As we approach election day, the question of how the market will react to the ‘will of the people’ takes on new significance.
As of today, equities are moving in a muted, sideways fashion, uncertain of both the outcome of the contest and exactly what should play out beyond.
There are four distinct possibilities, of course, that could be triggered once the results are known.
A Republican win, and a breakout higher, or lower.
A Democrat win, and a breakout higher or lower.
Whatever happens, though, it’s almost certain the market will not continue its sideways grind much more than a day beyond the polls’ closing.
It’s also looking increasingly probable that the ensuing move will be sharp – higher or lower – should a clear winner be pronounced the day after.
If the Hilarious one wins, we’re betting on a burst of Wall Street enthusiasm. Should the Trump card get played, a steep move lower.
Now, we offer these prognostications not in any way to influence your vote, and with the additional caveat that it’s more than likely that in both cases we’ll see some swings to and fro before the market then reverses direction entirely.
That is, the initial direction will be a knee jerk reaction that will suck a great deal of silly money either into or out of the investment pool. Thereafter, we’re looking for a serious reversal that moves the market in far more serious fashion.
To spell it explicitly – like the Brexit vote was good for U.K. markets, so, too, will a Trump win ultimately be good for markets.
The initial reaction will be in the opposite direction, however.
The Bigger Story
What may be far more interesting, however, is a scenario we outlined just over a year ago whose probability has now grown from nil when we first wrote about it, to slightly greater than nil today, and it goes like this…
On September 25th, 2015, in a letter called A Challenge to the People, just as the presidential primaries for both parties were beginning to take shape, we wrote the following:
The expected uproar didn’t take long to arise. Within a week we had hundreds of puzzled, unnerved and some downright irate subscribers wondering what sort of insect had crawled into our brains.
A week later, in an effort to clear the air, we penned a missive called Writing Conspiracy Premiums, wherein we went into great depth about the 22nd amendment to the Constitution, the War Powers Act of 1947, the Continuity-of Government Plan (COG) of 1949 and the Patriot Act of 2001, all in an effort to explain a possible legal basis for a second term president to remain in office.
Then we wrote this –
That was written a year ago.
And as far as we can tell, each and every item has been fulfilled and is growing in intensity, while one, the conflict in Syria, has recently escalated to the point where a shooting war between ourselves and the former Soviet Union has become increasingly likely.
Could things have been timed as such? Is it possible that the White House might be steering the ship of state toward just such a conflict should the election results fail to emerge as they desire – with a Clinton victory? Could more racially based rioting, more illegal border crossings and violence abroad lead our sitting president to invoke the necessary legal clauses to bring about a third Obama presidential term?
The conspiracist within us relishes the possibility.
We’ll only know if a Trump victory occurs. And that seems a fifty/fifty proposition at best.
In the meantime, the Russians are taking the threat of war very seriously. All that country’s major news outlets, including Pravda, RT and Sputnik News are penning stories of the inevitability of a conflict and what action would be necessary in the event of a worst case (nuclear) scenario unfolding.
The whole thing seems Kafkaesque and entirely improbable, but what if it were to happen?
As far as markets go, all bets are off if anything even remotely close to what we’ve written above transpires.
STACK ‘EM! COLLECT ‘EM! TRADE ‘EM!
We’ve got a single trade to close out before we get on to this week’s action, and it goes like this –
On September 20th, in a letter called The Road to Hell is Paved with a Ford, we recommended a bearish bet on the automaker: the purchase of the F December 12 PUT for $0.59 and sale of the F December 12 CALL for $0.58. Total debit on the trade was $0.01.
Now, the trade never actually reached its intended fiery destination, nor has it yet banged on the pearly gates, but it has taken a turn toward the heavenly that we plain don’t like. So we’re closing it down.
Today, the CALL trades for $0.43 and the PUT for $0.38. We’re buying back the former, selling off the latter and sustaining a net loss of $0.06 on the trade.
So it goes sometimes.
Our effort this week is focused on the precious metals, where we see a number of important Fibonacci retracement levels in play.
Before we look at the charts, however, remember that we only consider the standard 0.618 Fibonacci calculation to be reliable. It’s the only one we use regularly, and we recommend you lean on it more than all the derivative Fibs that are bandied about by other, less than savory investment letters.
Know, too, that every Fibonacci retracement measure is marked twice on a chart, from the bottom up, and from the top down (in red, below). We’ve done just that in the charts that follow.
We’ve also marked the tops and bottoms themselves with arrows so you can make the calculations for yourselves.
With that behind us, let’s start with a chart of gold proxy SPDR Gold Trust (NYSE:GLD), the most bullish of the precious metals of late.
GLD is now sitting at its upper Fibonacci support line, and only time will tell if that level holds. RSI and MACD indicators still have a ways to travel before they give a bullish indication, so the picture remains mixed at this point.
Look now at the VanEck Vectors Gold Miners ETF (NYSE:GDX) for the same period.
In this case, Fibonacci #1 didn’t hold, though the stock has recently retaken that level. That would normally lead us to look for a drop to the next Fibonacci retracement line, which emerges at the long term moving average (in yellow).
But it doesn’t have to happen.
GDX fell close to its 50% retracement line (at $22.10), and that might also signal the end of the selling.
Picture for the miners is mixed to bad.
Finally, have a look at silver, as represented by the iShares Silver Trust (NYSE:SLV).
SLV gets the loser of the trio award, having sunk below its first Fibonacci retracement line and subsequently failed to retake it (as GDX did).
Historically, SLV has led GDX and GLD both higher and lower, so we’re going to bet on continued weakness here for SLV relative to those others and offer you the following –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew