[The uncensored, unscripted, and unbridled list of stocks to consider buying (and to avoid) right now.]
We are less than a week away from the presidential election, and the U.S. has already had a record-breaking 66 million people show up for early voting – 19 million more than in 2016.
Voters have already cast more than 48% of the total votes from the last election, and it’s safe to say that voter turnout will far exceed what we saw four years ago.
And although these numbers are hitting new highs, the most important aspect of it all is that these numbers get reported every four years like clockwork.
I’m always on the lookout for tradeable patterns, and the U.S. presidential election cycle is one of them.
By looking at reliable patterns that happen during election years, you can find hidden moneymaking opportunities no matter what party gets the vote.
I have narrowed down both a long- and short-term trading strategy to profit on this election cycle, and you can get all of the details right here…
Two Strategies to Play the Presidential Election Cycle
As a rules-based trader, I look for reliable, repeatable, historical patterns that trade the same way year after year.
And if there’s one consistency, it’s the patterns that trade around the presidential elections.
On Tuesday, November 3, we will have our 59th election choosing the next president. With a consistent, repeatable, and potential catalyst every four years, the question is, “What are the potential tradable patterns around the election?”
Here are some facts:
- The S&P 500 is the most bullish in year three of a presidential term.
Investopedia provides the following data from a 2016 Charles Schwab report, illustrating the average S&P 500 performance during each year of U.S. presidential terms going back to 1950:
| Year one: |
+6.5% |
| Year two: |
+7.0% |
| Year three: |
+16.4% |
| Year four: |
+6.6% |
The first and most important thing to note is that on average, the S&P 500 goes up each year of a presidential term. Historically, year three is by far the best performing.
- The stock market performs better on average under a Democratic president.
Adjusted for inflation and based solely on statistics, the Dow Jones Industrial Average annually gains an average of 3.8% under a Democratic president and 1.1% under a Republican president.
- Incumbent Republican presidential re-election = strongest end-of-year gains.
The last two months of the term produce the biggest market gains when an incumbent Republican is re-elected. The opposite is also true. If the incumbent Republican president is voted out, you can expect a short-term move to the downside by the end of the year.
So, given the above, there are at least two ways to play the presidential election cycle:
Of course, you will have to wait two years to enter, but historically you can reasonably expect a 16% return on your money. At the start of year three, simply buy the SPDR S&P 500 ETF (NYSE: SPY).
You can approximately double that return by buying a long-term option (LEAP) on the SPY.
On January 2, 2023, buy a January 2024 call option and hang on for the ride. Generally speaking, options offer a ten-fold increase in ROI. If that relationship and history holds, you can expect a 160% annual return.
- Trade November through December 2020
You can profit on the presidential election no matter the outcome. Here’s how:
- If President Trump wins, go short-term bullish.
Buy the SPY after the results are final. Sell on December 31, 2020.
Supercharge your returns by buying SPY January 15, 2021 calls. Use calls a few strikes out-of-the-money (OTM).
For example, with the SPY trading at $342, the SPY January 15, 2021 $345 calls are currently going for $14.50 per share controlled ($1,650 for one contract). These calls will double with a 9% increase in the SPY.
- If President Trump loses, go short-term bearish.
Short the SPY after the results are final. Buy to cover on December 31, 2020.
Supercharge your returns by buying SPY January 15, 2021 Puts. Use puts a few strikes out-of-the-money (OTM).
For example, with the SPY trading at $342, the SPY January 15, 2021 $340 Puts are currently going for $16.50 per share controlled ($1,650 for one contract). These puts will double with a 10% decrease in the SPY.
Now, one thing to keep in mind is that there are multi-dimensional forces on the stock market right now – and who’s president is only one of them.
The world is still dealing with a global pandemic, the likes of which have not been seen in modern times. COVID-19 forces may very well undermine presidential election patterns, so be sure to practice proper money management techniques (a.k.a. stop losses).
One thing that is likely? Volatility. Which for options traders like us here at Power Profit Trades means one thing: opportunity.
But with volatility abound, there are also certain trades you want to avoid. Because while opportunity is out there, it isn’t everywhere.
In fact, there are some incredibly toxic stocks out there. Stocks you don’t want anywhere near your portfolio.
Some of the most dangerous, portolio-wrecking stocks are also some of the most popular picks on the market.
To make sure you aren’t shelling out cash into any of these destructive names, click here to watch my colleague, investment strategist Shah Gilani, shine a light on the specific stocks that should be nowhere near your portfolio.
Talk soon,
Tom Gentile
