Snap Election

The U.S. Senate races being held tomorrow have my undivided attention. And markets are about to snap out of their complacency.

Like the digital world we live in, this is a binary event, with the Democrats being the "1s" and the Republicans the "0s". Control of Congress and the consequent fiscal policy agenda hang in the balance. There is an economic fork in the road and it's in Georgia.

Faced with this uncertainty, sellers came out of hiding yesterday. Stumbling out of the gate is never a great way to begin the year. Last month, markets were held up by year-end window dressing and FOMO thinking. Investor complacency is now at dangerous extremes. That sanguinity is quickly giving way to a sobering reality of policy uncertainty. The post-Trump era will have a fair share of that. And should we get a contested outcome and messy recount, don't expect markets to take that well either.

Is it fiscal largess and their inflationary impulses offered by dual Democratic wins? Is it more stalemate and acrimony like we have witnessed for a decade or more, should the GOP hang on to one or both seats? Those polar opposite choices have been set before us. There is no way to know in advance, but holding a lot of dry powder seems a prudent position this morning.

The consensus trade of Value over Growth also hangs in the balance. It is obvious that the liquidity currently being provided by the Fed is disproportionately being channelled into the Growth segments of financial markets. That alone is not going to help the lagging cyclical stocks that are now favoured by many forecasters. Fiscal spending, especially short term stimulus in the form of income support, is the main determinant of the success of the now-popular "rotation" trade. A full economic recovery is looking like a 2022 event now, given the slow pace of vaccine distribution. Twelve months is a long time to wait.

Should the election outcome result in a Republican-controlled Senate, you can kiss the value/commodity trade goodbye for the near term. I don't expect the current mild sell-off to cascade into a full correction just yet, just a bit of profit-taking. This would be only natural given last year's melt-up finish. The play here is to watch for the on/off switch being thrown in Georgia. The high levels of speculative positioning in commodities is a troubling aspect of the last month's run. Now gold is signalling a resumption in its bull market run having broken out of a consolidation pattern yesterday. Copper is looking stretched. I look for a pull-back to the $3.10 level.

GOLD

COPPER

And even if the Dems pull off a twin killing, the initial euphoria won't last long. Their fiscal agenda won't immediately kick into high gear until the back half of the year. Globally, metals demand usually wanes at the start of the year, as Chinese New Year shut-downs slow production schedules. Remember, they love to mess with the spec players, who are now at record longs.

One outlier in the current complacency is a potential dust-up in Washington this week, as the 'Great Orange One' lurches back on forth in his Presidential death-throes. His appearance this week at the Proud Boy rally should be fun. We will have an angry mob of gun-toting rednecks being egged-on by a delusional narcissist facing 300 National Guardsmen who don't get to fire their weapons very often.

What could possibly go wrong?

I kinda like cash as a strategy while I listening for a snap.

Risk Model: 4/5 - Risk On

Our slow-footed model seems as blithely complacent as the market. Although the only sell component is the 200 dma rule (XIU> 10% above), the other components are fading quickly and could give a sell this week on any continuance of their short term trends.

For example, watch for triggers from Cu/Au or 3mo Vix.

Shorts would work well if either occurs.

Cu/Au

3 Month VIX