Time to buy the ASX 200?

The money over the weekend has gone to Hillary Clinton, with various bookies putting her chances at less than 1.30, but the weekend news/polling is anything but convincing.

Capitol Hill
Source: Bloomberg

USD/JPY is rallying strongly on open this morning after news that the FBI do not see the investigation of Clinton’s emails providing any new news.

Both candidates have not stopped all weekend, calling on the support of the likes of Lebron James, Beyoncé and Jay Z. Reports that a famous monkey in China, who correctly backed Portugal to win the Euro 2016 soccer, has tipped Trump on live TV has done the rounds this weekend. At this stage, the polls are showing further tightening and reports of around 41 million Americans have already cast their votes, far larger than this stage in 2012. By all accounts, Florida is tied, while North Caroline and Ohio are leaning towards Trump - but Florida seems key to the outcome. If Clinton picks up this state, her chance of winning the Electoral College vote increases markedly. Clinton is also polling well in Pennsylvania and Colorado, so those who back Clinton this weekend for a potential 30% return are probably looking good at this stage, but it is no certainty.

So the election is the only game in town, although China’s FX reserves (tomorrow), October trade balance (Tuesday) and CPI/PPI (Wednesday) will also make interesting viewing. The great thing about these sort of key events like the election is not only do they bring out debate, but they also create misalignments in positioning, price and expectations. This is what traders thrive on as we often see markets overreact, which is what’s taking place right now.

While the playbook for this week is large and diverse, the question I am specifically interested in will be whether Trump accepts a loss, thus providing some degree of certainty for markets to get back to watching the Federal Reserve (Fed) and whether rates are going up in December. If you take the election fully out of the equation, a hike in December seems all but assured given Friday’s reasonable US payrolls report, with hourly earnings at the strongest levels since June 2009. The market places this at a 66% probability of a hike at this stage, but once the election result is known on Wednesday, we will get a chance to hear the thoughts of Fed members James Bullard and Stanley Fischer. This will potentially allow us to understand if the Fed sees an impact from the election on the Fed’s thought process. Of course, their view will largely be dictated by the markets themselves and a relief rally in the S&P 500 will tell us all we need to know, ie. if equities rally from Wednesday to Friday, rates are going up in December.

As mentioned, traders and investors tend to over exaggerate in times of great unknown. There has been a strong increase to back hedging structures, with the US volatility index (‘VIX’) pushing up a further 2% on Friday to 22.51%. The market is positioned for large moves in the S&P 500, which seems fair, especially on a Trump win, or a Clinton win with a rejection of this result by Trump.

The ASX 200 itself fell 2% last week and is likely to open around 5144 (-36 points or 0.7%), with Japan likely to be down around 0.8%. Given the FBI news and reaction in the USD, I would not be surprised to see strong upside risks to this call. The technical set-up tells me to stay cautious, with price on Friday closing below the 14 September low and Aussie index trending lower. The bears have had it their way; when there is uncertainty and no one is buying, the short sellers will come out to play. That may change this week if we get a Clinton win and split Congress (which is my base case), especially given the market’s internals and traditional oversold (chart) readings flashing up at extreme readings. We have reached a point where we can see a mere 19% of ASX 200 companies trading above their 50-day moving average, while a quarter of companies have an RSI below the 30 level and 40% of companies trading are at a four-week low. These are getting to extreme levels of pessimism priced into the market and the contrarians out there will be starting to increase exposure to the ASX 200 in small sizes. My preference is to wait for the market to show some confidence and jump in.

Today’s open will be fascinating viewing given the degree of pessimism, build-up in short positioning and the week’s event risk. This week we’re all going to be playing political analysts and day traders.

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