Post-election commentary and strategy notes.  

BREXIT STRATEGY 2.0 – In our largest tactical accounts, just prior to the election, we added some exposure to small cap stocks, but hedged (for you technical folks) by the 2x VIX.  We felt this was more appropriate than having equity exposure with no hedges or having no equity exposure at all given the perceived risks of a Trump victory and the potential upside of a Hillary/Senate win.  

Let us explain.  We had calculated the upside/downside possibilities and concluded that hedging using the VIX (volatility index) like we did with BREXIT, was the best course of action.  Thus, BREXIT STRATEGY 2.0.

Oh, and this proved to be correct.  Early in the evening when it was clear that the senate would hold Republican, and with Hillary still anticipated to win, the S&P futures were up close to 1% with our VIX hedge flat.  Our growth portfolios, for example, were theoretically up +0.5%. Then when it became apparent that Trump could pull out a win, the S&P 500 futures sold off -5% (they actually suspended trading, which is a BIG DEAL) with the hedge (VIX futures) trading up 45%! At that time our Tactical Growth portfolios, with 50% small cap stock exposure and only 8% hedge exposure (2xVIX), were theoretically up +1.1%.  Imagine that! With the market up 1% early in the evening our growth portfolio was up 0.5% then when the market crashed hours later our growth portfolio was up slightly more at 1.1%!!  A win/win regardless of the direction, what other RIA can say that to their clients?? Not that we are bragging….

Let’s continue with what actually happened.  Wednesday morning the S&P 500 opened down 1% with the small caps (IWM) down 0.7% and the 2x VIX up 15%. That means on the open our growth portfolios were down half of the IWM (-.35%) and up 8% of the TVIX, or up a total of 0.85%.  We started selling our hedge and slightly lowered our small cap equity and by the end of the day with the S&P 500 up 1.18% our growth portfolios finished up 1.4%.  Not bad for a portfolio built to hedge a 5% decline! The reason I walked you through this is because it is a perfect example that demonstrates the sophisticated way we manage our clients assets that allow the assets to grow in a rising market in order to meet their long term objectives all while protecting them from the meaningful drawdowns that historically have derailed clients from their goals.  

The bottom line?  Markets and people got it wrong again.  Most had forecast a 5-10% decline in the event of a Trump win Tuesday.  We didn’t know if that would materialize, but we had to hedge the possibility.  Then, when market players got it all wrong about Donald Trump, they started scrambling to catch up. The Dow closed at an all-time high yesterday, and many of the broader averages are not that far behind. This action is essential the same thing that happened following the Brexit vote. One big difference is that the immediate reaction to Brexit, a major fail, followed by a two day period wherein the market reversed course. This time, BREXIT 2.0, the market reversed IN A COUPLE OF HOURS, but in both cases market players found themselves totally out of position and were forced to chase aggressively to add long exposure. 

Being poorly positioned happens all the time, but in this market environment it is a feeding frenzy for the algorithms (computer trading technologies) that feast on exploiting such a situation. There are no dips or pullbacks as the computers keep on pushing. They produce massive squeezes and great anxiety over being left behind. I suspect that if Hillary had won, as many market players had forecasted, the market would probably be wrestling with some ‘sell the news’ action. The poor predictions about the election created a very different dynamic. 

The issue now is how much longer will the Trump honeymoon last. Trump doesn’t take office for two months and then he has to have his policies formulated and passed. Who knows how long implementation will take? The market is celebrating some themes now, but it is going to be a long time before they have any real financial impact. What really needs to be considered are a number of equity-friendly policies that were not taken seriously (alongside the candidate himself). These include a large fiscal stimulus; reduced taxes on corporations, income, and capital; de-regulation; smaller government; and fighting corruption. While a Trump presidency is not without risks, if he actually goes forward with these pro-growth policies we could be see the market get behind the possibility for a real sustainable move. The support of congress is also likely, given that the party establishment will be trying to court the new leader.  We will have to wait and see.

Back to BREXIT STRATEGY 2.0.  If we take a couple steps back and look at the overall picture, it looks like a classic breakdown and reversal that so often catches market players flat footed. It doesn’t matter what the catalyst might be but the market beast did a masterful job of faking out market players that were convinced that the big breakdown was finally upon us. This market has momentum and has trapped many bears. The recent economic indicators suggest continued growth, sentiment reached a bearish extreme right in front of the election, and that technical condition is bullish, and while valuation is not cheap, the pro-growth policies of Trump could ignite corporate earnings, which we recognized in our quarterly review as incredibly important.  We have to seriously consider the possibility that we may be entering a secular bull market (ala 1982) after years of mostly sideways action.      

Overall, we still remain focused on protecting against drawdowns in this environment while trying to take advantage of the rotations within the various sectors. 

As always, we are invested in you, and we thank you for entrusting us with your finances.  It is an immense responsibility that we take very seriously.  

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Gainplan LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Gainplan LLC or performance returns of any Gainplan LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Gainplan LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.