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Election Day: What Went Wrong -and What Went Right For Traders

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I have written about the elections in my last three articles, and by now, with all the media coverage, it might be that people are sick of engaging in election topics. However, given that this event remains ongoing and continues to be relevant to traders, I thought I would offer some recap of the events and what we now know in terms of what I have written about in recent weeks.

Polling Success and Failure In previous articles, I based some speculation on polls. However, I was quick to qualify that these polls were significantly off in 2016, and it would be essential to assess their relevancy for 2020. The failure of polling data is something that we have seen going back to the Brexit vote in June of 2015. I used the widespread polling data as reflected on the beneficial site which suggested that Biden had the edge in Florida and North Carolina, and was strongly favored in Wisconsin, Michigan, and Arizona. 

As the returns were coming in from the East Coast on Tuesday night, it became apparent that the polling again missed the mark. Polling operations need serious readjustment to accommodate how society has shifted.  However, the polling was entirely a failure. Results showed that Georgia was in play, and Texas, while not being a serious contender for Democrats, was still much more competitive than in the past. 

Where is the Volatility? I have several brokerage accounts for futures, forex, and equity products. For days before the election, I received email alerts that margins were increasing as speculation of a significant volatility boost grew. This concern was not unwarranted; just look at 2016. However, while there were some exciting moves, trading appeared to be pretty orderly given the uncertainty.

Volatile Population Not only was there a concern of unorderly price action, but also unorderly people. I believed that the losing candidate’s supporters, whoever that might be, would turn to protest, resulting in potential rioting.

I’m hesitant to write this now because we see protests, and these matters will always bring out the worse in people, regardless of political persuasion. Still, at this point, the population is responding in an orderly fashion. However, should protesting become volatile, I expect markets to go “risk-off.”

No Landslide, Please! One concern that I had for the markets was if there was a Democratic landslide. Not only did the polling project Biden to take the White House, but also that the Democrats would take the Senate. You have likely seen pundits discuss how disappointed the Democrats are, even to the extent that many Republicans thought this would be a Democratic takeover as well. 

Given that the legislative branch will remain mixed, Democrats running the House of Representatives and Republicans having control of the Senate, to the markets, who wins the White House is less of a concern because it will be divided regardless. I believe that this is why the equity markets have risen.

What Can Americans Be Proud Of? Regardless of party affiliation, perhaps a unifying take away is that there is more voting process participation. I believe this is a positive. I won’t say much concerning the disadvantages of the electoral college and try to stay positive. I hope that we can also be proud of how we in the United States conduct ourselves, whether there will be a transfer of power or not. 

Not Out of the Woods Yet! As a trader, it is important to remember, this isn’t over, and neither is the potential for volatility. It was speculated how highly contested this election would be, and now we know there are going to be recounts, in addition to lawsuits. This will be a fight, not only at the ballot counting stations or in the State and Federal courts but also in the court of public opinion. As traders, we can’t afford to get too comfortable and lose our guard.

What to Watch? I’m watching gold futures, particularly around the $1950 and $2000 levels, for clues. For crude oil, $40 seems to remain a pivot. Meanwhile, how much will this heatwave further impact natural gas? I’m watching the $3.00 level. Furthermore, grains see a nice rally on the weaker dollar, but should the politics cause the dollar to reverse and bid, then I expect grains likewise to reverse and sell-off.

If you are looking for a low volatility play in the dollar, then the British pound (GBP/USD) has responded quietly to the election.

Conclusion Once more, I’ll say what I’ve said for weeks; as traders, we set our politics aside and find ways to be profitable. Whatever may happen in the days and weeks to come, don’t lose focus on that crucial part of our vocation.

Trade Well!

Posted by Fair Value Trader on November 05, 2020

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