Trump Can Still Pull Off A Surprise Win. The Market Hates Surprises.

| About: SPDR S&P (SPY)

Summary

It seems many have written off Trump.

A win would certainly surprise a lot of people.

The market hates surprises.

I'm British, but the majority of the financial content I read on Twitter and Seeking Alpha comes from the U.S.

Between Brexit and the U.S. election, I've been bombarded by a lot of political opinions and information I haven't really asked for, but most of it gets absorbed regardless. It's nearly impossible to escape.

Anyway, I've managed to keep my opinions to myself and kept my head down. I'd rather finish my work and kick a ball with my kids than try and change the mind of a staunch Clinton/Trump supporter; a long lesson in futility if ever I saw one.

I spend most of each day identifying patterns and looking for repeated market sentiment and behavior. At times I get my ideas from a feeling of deja vu; I remember a type of market behavior as it appears to be happening again.

Well I am getting that feeling now with the U.S. elections. It reminds me of the Brexit vote with a month to go. And it's not just a hunch; there are many parallels. I think Trump could still win the election.

The Data

Brexit was almost unthinkable to most Brits six months ago. I can't express how utterly shocked I was to wake up and read the news. Sure, polls were close, but it was felt the undecided and swing voters would maintain the status quo. The potential disruption and knock-on effects to the economy seemed too much for many voters to bear, just as it did in the Scottish referendum.

I tended to dismiss the polls as they were a noisy measure and included all sorts of spurious figures. Phone polls of only 800 people turned into market-moving events. This was fine if you were positioned the right way, but were no help as a gauge of the intentions of millions of people.

Up until mid-May, there was about a 4% lead for the remain camp, which narrowed in the lead up to the vote.

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Source: FT

I preferred to take my cue from the bookies and the markets.

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Source: Ladbrokes

The bookies odds were skewed by the size of bets on Remain, but I didn't imagine them getting things so horribly wrong.

It appears they are again overly confident:

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Markets such as the S&P 500 futures made a yearly high right before the vote. The size of the sell-off is testament of how surprised the markets were.

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With about a month to go until the vote, all the charts above showed a turn favoring the Remain vote; it looked like the Brexit campaign was dead in the water, and many, including myself, were very complacent about the outcome. This turned out to be the high point for the Remain camp. Momentum slowly turned, but few saw what was to come.

This situation reminds me of the position Trump is in now. The polls have taken a dive, the markets seem indifferent (if they are scared of a trump win it doesn't really show), and the bookies are already paying out on a Clinton win. It all seems a done deal, but as an investor with a good deal at stake, I'm not so sure.

Trump's demise has been attributed to some comments he made in 2005, which has led to this swing in the polls.

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But as we have seen with the Brexit vote, the polls don't tell the full story.

The very first chart in the article shows the downtrend in undecided voters throughout the last few months coincided with a move up in Leave voters. The 6% who were undecided before the vote must have nearly all voted Leave as the figures jumped from 46% to a final total of 51.89%. Remain voters were polled at 48% before the vote and 48.11% in the final count.

The point is the all of these measures, as well as the general sentiment (based on my take of media coverage and social media streams) were almost completely wrong before the Brexit vote. We have to ask, why was this? Is the same situation possible in the U.S. today?

Media Bias?

One of the reasons for the Brexit surprise can be attributed to the London-centric view life in Britain. The voting patterns show the clear divide between the industrial, predominantly working class areas in the North and the wealthier South East where finance and media is centered.

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Source: alphagammeu

The chart to the side also shows a clear young/old divide and can explain why my social media streams seemed to favor Remain.

Donald Trump has made much of the apparent media bias towards Clinton. I shall stay quiet on this matter, but I do observe a clear recurring pattern, both in demographics, specifically young/old voters:

Source: people-press.org

And the locations of support:

Click to enlargeSource: realclearpolitics.org

What this tells us, in general terms, is the media, the young and the powerful are surrounded by like-minded people. This, either intentionally, or subconsciously, gives a bias to the media content.

We cannot make conclusions on a specific outcome, or on our investments, based on a biased media.

The Swing Voters

One of the reasons for the erroneous polls and the big swing on the Brexit vote itself was the stigma associated with voting Leave.

The campaign created great divisions and some voters on the Leave side obviously wanted to stay quiet about their intentions. The 6% 'undecided' voters all voting Leave is testament to this. It was these voters who swung the election.

In the end, people voted for what they believed in. I don't see why U.S. citizens will be any different. Beliefs are very, very strong, as anyone who has had a debate with a strong supporter of any political party should know.

The polls swung down after a recording surfaced of a conversation Trump had in 2005. Some people don't want to openly condone what he said. But will an 11-year old conversation make them vote against their beliefs? We will find out election day.

The Markets

It's clear form Brexit the markets are not all seeing, all knowing. And they hate uncertainty.

Before Brexit the market went sideways for over two months and that is happening again. I actually thought the S&P 500 (NYSEARCA:SPY) could make a new high in October, but would come back down before the elections. It looks less likely now, but I wouldn't be surprised to see the market at the highs sometime before the vote, if only to squeeze out some weak shorts.

What is clear is the market does not expect a Trump win. Surprise events lead to the largest moves and this move is almost certainly going to be down for equities, and up for gold (NYSEARCA:GLD). The downward move may end up looking quite similar to the Brexit move, which projects a low of 2066 if measured from the 2194 high (using market hours data, not futures). Here's a rough guide:

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2066 is an interesting area of support as it is just below the 200dma and the 50ma on the weekly chart, as well as the channel. I wrote about this, and the prospect of a decline here.

The main takeaway is a Trump win will likely prompt a sharp move down, but the market will almost certainly bounce as it did after Brexit. The origin of any surprise move is nearly always tested. I've heard it called 'returning to the scene of the crime'.

Over the longer term, I believe the market will top and decline in its own time no matter who is in office. Various sectors and stocks will have different reactions to a different president, but the market as a whole will correct because of unrelated matters. I happen to think that time is very close, but let's leave that discussion for another time.

Conclusions

Donald Trump has defied critics and those who said he would never get this far. It would be premature to write him off now, especially given the precedent of Brexit.

With this in mind, I am preparing my portfolio for a sharp turn down, and also have plans to buy if the conditions are right. I cover this more in the linked article.

Whatever happens, life will go on. I visited the UK a few weeks back and of course the effects of Brexit are nowhere to be seen. It has created divisions, as has the U.S. election, but there is more to life than politics. On that note, it's time for me to wrap up and go kick a ball with my kids. Happy voting.

Disclosure: I am/we are short GLD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am short gold futures and long various U.S. stocks. I am reducing equity exposure and will be flat gold into the election.