How far can the post-election rally run?

The rally would have occurred no matter who won the election. The market was over-hedged for downside risk going into the election. When catastrophe didn’t happen, market participants scrambled to unwind their hedges.

Nomura derivatives analyst Charlie McElligott described it as “the risk event that never was”. Hedges became “[a] smoldering pile of ash,” as crash protection was “absolutely decimated”. He believes the rally has more room to run: “We’re just not ‘long enough’ quite yet…We need to get ‘longer’ first with more ‘spot up-vol up’ before we are exposed to a big pullback.”

In addition, I also pointed out that Treasury is likely to take extraordinary measures to keep the federal government solvent by drawing down the Treasury General Account ahead of the debt ceiling deadline in early January. TGA drawndowns have the effect of injecting liquidity into the banking system and create tailwinds for stock prices.

I continue to be short-term bullish into year-end. The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.

 

 

Disclosure: Long SPXL