How to trade US midterm elections

Short guideline ahead of today's US midterm elections

WHAT HAPPENS :

Results of US midterm congressional election tonight. Democrats likely to win the House of representatives. Republicans likely to keep the Senate.

WHAT IT MEANS TO YOU :

(0) Market has typically no strong relationship with midterm elections.

(1) However it will likely result of a strengthen dollar to foreign currencies (i) and thereafter a fall of volatility (ii).

(2) More specifically a divided congress could result of :
(i) Consensus on increasing regulations on social media companies, likely to happen in 2019
(ii) Infrastructure bill likely to pass regardless which party control the congress
(iii) Trump could quickly propose the Transportation bill, high road to people’s business

(3) But If Democrats take full control it suggests :
(i) End of tax cuts and Infrastructure bill expected ahead of 2020 presidential election.
(ii) Drug price controls and infrastructure spending

WHAT CAN YOU DO ABOUT IT?

(0) Buy any dollar dip and sell the pullback

(1i) Sell/Short Emerging markets : KRW, SGD, TWD
(1ii) Short VIX

[Divided Congress]
(2i) Buy FB LEAPS (long-term) put options
(2ii) Long construction stocks : URI.N, ACM.N, JEC.N, VMC.N
(2ii) Long machinery stocks : CAT.N, DE.N

[Democratic Congress]
(3i) Long 10y bond yield and REITs.
(3ii) Short big Pharma and Biotech stocks.

MOST IMPORTANT

DON’T TRUST THE POLLS

Market is Sceptic. Valuation does not fully reflect the polls. Potential error in the polls could allow a bigger Democratic win than is currently projected (3).

ARE YOU STILL LOST?

KEEP CALM & DO NOTHING.
IT IS FOR THE BEST.

Credits - Reuters, Washington Post, Globe & Mail, Bloomberg