements of the markets to the political situation is ‘pretty silly’ then I think you are not seeing the whole picture which is what we need to look at as traders.
Please feel free to unsubscribe.
h
Hi Heather,I new to this blog, just read my first last friday and I totally agree with what you have to say. Concise and unbiased. You are just saying it like it is, keep up the good work.
Just finished you book ITM and it gave me a whole new concept of the markets. Looking forward to getting my feet wet!
Jim Morris
Thank you Jim!
Jeff sounds like most liberals… all about diversity, except diversity of thought.
Fishing today with a learned friend…from his observation Kamala’s inappropriate giggle stems from her inability to answer a specific question – I interjected “ she could just say she needs to think about it “ His answer to that was “ she would be saying that a lot so she just giggles…
But more importantly if she giggled when in the presence of our enemies like Russia or China wouldn’t they take it as a sign of what ?
R
Hi Randy
I really do want to comment but I am restraiing myself! I have offended enough people already.
But just to show that I am ot pickihng on America, we have an incredibly embarassing PM here in Australia, who has just made a fool of himself at the Australia / Pacific forum.
So I know what it is like and my sympathies!
x
h
Hi Heather, keep up the great work! I look forward to your blog every Monday morning.
Jeff
Thank you Jeff! I really appreciate your taking the time to send that!
h
Hi Heather– you were right with what you wrote about Harris.If people find it “offensive”,thats their problem for denying reality.I for one would like to see you continue blogging–I look forward to it every Monday morning.
Steve
Thank you Steve – I really appreciate that – I really mean it, it is not just words.
Thank you!
x
h
H – I remember someone saying buy the rumor sell the news. I was again spooked by the huge red candle before the news. Since the SPY didn’t or hasn’t pierced that ( resistance ) in a ranging market. From your insistence ( ) that we look at the number of contracts you have… I personally would need a stronger drink than you had in Greece. A 6% correction in that many contracts – which leads to my question – in the middle of 2023 did you objectively go from bull to bear in that move or did you go to the 5 year time frame ( or stay the course in a 1 year timeframe ). In and out of Options isn’t that hard to do. Lastly… do you aggressively protect “ your “ position or go to the sidelines…
R
HI Randy – there’s a few questions there – let me answer them one by one.
in the middle of 2023 did you objectively go from bull to bear – I am just looking at the chart now, and we came out of our bull trades in April 2022 when we got the 10/200 death cross. WE then had to wait until the market had dropped 20% so that we knew we were n a bear market – from memory that happened end May / early June 2022? I know that I was in Europe, on holiday, and cursing the market for being a nuisance!
In 2023 we got into the market in NOvember, because we had exited the bear, and had a golden cross. If you want to look back at the blog posts of the time they have all the facts and figures.
d you go to the 5 year time frame ( or stay the course in a 1 year timeframe ). I don’t use a time frame other than the daily chart. The 10/200 SMA gives me the entry and exit signals, it doesn’t really matter what time frame you have on the chart (as long as it is the daily chart).
do you aggressively protect “ your “ position or go to the sidelines… I exit as soon as the death cross in confirmed, and enter on the golden cross. I don’t ‘protect’ my positions – by which I mean that I use a pretective put or some other option strategy? The answer is no, and on this week’s blog I give an example of why I don’t use them – too much of an overhead. So yes, it is sidelines for me when the market goes against us.
Hope this helps
h
28 August 24
Because I saw the red candle I would have protected my position – but since I didn’t have the correct liquidity I exited the position. Had I been wrong I would entered at a higher level – but since I was right I can get in at a lower price… since reading your book it made sense to me that since other ppl give credence to market indicators it now becomes relevant. I’m reading
( studying ) a book on mean reversing etc I’m looking at bollinger bands and keltner Chanel’s in a different light.
Political rant: I find it offensive and demeaning that somebody would find something offensive and demeaning … back in the day Liberal meant something altogether different from what ppl think of it today. You got a liberal education – which meant you got a Liberal ( complete ) education… it boils down to if you can’t agree to disagree then maybe the should stay in their house and never come out because somebody might disagree with them. But God forbid somebody from another country might disagree with a US citizen.
R
Hi Heather,
I enjoy your website and analysis. You claim you don’t want to get into politics, but you say Harris is “DEI hire and known for her inappropriate giggling”. I think that is offensive and demeaning. Objectively she is more qualified to be president than Trump. Also, based on your logic Tim Walz is “DEI hire”. Do you consider Tim to be DEI hire?
Oh dear, I knew this would happen.
If you check what I said it was ‘She was widely viewed as a DEI hire ‘ and I think that this is correct. She IS widely viewed as this. It was not my opinion. Many major papers have referred to this, and Biden himself, in his speech appointing her said, and I quote:
‘”This morning, all across the nation, little girls woke up, especially little Black and Brown girls, who so often may feel overlooked and undervalued in our communities, but today — just maybe — they’re seeing themselves for the first time in a new way: as the stuff of Presidents and Vice Presidents.”
He was referring to her being a women and POC (did I get that correct?) and that this was why she was appointed.
In the Democrat primaries of 2020 she did not received a single vote and dropped out, so it is hard to see why she would have been chosen against the many candidates who DID receive votes.
Re the giggling – I have observed her giggling inappropriately in several speeches, and I am not the only one to have noticed; there are many references to it in the press.
I am not going to wade in on my opinion of Walz, or anyone else.
I was simply explaining why I could not see what the market was going to do as I could not see how this is going to play out. As yet Harris has not given a single press interview or outlined any policies so I cannot comment on them, we can only go on what we observe.
h
Your logic is perfect. The person writing is giving you an emotional reaction. Never the twain shall meet.
Thank you Ron.
I am only interested in how the election affects the market, and trying to look at it as dispassionately as I can.
Obviously it is a minefield, and the only way not to offend people is to not comment on it.
But that would be doing the wrong thing, a disserviice to the people who read me and expect that I explain things in the market in the best way I can.
As they say: in politics, if you want a friend get a dog!
Maybe I should be going to the dog pound!
Thank you
h
Regarding DEI hiring, one can consider the Supreme Court example, where the specification was for a black female candidate. This does not necessarily imply a lack of interest in finding the best candidate, but rather a focus on a particular demographic. It’s also noteworthy that prior to her vice-presidential candidacy, there were discussions about Kamala Harris’ qualifications, with some suggesting she be replaced. Her popularity ratings were not favorable, even among Democrats, until her selection, after which they significantly improved.
For a long time, it appeared that Harris lacked support. However, following Biden’s endorsement, the media portrayed her as an exceptional candidate, arguably the best since Obama, and overlooked her statements from the 2019 campaign. Furthermore, the organization that assesses Senators’ political leanings had previously ranked Harris as the most liberal, but her ranking has since been withdrawn. Despite claims of her being a moderate, her record suggests otherwise.
Discussing politics can often lead to offense, as accusations are made by both Democrats and Republicans, with each side believing their candidates are superior or the lesser of two evils. Harris has ceased her cackling and has been effectively using a teleprompter. The true test will come with time, to see how she performs in interviews and debates, if she participates in them. There may be attempts to limit her to scripted teleprompter statements without interviews.
If substituting candidates at the last minute, coupled with reliance solely on teleprompters without interviews, proves effective, it could shape the conduct of future elections across both parties. Regardless, such last-minute alterations have already shifted the landscape, and market volatility is expected to persist until there is more clarity on the likely victor.
Hi Jeff – good analysis, thank you.
But as I have commented elsewhere, I am not able to vote in the U.S. elections, my only interest is to try to interpret what is going on and the effect it will have on the market.
If we can’t discuss things where do we end up? WE are in unchartd territory, and as traders we have to try to figure it out as objectively as we can. Which is what I was trying to do.
As you say, time will tell – not only for the election outcome, but the economy and the share market after the election.
h
I hear you! I still question “widely” viewed as media builds up and destroys based on whatever narrative they want to push. Also, not questioning your opinion, but the DEI stuff is meant to minimize minority achievement!
HI Khadar
yes, I am aware that the media pushes particular narratives and that as traders we have to be able to match their narratives with facts and what we can see with our own eyes.
DEI focusses on ‘equity’ i.e. equality of outcomes.
I prefer equality of opportunity.
h
Hello Heather, Recently came across your website. Will appreciate if you refer me back to your blogs or writing as to how handle deep ITM calls when the underlying is way under in a bearish market. Also like wise when deep ITM puts thanks sid
Hi Sid, I can’t really answer that wrt ITM as we rely on the ITM signals to get us out of the market before we are way underwater, and only use it on the SPY and SPYG indexes.
If you are in this position then I would suggest getting out right away, even at a loss. Research shows that people hang onto losing potisions far too long, causing massive losses. If you get out and it starts rising then you can always get in again – there’s no law against that!
h