The world will be watching the US elections this week, due to its influence on the global population. This presidential year has been uncharacteristically volatile, and the results of the election could pale into insignificance with the backdrop of the COVID-19 pandemic. We have already seen losses greater than the Great Depression, and a recovery which was one of the most bullish rebounds in history.
This year both candidate are well known. The incumbent Donald Trump has had a controversial time in office, but this has coincided with one of the biggest bull markets in history, and policies designed to US businesses first. Joe Biden, his competitor, was the former VP to President Obama, and is favoured by Wall Street as a moderate Democrat. Kamala Harris, the VP to Biden, is also extremely popular on Wall Street.
An election which is predictable, without uncertainty, and strongly in favour of Biden, is likely to see the bulls come out as buyers early on. This is perhaps the most predictable of potential trades in election week. However, give the nature of the postal vote, this year election night will not be quite as significant, and the true results of the election will span many days.
Lessons from 2016
The chart below shows the S&P 500 futures contract (ES) on the 2016 US election day, November 8th. The chart is based on US times, so the biggest impact was overnight for those in Europe. Such was the shock of the Trump victory, the market sold off enough to hit the circuit breaker. This was swiftly followed by a strong recovery.
Whilst election night was clearly significant in 2016, this year it may not be. Due to the pandemic, postal voting has been more popular than ever, and so the results will come in over a longer period of time. Also, both candidates are better known, and hence there is not the uncertainty and unpredictability of a newly elected Trump.
In 2016 the ES futures markets hit the limit down protection (arrow in chart), which stops the markets falling to violently. Once this circuit breaker had been triggered, there was a swift recovery.
During US trading hours 8:30 a.m. to 2:25 p.m. CT, there are a circuit breakers on the S&P500, to stop a collapse in market prices The limit down levels for the S&P500 are tiered, as follows:
|Level 1||Level 2||Level 3|
|7% Decline||13% Decline||20% Decline|
In the previous US election of 2016 the futures markets reacted violently to the news that Donald Trump was going to become the next US president. As investors began to panic and tried to readjust their positions, the ES contract hit a price limit, which meant it was not permitted to trade any lower. The CME had set this first loss limit at 5% in 2016. Now it is set at 7%.
It is important to understand the nature of the circuit breakers and how it can effect your trading. If you are long when the limit down is hit, you may find you are unable to close your trade, as the market is suspended. When the market is reopened, you could find your position is heavily offside.
The chart below shows a live and historical chart of support for Donald Trump. So far (at the time of writing) he has been clearly lagging behind Biden.
The senate vote will be very important this year. The new president will be confirmed much earlier and more clearly than who has majority in the senate. If Trump loses the majority to Biden, that will given even more certainty and strength to the markets.
The chart below shows live and historical data for the support behind Biden, as the results are confirmed. A steady and strong support for Biden is the most favourable outcome for the markets, and puts into play a long ES trade for the week, and beyond.
The markets, and in particular ES futures, would benefit from a growing certainty of a Biden victory. So buying ES futures, with a stop below 3200, and a longer term target of 3500/3600, could be an option if there are no surprises and Biden wins comfortably with a senate majority.