Donald Trump’s Election Day victory sent a shockwave through Wall Street
Subscribers to Chart of the Week received this commentary on Sunday, October 27.
Indulge, for a second, one last 2024 election postmortem. The American people have chosen former President Donald Trump to take the reins of the U.S. government once more. We’ve telegraphed ‘qui bono?’ from another Trump administration and reading recent options-centric tea leaves confirms a lot of our initial biases.
ETF Winners, Losers Last Week
Trump’s win sent the cryptocurrency, banking, and energy sectors soaring. On Wednesday, the Financial Select Sector SPDR Fund (XLF) added 6.1%, VanEck Vectors Oil Services ETF (OIH) gapped higher by nearly 9%, and Invesco Galaxy Bitcoin ETF (BTCO) gained 9.8%. It will be interesting to see if any subsequent consolidation on the charts shakes loose call traders; both XLF and OIH boast 10-day buy-to-open call/put volume ratios of 2.57 and 2.85, respective skews that also rank in the 99th and 85th percentile of their annual ranges.
Back in September we also identified alternative energy, homebuilding, and cannabis as sectors hoping Vice President Kamala Harris to win. Sure enough, Invesco Solar ETF (TAN), iShares U.S. Home Construction ETF (ITB), and AdvisorShares Pure US Cannabis ETF (MSOS) all fell on Wednesday, the latter shedding 27.7%.
ITB has support in place at its 100-day moving average, and homebuilding stocks in general tend to be steady amid volatility. The same cannot be said for MSOS or TAN, the former now trading below $4.95, a far cry from 2021 highs above $100. TAN is down nearly 30% in 2024 and on Friday fell to a four-year low of $36.16, with a long-term chart that looks just as bleak after it spent most of 2024 in a consolidation pattern.
With a new administration recommitting to drilling and skeptical of alternative energy in general, an already shaky sector mostly driven by hope for progressive reform seems to be fading. You can copy and paste the same narrative for cannabis. There could be a reckoning for TAN and MSOS in the options pits with this new administration. Both stocks have a 50-day call skew that points to a bias toward bullish bets. A shift from options traders toward puts could be another headwind for the struggling sectors to battle.
Small Caps Stay Hot
The Russell 2000 Index (RUT) outperformed the Dow, SPX, and Nasdaq on Wednesday, adding 5.8% — its best single-session gain since November 2022 — as small caps cheered the potentially lower corporate tax rates from a Trump administration. Small caps are also reactive to growth economies and interest-rate cuts, yet after the 25-basis point cut from the Federal Reserve on Thursday, the RUT shed 0.4%. Good luck figuring that one out. Factor in a 10-year Treasury yield last seen at 4.29%, below weekly highs of 4.4% but still elevated, it’s no surprise that amid ramped-up borrowing costs that options traders prefer small-cap puts; iShares Russell 2000 ETF (IWM) 10-day put/call volume ratio of 1.70 sits in the 71st percentile of its annual range.
Time to Start Googling Tariffs
It wouldn’t be an election postmortem without talking tariffs. The Trump campaign promised a blanket tariff on 10%-20% on all imports, plus an additional 60%-100% tariff on China, packaged to the public as a way to shore up domestic production and provide the government with another source of revenue other than income tax. Ignoring for a second what that could do to domestic prices, U.S.-listed China ETF iShares MSCI China (MCHI) lost 2.7% on Wednesday and then 5.7% on Friday, the latter’s drawdown occurring after the National People’s Conference fiscal measures disappointed. MCHI’s 10-day put/call volume ratio sits at 1.50 amid low absolute volume.
Vaccines, Prison Stocks Making Moves
There are a few smaller-scale trends to follow now that the dust has settled. Private prison stocks CoreCivic Inc (NYSE:CXW) and GEO Group Inc (NYSE:GEO) added 29% and 42%, respectively, on Wednesday as a widescale migration crackdown looms. Both stocks extended their rally through the end of the week, but now sport 14-Day Relative Strength Indexes (RSI) of 89 and 85, respectively, deep in ‘overbought’ territory.
Vaccine stocks traded lower on the expectation that Trump will appoint Robert F. Kennedy Jr to a leadership role of federal health agencies. The controversial figure is vocally anti-vaccine, sending Moderna (MRNA) and Novavax (NVAX) to weekly losses of 14.3% and 4.7%, respectively. In the world of healthcare, UnitedHealth (UNH) and Humana (HUM) rose 8.7% and 11.3%, tailwinds stemming from likely lax merger & acquisition (M&A) regulation in the coming years. However, a potentially-gutted Affordable Healthcare Act (ACA) – with no alternative laid out by Trump – sent Medicaid-driven companies like Centene (CNC) and Molina Healthcare (MOH) lower.
Certainty Reigns Supreme on Wall Street
The final shoe is yet to drop still; if Republicans gain control of the House, it’s full speed ahead on all of the pro-Trump sectors. If Congress is divided, buckle up for political gridlock. However it shakes out, per Renaissance Macro Research, post-election S&P 500 Index (SPX) returns are healthy going forward, regardless of the political tone. Shorter term, per Schaeffer’s Senior Quantitative Analyst Rocky White, the SPX added 1.2% the day after the election was called by the Associated Press back in 2020, tacked on 2.2% a week after the call, and boasted a one-month return of 5.5%. Post-Election Day returns show a similar theme. Per the table below going back to the last eight elections, one day and week later, four of the eight returns were positive, including a 5.2% gain back in 2020. After a month, returns were even more robust.
At the risk of oversimplification, there is a lot to unpack from the 2024 election. Only 58% of U.S. families own stocks, according to the Pew Research Center, a number that helps explain why economic data and consumer sentiment are so at odds right now. Historically, friendly short-term data will now battle a large portion of Wall Street bracing for a turbulent Trump administration. Regardless of how you feel about the results, there are opportunities for options traders in every market environment, as long as you have the right information.
