UBS traders see a "combustible setup" for an S&P 500 rally after Tuesday's midterm elections. Davide Montoni, Americas head of institutional equity derivatives and QIS sales at UBS Securities, wrote that favorable seasonality and low hedge fund positioning could drive a year-end rebound. Technology stocks fell Monday, with the Nasdaq 100 dropping 1.4% into correction territory, down 10% from its October peak. The S&P 500 historically gains 1.9% in November since 1950, making it the strongest month of the year. Low net exposure from hedge funds could amplify gains if the market clears the final major catalyst of the US Midterms.
Markets have weighed the potential consequences of Republicans losing Congress, including uncertainty over policy and its implications for the AI buildout. A decisive Democratic sweep could weigh on financial stocks and data center companies. The S&P 500 Financials sector rallied 6% in October, leaving room for a tactical hedge. UBS recommends buying November 20 put options on the State Street Financial Select Sector SPDR ET F (XLF). Montoni also sees an opportunity in renewable energy stocks, where positioning has fallen to a one-year low. A Democratic victory could catalyze the sector, with light positioning allowing investors to rebuild exposure. Traders bought December call options on the Invesco Solar ET F (TAN) last week.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing