This Nov. 4, U.S. voters will choose between Republican candidate John McCain and Democratic candidate Barack Obama. The big issues will include the economy, Iraq, and energy prices.
As a voter, you likely will view this contest based on the issues most important to you, but as a trader you need to view how each candidate’s expected policies will likely affect markets.
The question is, how do you profit from the election? Keep in mind some basic trading concepts, such as the market is always right, and in almost all cases, supply and demand, known and unknown, is what moves price. The profitable trader combines fundamentals, market climate and technical analysis to time trade execution.
During the Bush administration, commodities and equities have witnessed lows and highs never seen. Crude oil, gold, corn and wheat are flirting with or setting all-time highs.
Gold has been in a strong uptrend since 2001. As the world’s recognized safe-haven investment, gold has risen in large part due to the various security, economic and political problems around the world.
Other markets are at or near historical lows. The dollar index, which measures the value of the U.S. dollar against major world currencies, recently reached its lowest point since 1973, the time of its inception. Since then, it has rebounded, but it is far from its highs hit in July 2001, which followed a healthy uptrend from 1996. The S&P 500 rallied in March 2003, but in late 2007 entered a trading range before breaking into a new downtrend. Lumber futures also have been in a general decline since summer 2004. Lumber, used primarily for residential home construction, is down largely due to the ever-increasing surplus of homes for sale or in foreclosure.
“Turning points” shows two of the previous 15 years strongest trends. Strong trends existed in many major markets during the Bush administration, which began on Jan. 20, 2001. An awareness of these trends is important, as the next President's policies may cause some of these trends to change direction.
Typically, a catalyst or trigger event must occur to tilt supply and demand balance and shift price to a new direction. The trend will remain until another trigger event occurs, which may reverse the trend or accelerate it. Usually the size or importance of the catalyst corresponds to the size of the price move. Consider these potentially catalytic events: discovery of new supply or new demand, war, revolutionary product or technology, interest rate policy shifts, devaluation/valuation of currency and shifts in world or domestic stability.
One thing we do know, the next president won’t be the same as the current president. Change is coming, and we can identify potential winning and losing sectors based on the candidate’s positions (see “Where they stand”).
The next step is to locate the profitable opportunities. From an equities standpoint, a company involved in stem cell and biotechnology research will profit if additional federal funds are directed to this area.
Companies that sell or distribute alternative fuel products will benefit, as the new
administration funds research and encourages the use of these products. In addition, if everyone has access to health care (per federal mandate), companies involved in hospital products, medical care and even hospital construction may benefit.
Two primary industries that should profit from a new president, regardless of which candidate wins, will be biotech and alternative fuels. At present, the stock markets are favoring biotech companies. A simple way to profit from these would be the use of exchange-traded funds (ETF). Various alternative energy ETFs and stocks are not currently in favor; however, this may change in 2009.
WHAT TO WATCH
ETFs such as IBB (iShares Nasdaq Biotechnology) and XBI (S&P Biotech ETF) should benefit from new funding for stem-cell research. XLU (Utilities Select SPDR) should benefit from investment in alternative fuels. Small cap ETFs such as IWM (iShares Russell 2000 index) and IJR (iShares S&P 600) may benefit, as small cap stocks tend to outperform others in a new bull equities market.
In terms of commodities, any continued reduction of crude oil consumption will serve to taper its price climb. If federal funds and mandates result in additional natural gas exploration, those discoveries could result in reduced prices and a short opportunity, as new supplies come into the market. Additional restrictions on automotive emissions could result in a buying opportunity in platinum, a key component of automotive emissions systems, due to increased consumption.
A new president may bring a different Iraq war policy. If stability is perceived, investors may feel safe to exit gold, creating a possible short opportunity. If the international community regains confidence in the dollar, the greenback could strengthen.
Historically — this is documented fact, not a political statement — U.S. equity markets have stronger returns during Democratic administrations (see Yale Hirsch’s “Stock Trader’s Almanac”). In addition, most of the previous bear markets began when a Republican was in office. The investor could thereby go long or short the stock indexes as appropriate. Note also that a new bull stock market may be in the works, having started in the first week of August 2008, after displaying signs of accumulation and purchasing of shares by institutional investors. Also note that whomever wins the election, Congress will remain in the hands of the Democrats so there will be a greater likelihood that Obama's policies will be initiated while McCain’s initiatives will struggle to get passed or be watered down.
Exciting times will follow this election. Both candidates are capable and qualified in their own regard. What happens after may spur huge profits, both long and short. By applying some logical concepts, traders can be better prepared and more attentive to the opportunities that await.
Bill Pritchard is a private trader with more than 15 years of trading experience He operates www.afterburnercapital.com and can be contacted at afterburnercapital@gmail.com.
