Presidential Election Scenarios

It looks like last week was fear week.  The week to get scared, buy puts at inflated prices, and hedge against a Trump presidency or Clinton getting arrested.  The chicken littles had a field day, but like the last 8 years, their time in the sun looks brief.

You can hate the game, say the rallies are fake, the fundamentals suck, but you have to trade what you know.  And when there is a lot of fear over something that isn't that scary, that presents a buying opportunity.  These dips happen over and over again, and you would think traders would eventually catch on to the fact that they are usually buying opportunities and not a start of some big correction, but 2008 is still seared into the minds of so many investors.  Eventually these dips will keep going down and be the start of a bear market but probably only after we get some real economic weakness.

The market overreacted on the Clinton emails and Trump gaining in the polls.  You are taking a lot of that back today.  Based on what happened in Brexit, I am pretty sure you aren't going to rip too much higher than these levels ahead of the election results.  At the same time, odds are very high that we have reached the apex in fear (as measured by VIX and put/call ratios) for the next few weeks (barring a Trump win, which objectively by most pollsters is about 15% probability).  That is not tiny, but it is small enough to make the risk/reward from buying equities ahead of election results a positive EV bet.

I would roughly guess that a Trump win would drop the S&P about 80 points the next day.  A Clinton win would probably raise the S&P up about 30 points.  Given what I think odds of Trump winning are(about 15%), it is probably a good bet to go long.  However, unlike Brexit, if Trump wins, I don't see a quick dip and then rip because of international money that is scared to death of Trump and will flee US stocks as a result.  That would take several weeks to play out.

I eventually think that would set up a monster long buying opportunity into the trough of that selling, but I don't see such a short correction like Brexit.  A Trump win would be much more of a shock to the system than a Brexit.  Easily by a factor of 100.  It would be more of a dip, dip some more, spend some time lower, scare the foreigners out of US stocks, and then rip for months on end.

Under a Clinton win scenario, you will get a big gap up that can eventually take the market up to 2160-2170 resistance zone over several days, and then we probably fade ahead of ECB and FOMC in December.

As for the Congressional races, I don't think those will matter much, because frankly, the Republicans and Democrats probably can't do anything substantial enough to affect the economy.

The odds favor the bulls.  I remain long S&P.