Two Speculative Scenarios (and Six Investments) for Midterm Elections

Late last month, I wrote to you about the fact that there is no significant statistical relationship between what happens next in the markets and midterm elections.

And what I had to say started a firestorm.

My email exploded, as you might imagine, with the bulk of the commentary centered on the five most dangerous words in the English language – "It'll be different this time."

Probably not.

But, I'm game.

So, let's continue the conversation by playing this through...

It's important stuff, the elections.

More importantly, though, what happens next is on YOUR mind – and that means it's on mine.

As you know, I created Total Wealth with the express intent of sharing everything – the tips, techniques, and tactics – needed to capture huge profits, especially when it comes to trading the headlines shaping our world.

I find scenario analysis works particularly well in situations like this.

Most investors concentrate solely on picking stocks, so they have little, if any, frame of reference for how specific stocks fit into worldly events. Worse, they miss out on some truly tremendous profit potential because they aren't lined up with where the big money is moving.

That's where scenario analysis can help you become significantly more profitable.

Scenario analysis is pretty easy to do if you understand the framework you're dealing with – in this case, that's midterm elections. Contrary to what most people believe, there's NO guesswork involved.

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Instead, you start with empirical data, past performance, and some combination of actual results-driven data. Then, you "walk forward" into the future.

Here's a quick chart that will help you "see" what I mean.

The critical part, for purposes of our discussion today, is the "headline inflection point" I've annotated in red.

That's where the markets can and will shift as headline-driven emotions throw otherwise sound investing logic right out the window. It's also your source of profits.

Out of a dozen or so scenarios I can envision, I see two that are really significant.

And tradable.

Scenario No. 1: A "Blue Wave"

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This scenario is hotly debated by political operatives who think Democrats will sweep elections, and in doing so, regain congressional control. This scenario is gaining traction in the mainstream media by the minute because it makes for great airtime.

I see three key market moves if this happens:

1) Drug prices take a hit as social medicine pressures healthcare profits;

2) Defense spending pauses because fiscal 2018 spending gets hijacked as Democrats, keen to stop Trump, block crucial funding; and

3) Financial stocks get clobbered on the assumption that deregulatory reform becomes re-regulatory reform.

Your key moves here would be to bet on the downside in each of those respective industries and on a general rise in volatility. Some of the high-probability trades that come to my mind include:

  • Buying at-the-money VIX calls like the VIX November 21, 2018 $12 Call (VIX181121C00012000). This is a play on the broader markets – the S&P 500 specifically – and the quick, knee-jerk move that will happen the moment it's clear the "Blue Wave" wins. Plan on exiting within a day or two – typically the window nowadays – because computers will rapidly arbitrage the fear "out."
  • Shorting the weakest defense, healthcare, and financial stocks one to two weeks ahead of elections, when polling is running rampant and the results are murky. I suggest you focus exclusively on companies with a Piotroski Score of 1 or 2 (on a 9-point scale) because research – that forms the basis of my very popular sister service, High Velocity Profits – shows very clearly those are the most likely companies to get hit hardest, fastest, and deepest – all of which are critical ingredients for short-term trading profits. Or, you could simply buy put options against three of the broad-based ETFs, one in each sector: the iShares US Areospace & Defense ETF (BATS: ITA), the Health Care Select Sector SPDR ETF (NYSE: XLV), and the Financial Select Sector SPDR Fund (NYSE: XLF).
  • Interestingly, I also think there will be a run TO technology stocks, including the "Big A" stocks we talk about all the time – Amazon, Alphabet, and Apple. Others too, but especially those with big stock buybacks in place. The critical assumption here is that the Blue Wave will reignite the war on the rich and reverse the tax cuts Trump put in place. But all of those things – stock buybacks, tax-related earnings, expanding margins – are locked into this fiscal year so traders can quite literally "bank" 'em.

Now let's take the opposite side.

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Scenario No. 2: Republicans Retain Control

  • Volatility will drop like a shot when traders realize that the rally's mainstay remains intact and additional speculative energy comes in. Unfortunately, computers have removed much of the skew that would normally be present in VIX-related put options, which is why the VIX has bumbled along at historically low levels for years. So, I suggest waiting for a final, angst-driven bout of pre-election jitters and selling a VIX call spread roughly five points higher than the VIX runs. My guess is that'll be around $15, so consider selling-to-open a VIX call spread with the lower strike – the one you'll be selling at or just out of the money in the current month when it happens. Unfortunately, I have no idea how high the VIX could run, so it'd be pointless – not to mention bad form – for me to give you specific strikes today. (But I will try to do so when elections hit, so keep an eye out for a special election-related volatility trade in the weeks ahead!!)
  • Defense stocks cruise higher, but financial stocks are hung up on fears related to the Fed's next move. Buy the strongest, including Lockheed Martin Corp. (NYSE: LMT), Raytheon Co. (NYSE: RTN), and The Boeing Co. (NYSE: BA), or a suitable ETF like the iShares US Aerospace & Defense ETF (BATS: ITA) – all of which will benefit from accelerated spending under the Republicans as key funding dates approach.
  • Rebalance your existing portfolio for maximum profits and for minimum risk at the same time. A Republican midterm election victory clears the contentious path ahead for President Trump and a growing economy. The single longest-running economic expansion in history is far from over, and a divisive Republican victory will bode well for accelerating earnings, profits, and, of course, stock prices. Any of the "26(f)" programs I've recommended as part of the Money Map Report are exceptionally good choices, as is the Vanguard Wellington Fund (Nasdaq: VWELX) if you'd rather ride the proverbial "wave" than catch individual fish.

In closing, let me leave you with a thought.

I don't like the political vitriol any more than you do. I am simply dumbfounded by the personal animosity gripping our country at a time when conversation seems to be a lost art, and when agreeing to disagree – a constructive start to figuring things out – is now a forgotten necessity in Washington.

Like many folks, I long for the country I knew growing up... a shining star of freedom, personal initiative, and innovation that made our way of life the envy of the world, and where respect was freely given rather than destroyed at every opportunity.

But you and I are neither naïve nor ignorant.

Money will continue to move no matter what happens come midterms.

And savvy folks like you – heck, like us – will continue to profit no matter who wins.

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The post Two Speculative Scenarios (and Six Investments) for Midterm Elections appeared first on Total Wealth.

About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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