Election week has arrived and so has volatility. This coming week should be another crazy one, no doubt. There are a few possible scenarios that can play out, and nobody knows for sure which will happen, but it is important to be prepared for whatever may happen. Here are some things to watch out for this week.
What Happened in the Previous Election?
Below is a chart of the S&P 500 during the 2016 elections. This chart includes futures hours as well so it goes beyond regular market hours. 4 years ago, the market was falling into elections just as it is now. One day before election night on Monday, November 7, the market started to rally. It even rallied on November 8 (election day, but before results came out). The night that trump won, the market initially sold off hard, as you can see in the chart below. But, by the end of the day on the 9th, it finished much higher. In regards to the Dow Jones, it finished 250 points higher, with financials leading the index. The market then continued to rally almost non-stop until January of 2018.
This price action was a result of a clean, uncontested election, where Trump undoubtedly became the new U.S. president and uncertainty was removed from the market.
What happens if there's no clean election this time?
Possible Outcomes For the Election
Today, a well-known market participant with a solid track record named Gregory Mannarino, released a Youtube video outlining his thoughts on potential elections outcomes. We agree with what he said, so we'll summarize it here.
Scenario #1. A clean election with a clear winner.
If there is a clean election with a clear winner (no contesting), then the market should rally regardless of who wins as it will remove much uncertainty from the market. We think it would be very similar to the 2016 chart above.
Scenario #2. "We don't have a clear winner, we have to wait several days to see who's winning".
This would result in uncertainty and lots of volatility which wouldn't be positive for stocks.
Scenario #3. "A contested election that drags out".
A contested election would cause a great deal of uncertainty that can hurt the market in a big way. If you're not sure how contested elections work, click here for more info.
There's a decent chance that scenario 2 or 3 can play out, meaning you may want to consider having downside protection if you are over exposed to the long side.
Which Sectors To Buy For Each President
Biden: If Biden wins, you can expect clean energy and cannabis companies to do well. Conversely, you can expect that oil and financial stocks may underperform relative to the overall market.
Trump: If Trump wins, you can still expect stocks to do well, but with less emphasis on clean energy and cannabis, and more emphasis on oil and financial stocks, compared to Biden.
5 Stocks To Watch For This Week
Here are 5 chart set ups to keep in mind for this week.
1. JD.com (JD)
A nice cup & handle forming here that can break out big if all goes well with the elections.
2. Celsius Holdings (CELH)
Consolidating in a range right now. Play the range or wait until a break out in either direction.
3. DraftKings (DKNG)
Below is DKNG's daily chart. It is oversold, no question. It is also approaching a support level. But let's take a look at the 65 minute chart just under that.
Here's the 65 minute chart. DKNG is down trending in a predictable fashion, usually bouncing to the 20 EMA (blue line) and then coming back down. Until this trend reverses, it remains bearish.
4. Fastly (FSLY)
Fastly 30 minute chart. Same idea as DKNG above. Oversold, but bearish until clear down trend reverses.
5. Watford Holdings (WTRE)
Low correlation to the markets' recent volatility, bullish volume patterns, and a bull flag that can break out soon if volume picks up again.
Earnings Being Reported This Week
Here are all the important earnings reports coming this week (the picture is clickable if it is too small to see). Some of the more notable names are Roku, Square, Alibaba, Peloton, Paypal, General Motors, Qualcomm, Ferrari, and Wayfair.
Overall, this is going to be a volatile week where we will look to potentially hedge our current long positions depending on how the week progresses. It is important to keep an open mind and be prepared for the 3 scenarios above in order to not get caught off guard (try to come up with a plan for each scenario). Things can change at any second in this market, especially this week, so it is not the time to be complacent.
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