Market Update and Election Trade

Since October 25th, the S&P 500 has posted nine consecutive losing trading sessions.   The last time that happened in 1980, I wasn't even born yet.  

Also interesting, the market is only down 3% in that nine day time frame.  That modest slide is far from any sort of crash, but has managed to send the VIX from the 13s to over 22.50.  (Incidentally, the VIX gained for nine straight days, the longest streak in the history of the index).  

What has this decline been about?  As far as I can tell, four things in particular:  

1.)  Technicals.  October trading patterns were extremely subdued, creating a very tight wedge formation.  As soon as the S&P broke below the 2120 support, gravity has slowly pulled it down because the chart now looks very bad for technical traders.  

2.)  The Fed.   The Fed released its statement for the November meeting, and according to Fed watchers, it more or less confirmed a December rate hike. 

3.)  Oil.   In the last nine trading days, oil has gone from $50 to $44 a barrel on more oil glut worries and comments out of Saudi Arabia.  That alone is not enough to cause the longest losing streak since 1980, but it has played a part.  

4.)  Trump Odds.   The market has begun to slowly price in the possibility of a Trump victory.  Two weeks ago, the market had basically priced in a guaranteed Clinton presidency.  As far as I can tell, the market still thinks Trump's chances are slim, but at least that he has a fighting chance.  I personally think he is the favorite. 

So the question becomes:  what happens if Trump wins?  Well, that is fairly easy to answer given the widespread assumption in the market.  Market participants widely assume that if Trump wins, the market will decline by 5%-10%.  Therefore, it will be a self-fulfilling conclusion.   Because most investors assume that, most investors will be selling.  Done and done.   

Just how significant might the market decline be in the event of a Trump victory?  It is hard to say.  Traveling into conspiracy land (where I reside from time to time) can take you to the conclusion of a major correction.   The market will eventually crash 40%-50% just based on the level of stock market bubble, why not blame it on Trump?  The powers­-that-­be may want to send a serious message if the American people go against their wishes.  Moreover, this market may have been propped up all year in an attempt to ensure a Clinton victory.  If that victory happens, an economic crisis might actually be desirable for the new administration.   

But lets go back to mainstream land: this election is panning out a lot like the Brexit vote.  How so?  The market has pretty much priced in the status quo.  It seems as though the market is still putting an 80% chance of a Hillary victory despite the fact that the polls show a very tight race. 

No need to travel back to conspiracy land to say that the media is on the side of the Clinton campaign in terms of polling; that has been confirmed by the Wikileaks “oversampling” email, and confirmed by the Democrat/Republican ratio in mainstream polling samples.  The media touts the Hillary slanted polls and ignores the reality of a very tight race.  The most recent national polls, and historically the most accurate ones, show nearly a tie or even a slight edge to Trump.   The LA Times poll, arguably the most valid because it attempts to factor in voter turnout, has Trump ahead by 5.4% with the election just four days away. 

This election is nearly identical to the Brexit: 

--Media touts a coming status quo victory. Check. 

--Market assumes a status quo victory.  Check. 

--Polls show an extremely tight race that could go either way.  Check. 

I am in no way attempting to forecast the winner of the election, however, I think that Trump is actually the Favorite.   But for arguments sake, let’s say it is a 50/50 race at this point.  If that is true, then shorting the market into the election makes a whole lot of sense on the risk/reward basis.  The logic goes like this: 

--50% chance that Clinton wins and the market goes up 1%-­2%.  

--50% chance that Trump wins and the market goes down 5%­-10% (for starters)

-- Half the time you lose 1-2%.  Half the time you gain 5%-10%

I will save the expected value calculation and just say that being short the stock market into the election is a very profitable bet, assuming that these assumptions are even remotely correct.  You don't know whether you will win or lose the coin toss, but to use a poker analogy: those are some great "pot odds."