Smart Money Bets Ahead of a "Dangerous" Election

We're nearing the end of what has been the longest presidential campaign in history. And no matter which candidate you're voting for, the opposition looks like a dangerous choice.

The truth is, as far as the market is concerned, Hillary Clinton and Donald Trump are both dangerous, for different reasons.

Fortunately, no matter who you're supporting, whether you're a Republican, or a Democrat, or something in between, there are a few smart bets you can make now - and rake in good profits on the election outcome.

Here are the real dangers we're facing this election...

Don't Make Any Long-Term Moves

Election 2016 Blue RedFirst of all, right now, the smart bets are all short-term moves.

That's because there's no way of knowing who's going to win the election and which long-term bets are going to pay off, since both candidates have completely different political and economic agendas.

That said, the only long-term play to make right now is to do nothing... if you're sitting on a diversified portfolio of great companies (not great stocks, mind you, but great companies).

In the long term, whoever wins the election - meaning which party runs the executive branch of government - doesn't make much difference to the stock market.

Profit Opportunity: How to Make a Killing... When Everyone Else Is Panicking

According to Russ Koesterich, CFA and head of BlackRock's global asset allocation team, "Historically, whether a Republican or Democrat occupies the White House has had no statistically significant impact on U.S. equity markets."

And research going back to 1853 shows that returns under Republican and Democrat administrations are virtually identical. That's according to Dr. Jonathan Lemco of mutual fund giant Vanguard.

In the long term, which for me is five years out, stocks have nowhere to go but up.

If either candidate wins by a landslide, which is unlikely, there would be smart long-term plays to make, for sure. But we'll cross that bridge if we come to it.

In the short term, however, until the dust settles sometime after this election, staying on the sidelines with big money makes sense.

It also makes sense to put on smart short-term positions to profit from likely outcome turmoil.

My position on the outcome is that no matter who wins, unless it's a landslide, the vote is going to be contested, lawsuits are likely to fly, we could face a constitutional crisis, and there could be civil unrest.

I'm not the only one who thinks there's trouble ahead...

University of Michigan economist Justin Wolfers co-authored a study that warned a victory for Donald Trump could result in U.S., British, and Asian markets plummeting by 10% to 15%.

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According to the report, which is based mostly on how markets acted during the first presidential debate on Sept. 26, besides equities selling off, a Trump victory could cause oil to fall $4 and trigger a 25% decline in the Mexican peso.

Wolfers says that the "Trump discount" is comparable to those that accompanied the Brexit vote or the 2003 invasion of Iraq and could "significantly increase expected future stock market volatility."

And a 2012 Goldman Sachs report titled "3 Reasons Why Investors Should Take U.S. Election Cycles Very Seriously" says:

The political stakes in presidential, parliamentary, or legislative elections often translate into changes in policies that can reshape the economic environment. Second, the regularity with which elections take place in most countries may give place to cyclical patterns in government and investment behavior. And third, elections can markedly increase political and social uncertainty. These three factors have the potential to affect all asset classes, especially equities, given their strong sensitivity to changes in the economic outlook.

One Thing's for Certain on Nov. 8

America's never had two more polarizing candidates. They not only seemingly hate each other, but rally their supporters into fighting corners and demand they come out swinging.

The one almost given in this election is that volatility is going to rule the markets, across all asset classes.

In my Capital Wave Forecast and Short-Side Fortunes trading services, we're already long volatility, betting that the VIX is going to make new 52-week highs.

We've also got straddles on the U.S. market, which means we've taken a split position, at very cheap prices, that there will either be a huge relief rally if Clinton wins or a major sell-off if Trump wins (or if the market goes down just because investors want to take profits in the face of what may be a very uncertain future).

We're going to add to our downside bets and volatility bets as the odds of a Trump victory increase, which they have been doing lately.

Buying calls on the VIX, or buying call options on the more leveraged iPath S&P 500 VIX Short-Term Futures ETN (NYSE Arca: VXX), makes sense if you're expecting the kind of volatility that accompanies panicky markets - and we are.

And buying straddles - which make money if the market goes radically higher or lower, it doesn't matter as long as there are big moves - makes sense, too.

We own calls on a market-following ETF and calls on an inverse market ETF.

"Our financial markets have become a Vegas/Macau/Monte Carlo casino," bond guru Bill Gross wrote in the October edition of his widely read monthly newsletter.

I agree.

And the way to bet this election in the big casinos is by putting down short-term bets on volatility, on big moves either way, and on other positions that I'll tell you about soon.

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About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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