Three Ways to Trade Volatility Ahead of Midterm Elections
Not long ago, we issued marijuana trades.
On July 4, 2018 for example, we recommended Canopy Growth (CGC), as it traded at $30. It’s now up to $48.30. Consider selling half to secure the win.
On August 22, 2018, we recommended Tilray Inc. (TLRY), as it traded at $37.50.
TLRY is now up to $115.31 for a potential win of 207%. Exit half of this trade, as well.
While we can sit here and pat ourselves on the back, let’s just move on to the next trade idea.
Midterm Elections: Volatility is Likely to Spike
If the Republicans retain leadership, we’re greatly optimistic we could see 35,000 on the Dow Jones Industrials. In fact, some argue that tax reform is likely to leave many Republicans relatively unscathed in 2018, and perhaps put them on solid ground by 2020, too.
Especially if tax reform fuels further economic boom…
Granted, the press has warned of a 2018 “bloodbath” for Republicans.
Politico suggested for example that the midterms could be “the worst” in history for them. The Hill has predicted that November midterm elections are the Democrats’ “best chance in years to win back House.”
The Washington Post has said the White House is “poorly positioned to handle the tough 2018 political landscape,” adding, “The president has been informed by aides and friends that if he loses the House in 2018, not only would Democrats almost certainly begin impeachment proceedings against him, but his entire legislative agenda would be imperiled, making any 2020 reelection bid far more challenging.”
Lee Gettess is a top trader who is excited to bring you his video newsletter. Each week, Lee will share his predictions on what he anticipates from the bond and S&P markets.
Realized Volatility and Market Behavior Since 1901
Volatility can often seem high. But is it really that high compared to a complete history?
To see how high volatility has been compared to history, I looked for periods when realized volatility of the Dow Jones Industrial Average has been as high. I chose realized volatility instead of implied volatility, because implied volatility has a limited history.
For instance, although I consider the VIX a very important indicator of future volatility expectations, it is not that valuable in severe market Crashes. That’s because, fortunately, we haven’t had that many (1987, 2000-2002 and 2008-2009). We just haven’t had enough extreme declines during VIX’s life to have a statistically significant data set from which to work. Using realized volatility instead of VIX allows us to do testing going back over 100 years.
What I found was a mixed picture. When actual market volatility (as measured by the one-month standard deviation of log returns of the daily closing DJIA values) gets this high, more often than not the market makes a low or a short-term market bottom. The problem is, when you get extremely high volatility, sometimes the resulting market behavior can be very alarming.
Let’s look at some charts of DJIA (orange line) to visually analyze the period from 1901 to 2011. Periods where volatility was greater than or equal to recent closing volatility levels are marked by yellow vertical bars.
The chart below, which dates from 1901 to 1919 shows where high volatility successfully coincided with a major market low in late-1903, late-1908 and right after the inception of World War I in 1915. There were also period of high volatility in 1901, early-1907, and 1917. The problem with those instances is the market did not rebound (although it did stabilize for several months after each signal).
Thought for the Week: The fastest way to receive is to give, because giving starts the reciprocal action of receiving. We all receive according to how much we give. Give the best of you everywhere you go. Give a smile. Give thanks. Give kindness. Give love.
Your giving should be a giving without expectation of return – a giving for the sheer joy of it.
This Week In Trading: The DOW closed at +184, Nasdaq +60, and S&P +16.
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