Opinion – Grain in Grain: Two lessons from the first market day after the elections

Expectations were high for today. It would be the first day of market trading after the elections. Hard to believe anyone expected it to happen exactly as it did. However, for more experienced investors the result is typical and reflects two lessons that the investor should always consider.

The evolution of the market throughout the month, in part, signaled what the day would be like.

At the beginning of the month, the result of the first round showed that Bolsonaro’s chances were better than expected, as the difference between Lula and Bolsonaro was smaller than in the polls.

As a result, the market improved. The Ibovespa rose 9% and the dollar dropped 4.5% until the third week of the month. Realize that the best in the Brazilian market meant that Bolsonaro’s victory was not expected

However, the international market also helped a good part of this movement. The S&P500 is up more than 4.5% over that period. Therefore, if our stock market only followed the international market, its rise would be 4.5%.

In the last week of the month, some events reduced Bolsonaro’s probability of victory and the Ibovespa fell 4.5% and the dollar rose 2.6% last week.

Note that the adjustment for Bolsonaro’s victory was carried out in the last week.

Here comes the first lesson.

The market usually anticipates movements. Considering the polls and prices in bookmakers, the odds of the candidate Lula winning was around 70% to 80%.

Thus, much of the price movement to adjust to this scenario had already occurred. It was carried out in the last week.

Remember, your investment should always consider your expectation in relation to what the market already embodies in the negotiated prices.

The second lesson comes precisely from what happened this morning.

What happened today?

The Ibovespa opened falling more than 3% and the dollar rising more than 2%.

Still in the morning, the signs were reversed and the Ibovespa closed with a rise of more than 1.3% and the dollar with a fall of more than 2.5%.

So be very careful when deciding to trade in the first trading hour after events.

At the beginning of the day, usually, the desperate and the daring arrive first. Both are willing to execute the trade without worrying about price.

Therefore, there is a great risk that the price is wrong. In other words, the market is over reacting. Therefore, your critical analysis must be redoubled at this point.

So, be careful when trying to trade events soon after they’ve already occurred.

You can take two risks in doing this. First, the market has already priced the event. Second, if you negotiate early in the day, join the desperate and negotiate at an unfavorable price.

Michael viriato is an investment advisor and founding partner of Investor’s House

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