TMGM: How to Position for Potential Trading Opportunities Ahead of the U.S. Election

With the U.S. election approaching, the market remains calm as investors focus more on factors like Federal Reserve rate cuts and economic health rather than the election itself. Hedge funds have increased equity exposure, and concerns about the election rank lower compared to geopolitical tensions, Fed policies, and earnings reports. Polls show a close race between Harris and Trump, and both candidates have ambitious economic goals. Key trading instruments include the U.S. Dollar Index and gold. The dollar may continue rising, supported by strong economic data, while gold is boosted by safe-haven demand and expectations of a Fed rate cut, though resistance levels suggest possible price pullbacks.

TMGM: How to Position for Potential Trading Opportunities Ahead of the U.S. Election

With less than a month remaining until the U.S. election, the market is surprisingly calm, as savvy investors appear hesitant to place bets on such a significant event that is fast approaching. Analysts at TMGM Group point out that as the election nears, carefully considered investment positioning may not be as effective as it once was. However, unlike previous elections, hedge funds have not reduced their holdings. Instead, as the S&P 500 continues to hit record highs, hedge funds have increased their exposure to equities. Meanwhile, investors are more focused on the Federal Reserve’s rate cuts and the health of the U.S. economy, with concerns about the election ranking below issues such as the Middle East conflict, Chinese policy shifts, expectations of further Fed easing, and the upcoming earnings season. The election vote on November 5 is lower down on the list of current priorities.

Recent polls show Democratic candidate Harris with 49% support nationwide and Republican candidate Trump with 47%. However, in the Electoral College system, national averages are far less important than state-level polls, which mostly show a tight race. Neither party is likely to sweep both the presidency and Congress. This is a closely contested presidential race, especially in the swing states. Moreover, both candidates have ambitious economic goals, but neither is likely to fully achieve their campaign promises unless their party wins control of the White House and both chambers of Congress.

As of the end of September, long/short hedge funds had returned 11% year-to-date, placing them in the top 25% of rolling nine-month returns since 2010. Most funds are more inclined to maintain market growth rather than make significant cuts, given the uncertainty around the election outcome. Compared to the ambiguous statements from the Trump or Harris campaigns, the impact of Fed rate cuts on investments is far easier to gauge.

Meanwhile, compared to last year, the volatility of U.S. stock options is relatively higher, indicating that investors are taking a defensive stance. However, derivatives professionals say there is little evidence that this is primarily due to the election. Instead, options trading is mainly driven by recent catalysts, such as economic data reports, heightened volatility in Asian markets, and geopolitical tensions. That said, there are still ways to trade around the election. A Republican government is typically viewed as favorable for heavily regulated sectors such as finance and healthcare, while Trump’s tough stance on trade and tariffs could spell trouble for Asia-Pacific markets. Energy is another popular election trade, with a Trump victory seen as beneficial for traditional energy producers, while a Harris win is expected to favor the clean energy sector.

Trading Instruments:

U.S. Dollar Index (DXY)

The latest U.S. September retail sales growth shows that the economy remains on track, which may not prevent the Federal Reserve from cutting rates next month, though the extent of the cut is likely to be reduced. Solid income growth, ample savings, and strong household balance sheets are supporting consumer spending and the overall economy. Although the labor market momentum has slowed, layoffs remain near historic lows, supporting wage growth. The Fed’s goal is to achieve a soft landing, where the economy slows just enough to lower inflation but avoids a recession. The Fed is likely to soon shift from restrictive policies that are curbing economic activity to a more neutral stance. This would provide more room for growth while still keeping inflation in check.

Trend Analysis:

The U.S. Dollar Index has been rising for several consecutive days on the daily chart, without any significant pullback. In addition, the MACD lines and volume bars have entered overbought territory and are starting to contract. Due to clear resistance at the upper pressure zone and the accumulation of significant profits from previous gains, a correction may follow. As the U.S. economy remains strong, the possibility of a sharp rate cut is low, and further upward movement of the Dollar Index cannot be ruled out.

Gold

Gold prices have been rising, driven primarily by a weakening dollar and increased demand for safe-haven assets, especially against the backdrop of heightened geopolitical tensions and rising global economic uncertainty. Investors are reallocating portfolios ahead of the November 5 U.S. election, further supporting the demand for gold as a safe haven. Additionally, the market is widely betting on a 25-basis-point rate cut by the Federal Reserve at its November meeting, with FedWatch tools showing a 90% probability of such a cut. Furthermore, although global central bank demand for gold has eased from its early 2024 highs, it remains on a positive growth trajectory, with emerging market central banks accounting for 70% of net purchases by global central banks.

Trend Analysis:

Gold is attempting to break through the $2,700 resistance level on the daily chart, with the MACD lines and volume bars suggesting that the bullish momentum is accelerating. It is possible that positive price trends will emerge in the coming days. However, due to overbought conditions, strong selling pressure is expected around the $2,700 level. As long as gold fails to break through this level decisively, it may enter a consolidation phase or experience a pullback.