At some point, hopefully soon, we’re going to know who won the election. For the sake of this analysis, it doesn’t really matter who wins, just what the market does next and how we’re going to trade it.
I don’t subscribe to the conventional wisdom that Republicans are better for stocks. I’ve been trading for more than 30 years and some of the market’s best years occurred when Democrats occupied the White House and some of the worst bear markets started on Republican’s watch.
Trading through countless economic and political cycles, the one thing I learned a long time ago is the stock market and the economy are far larger than any one man. The initial knee-jerk might be lower or higher based on deeply ingrained cliches, but within weeks and sometimes even days, the market forgets about the election and start focusing on what’s coming next. In our case, Covid and the next round of economic stimulus. Those things matter far more than the (R) or (D) that follows our president’s name.
Stock futures are all over the place as I write this. One minute we’re up 1%, the next minute we’re down 1%, only to be back up 1% a few minutes later. Four years ago stock futures plunged 5% after Trump won Florida. And you know what happened the next day? Stocks finished in the green. Don’t pay attention to this overnight noise. Only inexperienced, impulsive retail traders are participating in this after-hours nonsense. The only thing that matters is what big money thinks and we won’t know their opinions until tomorrow afternoon.
As a trader, I don’t care who wins the election, only what the market does. Regardless if stocks open up or down, use those early few minutes as a starting point and then trade based on the market’s next move. If it rallies from the open, buy it. If prices retreat from the open, short it. Start small, get in early, and place a stop on the other side of the open.
There is a very good chance the first move will fizzle and reverse within an hour. If the opening dip bounces or the early rally fizzles, close the initial position near breakeven and flip the other way. More often than not, this second move is the real move and given how volatile the market’s been lately, expect this next move to cover multiple percent. If the market continues to trade strongly in that direction through the afternoon, add more and consider holding overnight. Most likely once this freight train starts moving, it will keep moving in the same direction for a few days.
After a couple of days, if the above trade is a short trade, look to lock in profits because short trades tend to be strong and fast. Take profits and get ready to buy the bounce. But if stocks rally over the next few days, these moves take longer to play out and expect near-term strength to stick around for a while, most likely taking up to and past the old highs.
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Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.