If the events that unfolded on Sunday, with FBI Director James Comey seeming to cancel any potential legal problems for Democratic presidential candidate Hillary Clinton, are any sign of what’s to come, investors should prepare for an extraordinary election day and post-election market.

The Waiting Game

It’s not difficult to get nervous before a big event and it’s clear that the election is likely to be a major market-moving event. I expect that waiting until Wednesday morning is going to be one of the most stressful experiences in the lives of many investors, especially if the market rallies into Tuesday. That’s because the overnight futures markets, as they did on Sunday night, will set the stage for what could be a dramatic open to the U.S. stock market once the election results are known late Tuesday and investors will have all night to worry.  

Of course, experienced investors know full well that being nervous serves no useful purpose. Instead, I am of the opinion that the election could present some significant opportunities on both the long and the short side, especially through option strategies. Thus, I want to use this weekly update to offer a sober analysis of the situation and describe our next set of moves once the election’s outcome is known.

Uncertainty is often the Prelude to Opportunity

Prior to Sunday, there was an overwhelming opinion that the stock market was about to crash. And while it may still fall significantly, as I point out in this week’s Technical Nuggets column, the stock market, prior to this weekend, was oversold. And since it sometimes seems the market’s main function is to make as many of us look as foolish as possible, anything can still truly happen, including an unexpected rally, or a nasty reversal no matter who wins. Thus, investors should be looking to protect current assets but also to look for profit opportunities if and when they arise.

So while my first goal currently is the preservation of our portfolio’s value, I am also looking to make the best of whatever the market presents. Thus, I have hedged our portfolios via options and inverse ETFs (see positions below) in order to blunt the potential damage to our long term portfolio holdings if there is a sudden and severe decline in prices after the election. I have also kept long positions in the portfolio, to capitalize on any up move that materializes. 

So far the use of low risk/high return option and option straddle positions – see portfolio section below for details – has left the door open for potentially significant profits. This safety-first approach has already paid off handsomely through the option strategy I recommended for shares of McKesson. But there is more work to do which is why I will be adjusting the portfolio further after the election with positions that reflect the most viable intermediate and long term price trends. 

The Expectations Game is only an Exercise

The take-home message is that no one knows what’s about to happen. Just ask anyone who thought FBI Director Comey was going to be busy reviewing emails for a few weeks before Sunday’s surprise announcement. Yes, the conventional wisdom – and the polls – now suggest that Mrs. Clinton will win the election. Thus, the expectation is for volatility to rise and the market to crash if there is a surprise win by Mr. Trump. But what could go wrong to derail this scenario? How about the following:

(1) What if neither candidate wins decisively? In case of an Electoral College tie the election goes to the House of Representatives, which may give Trump the win – although who knows what anyone would do at this point;

(2) And what if we have a repeat of the Bush-Gore legal battle after the 2000 election? This could add weeks or months of uncertainty to the political process and could have major economic and perhaps even defense related consequences;

(3) Another question is what happens if either candidate wins by a landslide? In a nation as polarized as the U.S. is at the moment, with fraud accusations flying high and about, anything is truly possible. The truth is that we could parse the questions forever, and still have no tangible answer.  

Expect the Unexpected

Let’s not fool ourselves; the past is not a guide to the future at this point because this is an unprecedented election full of intangibles. Indeed, the only recent guide to what may happen if Trump wins is the market’s response to the Brexit vote, which was a short-term market crash followed by a very profitable intermediate term rally. Yet, that analogy is a stretch given the Brexit situation has yet to be resolved. Even a Clinton win will bring its own set of questions, especially in the wake of all the Wikileaks e-mails and the potential for a blossoming of the FBI investigation into the Clinton foundation. And even that may be changing; as I wrote this article news was breaking that FBI Director Jim Comey had sent another letter to Congress in which he stated that the FBI had not “changed its conclusions” on the Clinton server. My point is that the conventional wisdom is full of holes, and every minute offers the potential for yet another so called “bombshell” or “surprise” and there is nothing to do but batten down the hatches and wait it out.

Prepare and Act Accordingly

The only way to approach the most unpredictable event of the past fifty years is to prepare and to respond when called to do so by designing, deploying and adjusting contingency plans as events unfold. As a result our portfolio is hedged, our eyes are open, and we are waiting for the next proverbial shoe to drop. More specifically, I recommend you review of every portfolio position on Monday paying close attention to sell stops and changes in recommendations if they are present. Aside from reviewing all open stock and option positions I recommend special attention to the following:

(1) We have two stock option straddle positions: Gilead Sciences (GILD) and Anthem Inc. (ANTM). The positions are stable but there has not been enough volatility in either underlying stock to deliver the all or nothing move that would deliver a large profit. As a result, I want to give these option positions time to evolve and respond to the election. I certainly don’t want to wait too long before making transactional decisions because the time premium is fading and waiting too long will cut into the trade’s value.

(2) Our SPY ETF Straddle is acting as expected, but is also waiting for the election to happen. I expect to close this position out soon after the election as well. 

(3) Our ProShares Ultrashort Biotech ETF (BIS) has delivered excellent gains of late and is seen some profit taking this Friday. I am monitoring this position carefully and will provide more information as needed. I have raised the sell stop recently and recommend reviewing this in your own holdings in order to preserve gains. I will have more about this on Wednesday.

(4) Our other positions either have sell stops or are designed with long term or specific goals in mind and will be addressed individually as events unfold, or should the market move to the point where we need to act upon them.

Portfolio Changes this Week:

Breakthrough Tech

ProShares Ultrashort ETF (NYSE Arca: BIS) – Raise Sell Stop to $35. Bought on 8/25/16 at $33.44. Closing price on 11/4/16 was $40.77.

Rollins Inc. (ROL) – Raise Sell Stop to $26. Bought on 2/22/16 at $27.38. Closing price on 11/4/16 was $30.36. Dr. Duarte owns shares in ROL.