Trade the Congressional Effect: How To Profit from Congress's Impact on the Stock Market

Summary

“No man's life, liberty, or property is safe while the legislature is in session,” said Mark Twain.

The Congressional Effect approach should allow you to shield a portion of your assets from government news, and trade more based on the predictable commercial news cycle. When you think of Congress and realize that there are 535 issues entrepreneurs, it is easy to imagine that almost every day the legislature is in session is a day where there may well be legislative risk. No individual congressman ever feels responsibility for the market's going down, but the cumulative impact of their aggregate actions results in vast unpredictability and volatility.

One way to systematically reduce legislative risk is to have little or no equity exposure just on the days Congress in session. This can be achieved by buying S&P 500 Index analogs such as the SPDR ETF or S&P 500 Index futures only on the days Congress is out of session. Alternatively, you can have a portfolio that is both long and short these S&P analogs, where the short position is eliminated on days Congress is out of session. By avoiding equity exposure when they are in session, you are less likely to suffer short-term “legislative risk” in the mix of news affecting stocks that particular day. The more predictable and stable macroeconomic news and the industry-specific business news is more likely to move the market positively because that news is either largely created and communicated by CEOs who have a vested interest ...