By: Steve Smith
The stock market continues to find ways to confound the maximum number of people and lay waste to commonly-held assumptions. In this case, it’s the conventional wisdom of ‘the market hates uncertainty.’ It was based on this assumption that I, and many others, believe that once the election ends — regardless of the outcome — the market would stage a rally simply because the event was over. But, here we are nearly four days later with the outcome of the presidency, and more importantly, the Senate’s makeup still unknown. Yet, the S&P 500 (SPY) has rallied nearly 7% week and the Nasdaq (QQQ) has surged almost 10% since Monday — marking one of the best weekly performances on record.
While it seems likely Joe Biden will be declared President in the next day or two, it’s also clear that it will be contested with recounts, which could drag on for weeks. The issue of Senate control may not be decided until January if there’s a Georgia race run-off. Remember, part of the initial stock rally was on the premise Congress would be split, leading to gridlock, and Wall Street usually reacts favorably to maintaining the status quo, especially as it would remove the possibility of corporate tax hikes or increased regulation. Oh, and I almost forget: There’s still a pandemic causing a retrenchment on reopening economies worldwide. So, with plenty of uncertainty still in the air, what’s the reason or narrative for the surge in stocks? As an options trader, I prioritize all my trades with the probability of profitability in mind. I believe this is the market’s also working on probabilities that the ultimate outcome is Congress likely being divided with a vaccine or therapeutic on the way.
Secondly, the Federal Reserve reiterated that it will keep rates at zero while continually pumping liquidity at $140 billion a month. This combination of no yield from bonds with free money creates the TINA (There Is No Alternative to equities boosting risk asset prices). Factually, many stocks provide a solid 3% yield and/or trade at reasonable price multiples, given their growth and profitability. Lastly, many money and hedge managers needed to hedge or take a defensive stance heading into the election as a matter of professional diligence. Once stocks started to rally, they needed to unwind the hedges and scramble to reload their long exposure. I have had a week to commensurate with how well the market did. However, at least I was leaning the right way and able to close a few moderately-profitable trades. I’ll be back at it next week.
Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.
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