Behind The Noise - Elections and Relative Strength
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I just recently watched the Wall Street Journal’s video where a Susquehanna trader plays poker with a journalist and describes the concepts of the game.
The ideas of risk and patience all carry over, but what stood out to me was this: “average investors assume the current state of the world is the world as it will be in the future“.
It’s pretty interesting to think about what the world will actually look like in a year, a couple years, a decade, next week.
So how do we predict it? Is it based on what the Fed says, where interest rates will go, who will become President?
My take is that there are risks, and then there are hidden risks. The max any trader can do is quantify the risk with the information they know and implement that in their trade via an exit strategy.
For example, the 2024 Presidential election winner:
Nate Silver has Harris ahead of Trump in the polls by around 280bps while Polymarket has Trump to win by 600 bps. The question begs- is this alpha? Sure- depending on who you trust.
Today Oppenheimer announced their picks for the 2024 election:
Republican wins: TSCO, CAT, GOOG, PGR, AMGN
Democratic wins: GPRE, RUN, SKWD, ALTR, CNC
The debate tomorrow should provide for some fun opportunities navigating the market around election time.
Speaking of- I’ve always wondered why Presidential candidates take so much pride in gas prices. I mean, how much influence do they really have?
Let’s take a look:
This chart from the US Energy Admin. shows prices declining after Summer, with seasonality playing a factor in declining prices right before the election. MarketWatch reported that after the Russia invasion, Biden pulled out “every tool” he had to lower gas prices. Guess what? Prices still rose above $5.
So tomorrow if the candidates start making a deal about how much they’re going to lower your cost of gas, remember this: they really can’t do much. Maybe release some from their reserves, maybe they’ll “drill, baby, drill”, but at the end of the day- gas prices are driven by global supply and demand economics and are controlled by much different people than the White House.
With a new storm in the Gulf, nat gas traders may be worried about fluctuations in price there, but futures continued to fall. According to Seeking Alpha, years ago it was 20% of US gas coming from the Gulf, now it’s only 2%.
Here’s the basic idea:
The market is weak, other than one stock.
Since everything but this one stock is weak it has something called “relative strength“
That MUST mean this is a good stock if it can be strong when everything is weak
Let’s all buy this stock and get over positioned into it
Things don’t get better and we all sell and it now has relative weakness.
The idea of relative strength isn’t a new thing in momentum trading, in fact, it’s in pretty much every technical analysis book you can find.
But the whole concept of it doesn’t really work, and I’ve found that the strategy is best when you expect the frame of reference to get even worse. Take Tesla, for example. When the market began to dump, traders piled into Tesla and it closed up nearly 10% from the S&P 500. But when things got worse, and the market sold off harder, Tesla erased all + more of those gains
And of course, here are some interesting setups going into tomorrow:
Have a great week everyone,
-Adit Dayal