Hey Trader,
Brazil just showed what happens when you don’t hedge election risk. Brazilian stocks ripped when Bolsonaro took the early lead.
Then the race swung back to Lula. The market got hit hard.
Our election is next Tuesday. Nobody here is pricing in an outcome either.
Before Tuesday, I’ll show you how I hedge election risk when I can’t predict the outcome. You’ll see what I’m buying, what I’m holding and what I’m watching.
That way, one bad outcome won’t cost you years.
Right now, buyers keep piling into stocks as if the winner doesn’t matter. I completely disagree.
There’s an old saying for what I’m seeing. It’s called whistling past the graveyard.
It means acting calm while you’re actually scared or in denial. That’s this market right now.
We don’t know how the election turns out. Nobody does.
When you can’t predict an outcome, you don’t bet on it. You hedge election risk before the vote.
Get the risk wrong here, and there’s no turning back. A 33% or 50% loss can take years to win back.
I’m not calling for the end of days. I’m not a bear either.
Let me show you how I’m getting ready. We’ll start with what Brazil just taught us.
What Brazil Just Taught Us About Binary Events
A binary event has two possible outcomes. You can’t know in advance which one you’ll get.
An election is the classic example. That’s why I hedge election risk before the vote happens.
Brazil’s stocks ran on Bolsonaro’s early lead. Nobody buying that rally knew how the vote would swing.
When it swung back to Lula, those buyers got caught on the wrong side.
I’m bringing up Brazil because it could happen here. Anyone buying today is assuming our election won’t bring that kind of volatility.
I wouldn’t make that bet. I’d rather hedge election risk now.
If you get caught on the wrong side, you won’t bounce back quickly. After a big enough hit, a lot of traders just give up.
They know it’ll take years to get back to even. That’s why I manage my risk in increments.
If you don’t, it’s going to hurt you.
When you don’t know the outcome, you don’t play games.
Why I Think This Market Is In Denial
Early in my session, the S&P 500 was up 49 points. The advance-decline line looked strong too.
Money managers are just buying whatever sits at a 52-week high. Technicals mean nothing to them because it’s not their money.
The S&P sits about 100 points above 7,600. Everybody on Wall Street knows that level is the line.
If one ugly, extraordinary candle takes it out, things get fast and furious.
The weekly chart worries me more than the daily.
It’s been my best friend for 39 years. Right now, it’s in a bearish formation.
The weekly doesn’t come with a timestamp. I can’t tell you when it triggers or when it ends.
I can tell you it’s going to cycle all the way down. The wheels are already in motion.
That’s another reason I hedge election risk instead of guessing at the timing.
If you don’t hedge election risk now, you’re whistling past the graveyard.
How I Hedge Election Risk With Puts And Cash
When I can’t predict an outcome, I buy puts.
Puts are my first tool to hedge election risk. They’re options that gain value when a stock or index falls.
I’ve also got some short positions on. Between the two, I’m really well hedged.
Cash is the other way I hedge election risk. I’m sitting on 60% cash right now.
If the market falls out of bed, I could care less. I’ve got a lot of cash.
You can hedge election risk without turning into a bear. I bought two new positions on Friday.
I still hold way more longs than my four or so shorts.
Today I sold two positions near multi-month highs. They hit exit points I’d mapped out in advance.
I wait for price to come to me before I buy. My exits are already picked before I’m in.
What I Watch While I Hedge Election Risk
Until the vote, I’m watching three things:
- The 7,600 level. A break there is when things get ugly.
- The slopes. They tell me whether I can buy, short or neither.
- The money flow. Buyers loaded the boat and backed off. Now they’re trying to load it again.
The slopes keep you out of the wrong trade. A flat slope means a two-sided market.
A vertical slope is unshortable. If any of you worked for me and shorted this market today, I’d fire you.
Before I was 20 minutes into my session, the S&P was up 66. That’s a gamma squeeze, where options hedging forces buying that drives prices higher.
When you hedge election risk, you protect your account if the market drops. A short against a vertical slope just fights the squeeze.
You short once the slope turns down. Until then, you wait.
Professor Jeffrey Bierman
Creator of the Genesis COG System
