Vote with your heart, trade with your head

S&P500 daily at end of day

Markets took a day off ahead of Tuesday’s election.  Vote with your heart, but trade with your head.  This is Obama’s election to lose and don’t let political biases or talking heads influence your trading decisions.  The market is getting close to a point of maximum pessimism and that creates an excellent buying opportunity.

MARKET BEHAVIOR

The market traded between 1410 and 1420 again.  We dipped at the open, but recovered to finish in the green, near the day’s highs.  It was nice to see the markets find a floor after Friday’s reversal, but no doubt today was just filler as everyone awaits Tuesday’s election.

Technically we found rock-solid support at 1400 going all the way back to early August.  Breaking under this would trigger a large wave of stop-loss selling and send us to the 200dma in a hurry.  But at the same time, we could bounce off 1400 and never look back.  The market is trading sideways and looking for its next move.  Will that be higher?  Will it be lower?  Will it be higher and then lower?  Or lower before higher?  Great question and as traders we need to figure that out.

MARKET SENTIMENT

The headlines make it sound like the race for the White House is deadlocked.  But the thing to remember is the media is in the business of selling advertising, not educating the public.   To sell advertising they attract eyeballs by looking for creative ways to create juicy headlines and spin sensational stories.  And you better believe they are doing that here by cherry picking their data to craft a hotly contested presidential race so people will tune in.

This is not a bad thing, it keeps the electorate engaged and boosts voter turnout, but we are in the business of trading the markets and we need to leave all partisan biases at the door.  We can root for one side or the other as individuals, but as traders we need to come into this with our eyes wide-open

In spite of the headlines, the state polling data clearly shows this is Obama’s election to lose when looking at the electoral college map.  No matter what we think, want, and hope for, the high-probability trade is an Obama reelection.  Go vote, support, canvas, and everything else for your candidate, but position your portfolio for an Obama win.  Like the markets, there are no guarantees in politics and Romney could very well pull out the upset, but trading is a game of probabilities and we need to make the high-probability trade no matter what we hope for personally.

TRADING OPPORTUNITIES

Given the pervasive hope for a Romney win, especially among retail traders bamboozled by the media, creates an opportunity for a trade.  We could easily see a selloff after an Obama reelection if emotional traders dump shares due to an irrational expectation Obama will wreck this country.  That selling will climax quickly and create a great entry point for the trader who understands politics, how the markets work, and supply and demand.  Within a couple of days everyone who wants to pull their money out of equities because of Obama’s win will have done so, meaning all the sellers have sold.  At that point supply dries up and the market rallies.

Of course we don’t need to see the market selloff if most traders already sold in anticipation of the result and we could start rallying as early as tomorrow.  Watch the market and be ready to buy the breakout, whether that is tomorrow or next week.

ET CETERA

Speaking to the sentiment that this president or that president is the worst ever, don’t fall for it.  Our founding fathers created the most brilliant form of government ever conceived.  We don’t live in a monarchy or a dictatorship where one person has all the power.  What matters here is the system, not the individual.  You might like one guy more than the other, but don’t fall into the trap that one side has all the answers and the other is just a bunch of idiots.  Neither side has a monopoly on good ideas and it is the compromise between the two parties that made this the greatest and most prosperous nation in the history of the world.

Politics is an ugly sport, but the worse it looks, the better it is working.  The way you can test this is looking at Congressional approval ratings.  A low approval rating shows everyone is equally pissed off, meaning Congress found the right balance point where each side gave up something meaningful in order to reach the ideal compromise after taking all the competing views into consideration.

Stay safe

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