Position Yourself to Profit from a Possible Trump Victory

Last week was mostly negative for global stock markets, with the Dow Jones up 0.09%, S&P 500 down 0.69% and NASDAQ falling 1.28%. The MSCI Emerging Markets Index also fell 1.78%.

Big gainers in your Bull Market Alert portfolio included Littelfuse (LFUS), which rocketed 10.10%; LogMeIn (LOGM), which climbed 4.43%; and Cirrus Logic, Inc. (CRUS), which rose 2.50%. Both Littelfuse (LFUS) and LogMeIn (LOGM) hit new 52-week highs.

You were, however, stopped out of B&G Foods Inc. (BGS) and Drew Industries, Inc. (DW) when these positions fell and hit their stops.

The iShares MSCI Emerging Markets (EEM) also fell below its 50-day moving average and moved to a HOLD.

Traders across the globe are positioning themselves for the outcome of next week’s presidential election. If you are a U.S. citizen, your opportunities to bet on the election directly are limited.

However, there are plenty of other ways to skin this election cat.

Friday’s market action, following the news that FBI Director James Comey had written a letter to Congress advising a renewed investigation into Hillary Clinton’s emails, gave a hint as to what you can expect if Trump pulls off a victory.

After the news had broken, the Dow Jones Industrial Average plummeted from a peak of 18,255 to a trough of 18,097, a decline of not quite 1%. The VIX — or the “Fear Index” — also jumped to a one-month high.

The sharp drop suggested that most investors are fearful of a Trump victory. That is nothing new. Economics research firm Macroeconomic Advisers also found that there’s been an inverse correlation between the probability that Trump wins the election and stock prices.

Nevertheless, conventional wisdom still tells us that Hillary Clinton is set to cruise to a victory next Tuesday. A bevy of polls, as well as careful examination of the Electoral College map, support this view.

Yet, this divergence in expectation is exactly where an opportunity lies for speculators.

If you are willing to take a contrarian view, there are plenty of novel and counter-intuitive analyses of the election which suggest that Trump will pull out a win.

Here are some of the most colorful:

First, Professor Helmut Norpoth at Stony Brook University in New York — whose model correctly predicted the last five presidential elections — expects Trump to win 52.5-47.5%.

Second, an artificial-intelligence system developed in India, which tracks account data from Google, YouTube and social media, says Trump’s “engagement data” is even better than President Obama’s in 2008, and thus also portends a Trump victory.

Third, Allan J. Lichtman, a professor of history at American University (and a Clinton supporter) also reluctantly predicts a Trump victory, using his system that has correctly predicted the winner of the popular vote in every U.S. presidential election since 1984.

Fourth, even left-wing filmmaker Michael Moore has predicted a Trump victory, calling it “America’s Brexit.”

Finally, William Hill, the United Kingdom’s leading betting shop, notes that betting patterns on the U.S. election are very similar to the ones preceding the Brexit vote. About 71% of the money bet so far has been on Hillary Clinton. However, 65% of the bets by number are for Donald Trump.

Whatever your personal political stripes, from a purely betting standpoint, the prospect of a Trump victory is a low-probability, high-gain wager, versus Clinton’s high-probability, small-profit scenario.

So what kind of a drop in the U.S. markets can we expect?

Macroeconomic Advisers predicts an 8% fall in the S&P 500 if Trump wins. A Brookings Institution paper projects that the U.S., U.K. and Asian markets would plummet by between 10% and 15%, push oil prices down by $4 a barrel and cause a 25% slide in the Mexican peso.

So, if and only if you are in a highly speculative mood this week, I am recommending that you the buy the SPDR S&P 500 ETF (SPY) Nov. 9 $212 puts ETF (SPY161109P00212000) at market today.

Since $212 is not that far below the market’s current levels, a pullback of 8% would generate significant gains, which you would take on the Wednesday after the election.

This particular option has a whopping 19,795 contracts outstanding, making it the single most popular option expiring the day after the elections.

Portfolio Update

iShares MSCI Emerging Markets (EEM) moved 1.78% lower last week. Despite treading water over recent months, U.S. markets have had a strong 2016 as equities have gained nearly every month through August. However, a five-year chart of EEM clearly shows a healthy resistance level near $46, as compared to its current $37 price level, giving EEM some room to run higher in the coming months. EEM fell below the 50-day moving average (MA) and is now a HOLD.

Avista Corporation (AVA) added 1.33%. Avista has been involved in legal proceedings that would increase yearly revenues by $6.3 million, or 2.5%, and bring the issue to a close — a welcome outcome for investors. Avista will also report earnings on Nov. 1, before markets open. Analysts’ expectations are calling for earnings per share (EPS) of $0.21. AVA is a HOLD.

Allete, Inc. (ALE) remained flat last week, rising 0.07%. ALE will report earnings on Friday of this week, and analysts’ consensus estimates are calling for $0.98 earnings per share (EPS) with revenue estimates at $442 million. Allete also will pay out a quarterly dividend of $0.52 per share on Dec. 1 to shareholders of record at the close of business on Nov. 15. After trading along its 200-day MA for several weeks, ALE moved purposefully higher to straddle the 50-day MA last week. Currently standing just below the 50-day MA, ALE is a HOLD.

Cirrus Logic, Inc. (CRUS) rose 2.50% over the last five trading days. CRUS reported earnings last Thursday of $1.35 EPS on revenue of $428.6 million. The consensus earnings estimate was $1.05 EPS per share. Revenue jumped 39.7% year over year. CRUS also issued guidance for its upcoming third quarter, calling for revenue of $475.0 million to $515.0 million. Stifel Nicolaus reiterated its “Buy” rating for CRUS and moved its price target to $68. CRUS is a BUY.

Masimo Corporation (MASI) fell 4.51%. MASI will report earnings on Tuesday after markets close. Consensus estimates on the street are calling for EPS of $0.42 on revenue of $165.79 million. MASI is a HOLD.

Take-Two Interactive Software (TTWO) remained quite flat last week, dipping 0.62% as its upcoming earnings report is imminent. The consensus analysts’ estimate stands at $0.29 EPS, with revenue estimates at $362.32 million. TTWO will report earnings on Nov. 2 after markets close. TTWO is a BUY.

Littelfuse (LFUS) rocketed 10.10% last week, hitting a new 52-week and record high on positive guidance news. Littelfuse raised its Q3 outlook one week ago, calling for EPS of $1.85 to $1.89 a share. This is a jump from the prior view of $1.36 to $1.50, and well above the street’s $1.52 consensus. LFUS will report earnings on Thursday and is currently a BUY.

LogMeIn (LOGM) climbed 4.43% and hit a new 52-week high last week after reporting strong earnings last Friday. Earnings came in at $0.32 EPS vs. the estimated $0.28 figure. Revenue was $85.1 million, representing a jump of 22.3% on a year-over-year basis. LOGM is a BUY.

U.S. Silica Holdings Inc. (SLCA) gave back 4.11% for its first week in the portfolio. FactSet recently released information its 15 top-rated energy stocks — all of which it has “Buy” ratings on. SLCA landed on this short list. Earnings will come out on Thursday and consensus estimates are calling for EPS of $0.19 on revenue of $137.99 million. SLCA is a BUY.

Sincerely,

Nicholas A. Vardy