Election Aftermath: Don’t Fear Volatility, Embrace It

U.S. equity markets are trading off their session lows at 0752 GMT. The USD/JPY is also rebounding and December Comex Gold is retreating from its high. The markets are relatively calm. This comes as a surprise to traders because these events are taking place despite the fact that Democratic candidate Hillary Clinton has conceded the election to Republican candidate and president-elect Donald Trump.

Asian investors started the initial selling in the U.S. equity markets early in the session after the election results started to show the vote was closer than previously thought. Sellers came in droves to drive the Dow Jones Industrial Average over 800 points lower. At one point, the benchmark S&P 500 traded at levels not seen since late June.

Investors also took shelter in traditional safe haven assets like the Japanese Yen, Swiss Franc, Euro and Gold markets.

To the surprise of many investors, stocks started to find support shortly after the European opening. Many investors thought this may have been a reaction to the news that the election was too close to call. Or perhaps, Clinton took the lead in the remaining states or even took control of the Electoral College vote.

Demand for higher risk assets started to increase and investors began to shed safe haven assets. At this time, the stock market has regained more than half of its earlier losses. This is setting up the market for a volatile two-sided session because there is plenty of room to maneuver.

Although the earlier price action suggested a Brexit-type reaction to a Trump win, the current price action suggests that the worst may be over. We’ll see when the U.S. markets open.

There is also talk circulating that if the markets are volatile leading up to the Fed meeting in December, the central bank may pass on its widely expected rate hike. This may be another reason for the recovery in the equity markets. We’ll be watching how this story develops over the next few weeks.

In conclusion, I want to say that as traders, you should embrace volatility not fear it. Do you really want to have a stock market that moves less than 1 percent per day like we had from July to September? Furthermore, take a look at a weekly or monthly chart and see just how little impact today’s sell-off had on the bigger picture. Just last Friday, the December E-mini S&P 500 traded at 2078.75. Today, it reached a low at 2028.50, a mere 50.25 point difference.

Yes, Trump represents change and uncertainty to some, but change can be good. On Wednesday, in the U.S., consumers are still going to buy groceries, buy cars and go to the bank. So don’t just come in on Wednesday, selling in reaction to the news. Take a look at the charts and find value areas if you are an investor. In addition, trade like you normally do. If you don’t understand what is going on, then just take to the sidelines. Trade when you feel comfortable, but just don’t sell in reaction to the news.

Published by

James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.