PRUDENT INVESTORS PAY ATTENTION: ELECTION ANALYSIS FROM THE ANALYST WHO CALLED TRUMP VICTORY IN 2016 AND STOCK MARKET RISE

To gain an edge, this is what you need to know today.

Apolitical

My long time readers know that I am politically agnostic.  My sole job is to help investors. This post is not about politics but about investing.  It goes without saying that the election will have a major impact on investing.

The foregoing is important to help the readers read the post not through a political lens but through an investment lens, as hard as it may be for some readers.

It is important for investors to completely separate their politics from their investments to succeed.  Think of all those Republicans who missed out making money in the stock market during the Obama years and all those Democrats who missed out in the Trump years because they did not separate their politics from their investments.

Bold Calls

Over the years The Arora Report has made a large number of bold calls.  At the time of each call, the call went against the prevailing wisdom and hardly anybody else on Wall Street was on our side.

It is humbling that all of such calls have proven to be correct.

When it comes to politics, the two bold calls that have proven correct are the Trump election and Brexit vote of ‘Yes.’  At the time of these calls, almost everyone on Wall Street was on the other side.

The Process

The reasons for the success behind The Arora Report calls have been the following elements:

  • Starting with a neutral position.
  • Setting aside our own biases, prejudices and opinions before the analysis.
  • Taking a wholesome view of the data including unconventional data.
  • Using sophisticated algorithms.
  • Connecting the dots.

2020 Polls

One has to be careful looking at the polls. Here are the key points:

  • Many polls are not neutral but are designed specifically to give advantage to one side over the other.  Simply ask these pollsters where their funding comes from.
  • Even the polls from credible organizations suffer from biases.
  • The results of the polls often depend on how the question is asked.
  • Based on the past data, it is clear that Trump supporters under poll.  Many Trump supporters are reluctant to admit to pollsters that they support Trump.
  • 2016 election highlighted several deficiencies in the polling methodologies.  It appears that most of those deficiencies have not been corrected.

Four States

The president is decided by Electoral College and not by popular vote.  With the polarization of many states becoming solid blue or solid red, only a few swing states decide who wins.

This time Biden has many paths to win.  Trump has fewer paths.  Based on an analysis of the paths, only the following four states may matter.

  • Florida
  • Michigan
  • Pennsylvania
  • Wisconsin

In some scenarios, Arizona and North Carolina may become important.

If the foregoing was not jarring enough, in the end only about 20 counties within the states mentioned above will likely make the difference.

The Most Important State

Pennsylvania appears to be becoming the most important state.  Here are the key points:

  • On average, Biden is leading by about 5 percentage points in the polls in Pennsylvania.
  • Biden had a slip up in the last debate about fracking.
  • Fracking supports about one million jobs in Pennsylvania.
  • The large crowd that Trump drew in one of his rallies in Pennsylvania should be sending shivers down the spines of Democrats.
  • The all-important black vote in and around Philadelphia does not seem to be enthusiastic about Biden.

Adjustments To The Polling Data

In our analysis, we are making several adjustments to the polling data.

  • We are looking at the polling data mostly in six states.
  • National polls are not the deciding factor even though they are giving a big edge to Biden.
  • It appears that Trump rallies are attracting as much as 20% of the audience who previously voted for Clinton or did not vote.  This favors Trump. 
  • There is more enthusiasm among Trump supporters than Biden supporters.  This favors Trump.
  • The huge mail-in and early vote appear to be heavily from Democrats.  This favors Biden.
  • On election day, turnout is likely to be heavier among Republicans than Democrats.  This favors Trump.

The Victor

After the foregoing adjustments are made, according to the data so far, Biden should win, but not so fast.

Fast-Changing Data

The data is changing fast.  For example, in the latest poll from the Des Moines Register, there is a shocker.  The Des Moines Register poll is a credible neutral poll.

This poll in September tied Biden and Trump at 47%.  The poll had a margin of error of plus or minus 3.4%. The latest poll shows Trump leading Biden by 48% to 41%.  This is a shocking swing in Trump’s favor.

If history is any guide, Trump surge in Iowa may spill into Michigan and Wisconsin, two of the important states noted above.

There appear to be two late-breaking trends.

  • Republican turnout may be heading towards a larger turnout, compared to the adjustment already made to the data.
  • The Black and Hispanic turnout appears to be heading towards lower numbers compared to what is in the polls.

Both of these trends favor Trump.  There simply is not enough data to quantify these trends and put them in a model.

Mail-in Votes

There are likely to be a lot of legal challenges from Republicans to the mail-in votes.

Investors need to understand that we do not have one election system in this country.  We have 50 election systems.  Of course here the concern is about only a handful of states.

Based on the information so far, how courts will rule on these challenges is not knowable at this time.

The Call

Opinions are a dime a dozen.

You already know that The Arora Report refrains from opinions unless backed by solid data and analysis. Based on the data so far, the best that can be said is that if the late-breaking trends stop in their tracks and the issue of court challenges is not a factor, Biden should win.  However, it is equally important to emphasize that the late-breaking trends are favoring Trump.  If these trends strengthen, Trump can easily win.

It is not the definitive call similar to the calls we have made in the past but this is the best that can be done at this time.

The Definite

From an investment perspective, here are some of the definites or near definites we can share.

Please click here for a chart of Dow Jones Industrial Average (DIA) which represents the popular stock market index (DJIA)

Note the following:

  • This is a monthly chart giving investors a long term perspective.
  • The market has retraced to the top of the support zone.
  • If the election was not ahead, based on economic, technical and quantitative data, the call would have been that there was a high probability of the stock market breaking below the top support zone and going to the middle support zone.
  • Investors should be very mindful that since the Arora buy signal in 2009 shown on the chart, the market has come up a long way and is overextended from a long term point of view.  In plain English, this means that there is more risk in this market than is generally believed.
  • The Fed’s balance sheet has ballooned from $o.87 trillion in 2007 as shown on the chart to about $7 trillion. The balance sheet is simply a fancy way to describe money printing.  The Fed is likely to do everything it can to further inflate the stock market bubble irrespective of who is elected.
  • Wall Street is positioned for a Biden 🔒.
  • Wall Street is positioned for Republicans 🔒.
  • The positioning for both of the above scenarios is 🔒. Wall Street has learned its lesson from 2016 and is somewhat cautious.
  • Wall Street is positioned for a stock market🔒.
  • Wall Street is not positioned for 🔒.

Adjustments To The Portfolio And New Trades

There will be many new opportunities both long term and short term.  The impact of t his election will be felt worldwide.  The opportunities will extend beyond the United States to the rest of the world.

Protection bands, cash levels and hedges may also need to be adjusted.

There will be new posts as appropriate in the real-time feeds of all four services.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial)  stocks in the early trade. Smart money is 🔒.

Gold

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒.

For longer term, please see gold and silver ratings.

Oil

The momo crowd is 🔒selling oil in the early trade.  Smart money is 🔒.

For longer term, please see oil ratings.

Markets

Our very, very short-term early stock market indicator is 🔒.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates are ticking down and bonds are ticking up.

The dollar is stronger.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1891, silver futures are at $24.13, and oil futures are $35.61.

S&P 500 futures resistance levels are 3320, 3390 and 3420: support levels are 3278, 3228 and 3182.

DJIA futures are up 334 points.

Protection Bands and What To Do Now?

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold existing positions. Based on individual risk preference, consider holding 🔒 in cash or treasury bills or short term bond funds or allocated to short term tactical trades and short to medium-term hedges of 🔒and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

This post was just published on ZYX Buy Change Alert.

 

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