Volatility Warning and Quick US Election Trading Guide

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Volatility Warning and Quick US Election Trading Guide

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? Gender Gaps

Clinton has three key advantages when it comes to gender:
  1. Since the 1980s, women have voted more than men. In recent US elections, female turnout has been 4% higher than male turnout

  2. Since the 1980s, women have been more likely to vote Democrat than Republican, this includes 2012 when 55% of women voted for Barack Obama

  3. 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:

Q) Has Clinton wiped the email story from voters' memories?

Q) 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?

Q) Has Clinton harnessed, and has Trump alienated, the large Latino vote?

Q) Is the black vote, which normally has a strong Democrat bias, too disenfranchised to turn out and vote like they did for Obama?

Q) 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?

Q) Trump's rallies seem to draw a far more loyal and energised voter-based. Will a high turnout favour the Republican?

Q) Clinton has been far more successful at raising money but after 18 months of campaigning, can the extra firepower be used effectively?

State Signals

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

US Election Trading
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.

By Adam Jepsen, 8 November 2016

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