Volatility Warning and Quick US Election Trading Guide
The Market and Political View from Adam Jepsen, Founder, Financial Spreads.
Volatility Warning - Caution Needed
The VIX (volatility index) has been hitting its highest levels since the UK referendum and investors planning to trade the US election should take extra care.
In the aftermath of the UK referendum the VIX hit 26.7. On Friday 4 November, the index hit the 23 level.
Volatility can cause investors a lot of problems, not least the market spikes that can easily close a trade(s) for a loss.
We have already warned clients about the likelihood of high volatility and also reduced the margin (leverage) that clients can use. Having said that, inline with much of the industry, clients can still trade with x50 leverage, trading remains high risk.
Beware of the False Trend
Financial Spreads will be trading US stock markets indices
, forex and commodities overnight. However, given the unknowns and volatility, investors should think twice before trading
Using small trade sizes in volatile markets is prudent. Skipping trading until the markets have calmed down is another viable option.
Investors should also be wary of any market trends going into the election. Financial markets can get carried away with themselves.
Let's not forget that on the day of the UK referendum there was constant buying of the FTSE 100 until the voting showed that Brexit was likely. Then there was some very quick selling.
What Happens If?
- If Donald Trump wins, it's easy to imagine traders reaching for the sell button. Rapid 3-5% falls for the US stock market and the US dollar aren't out of the question.
Short-term volatility could also remain high as traders try to guess what a Trump Presidency would mean. Also see Hedge Funds Risk-On Despite Danger of Trump Presidency.
- If Hillary Clinton wins then there could certainly be a relief rally. However, given the sharp rally since Clinton was cleared of any new wrong-doing, any post election rally could quickly peter out.
Volatility could also fall quickly as the markets return to business-as-usual.
Clinton has three key advantages when it comes to gender:
- Since the 1980s, women have voted more than men. In recent US elections, female turnout has been 4% higher than male turnout
- Since the 1980s, women have been more likely to vote Democrat than Republican, this includes 2012 when 55% of women voted for Barack Obama
- Though more difficult to quantify, it feels like Donald Trump's lifelong attempt to alienate the female vote could be measured on the Richter scale
It should be noted though, during the Primaries, Bernie Sanders dispelled the theory that Clinton would automatically win large swathes of the female vote.
Unanswered Questions that Should Make Investors Think Twice
While the above, and Clinton's small lead in the polls, can lead people to a certain conclusion, there are many important unanswered questions.
Anyone trading the US election should consider the following grey areas:
wiped the email story from voters' memories?
Are the polls wrong because people are too embarrassed to say they'd vote for Trump but happy to vote for him in a booth?
Has Clinton harnessed, and has Trump alienated, the large Latino vote?
Is the black vote, which normally has a strong Democrat bias, too disenfranchised to turn out and vote like they did for Obama?
Can Clinton's more advanced ground campaign make up for the fact that she's somewhat charmless, unloved and represents the status quo when much of the electorate is desperate for change?
Trump's rallies seem to draw a far more loyal and energised voter-based. Will a high turnout favour the Republican?
Clinton has been far more successful at raising money but after 18 months of campaigning, can the extra firepower be used effectively?
It's a race to 270 electoral college votes.
The following is a quick look at some of the key states:
- Ohio: the state has voted for the winner of every Presidential election since 1964, including 2012 when Barack Obama narrowly won the state with 50.7% of the vote
- Florida: if Trump doesn't win Florida then his path to the White House is deemed to be far more awkward than Clinton's if she doesn't win the state
- Larger Swing States: Florida (29 electoral college votes), Ohio (18), North Carolina (15), Virginia (13), Arizona (11)
- Smaller Swing States: Colorado (9), Iowa (6), Nevada (6), New Hampshire (4)
While California (55) is deemed a secure state for the Democrats, and Texas (38) is deemed secure for the Republicans, there are the more interesting left-leaning and right-leaning states.
If these vote unexpectedly then that could signal a big upset e.g.:
- Right-Leaning States: If Clinton wins some of the right-leaning states like Georgia (16) or South Carolina (9) then it might be time to tweet Trump, "You're Fired"
- Left-Leaning States: If Trump grabs some of the more left-leaning states like Pennsylvania (20), Michigan (16), Minnesota (10), Wisconsin (10), Oregon (7) or New Mexico (5) then the former First Lady might not be breaking any more glass ceilings
With the polls still close, high volatility and many grey areas there is a lot of risk that comes with trading the Presidential election.
If you feel like you really need to take a position, consider a small side bet with a friend.
External Election Data and News
Financial Spreads is not responsible for the content of external / third party websites
The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.
By Adam Jepsen, 8 November 2016