Romney’s Intrade Stock: Ready for a Bull Run?

What if there were a magic market that could foretell the political future – a digital trading floor filled with expert investors, all betting big bucks on election contracts, forward-looking “stocks” whose prices gave exact odds on a cloudy campaign?

There isn’t. But there is InTrade, an online betting ring that does a decent job of aggregating conventional wisdom. For the uninitiated, InTrade is a website where you can trade financial contracts on whether an event – say, a Romney victory – will or won’t occur. If it does, the contract pays out $10; if it doesn’t, $0. So, for example, good news or poll numbers for the “Romney to be elected” contract will boost its trading value, and vice versa. That price loosely correlates to the probability of that event occurring: above $5, and the market thinks Romney has an above-50% shot at victory.

InTrade is not an invisible-hand driven oracle. It doesn’t host enough trading, its betters aren’t experts, and it discourages short-selling, leading to inflated odds. But as a tracker of election optics, InTrade can be a reliable quantifier of the rise and fall of political fortunes.

We’ve all heard the conventional wisdom on the Romney campaign’s past month: flatfooted and disorganized, reeling from critical coverage of offshore accounts and unreleased tax-returns, and desperately culminating in the Hail Mary Paul Ryan pick.

But, as they say on Wall Street, what about the core financials? For a hard look at Romney’s InTrade data, I turned to Sam Turner, director of large cap portfolio management at Riverfront Investment Group and a certified technical analyst. Technical analysts are hardcore chart gurus, who predict market trends based on graphs of recent security prices. If you can predict trends in InTrade’s 2012 election market, you may be able to get ahead of public opinion. In this market, breaking $5 means a strong chance of winning the White House.

Turner took a long look at a month of prices on InTrade’s “Mitt Romney to be elected President in 2012” contract. (At the time, he didn’t know what security he was looking at – to rule out subconscious bias, I blacked out the name of the contract.) Here’s his financial analysis (click to expand):

The trading data certainly reflects a difficult month for the Romney campaign. The last two weeks of July saw a dramatic slide from a monthly 42.5 high (that is, $4.25) to a treacherous 38 ($3.80) low, as Mitt faced mounting criticism. The month began with muckraking Vanity Fair and AP reports, poring through Romney’s labyrinthine and often-opaque offshore holdings. Then came awkward questions about the length of his tenure at Bain Capital, kicked off by July 10-13 reports that Romney didn’t leave the venture capital firm in 1999, as he now claims. In the following days, InTrade betters started selling his contracts in droves, as some critics accused the candidate of felonious misreporting to the SEC. The peak in selling pressure came on July 19, coinciding with Ann Romney’s unfortunate “we’ve given all you people need to know” tax returns declaration.

But for all this bad news, Turner sees serious growth potential in the Romney stock. As July drew to a close, Romney began to rally. Lower volatility and increased volume indicated growing investor confidence, perhaps a result of hard Mitt hits on false Obama ads, as well as growing veep speculation. As the graph shows, Romney’s July 26 overseas trip and alleged Olympics gaffes barely dented the rally. “When volume increases after a sell off, you tend to get persistence,” Turner says. “This will be bullish in the weeks ahead.” In short, Turner expects that Romney will beat his 42.5 high in the coming month. The “accumulation behavior” spells a good chance of Romney’s previous high getting “taken out” in the next two weeks. The unveiling of running-mate Paul Ryan on Saturday, August 11th, lit that accumulated powder, pushing the contract up to today’s two-week high of 40.5.

Looking further forward to September, the outlook is still bullish – in fact, extend our analysis, and there’s a distinct possibility that the Romney contract breaks 50 by November. In this market, that means you win. “Extend a channel and you get over 50 by September, assuming trend persists,” Turner adds, although he admits that’s “more of a guess” than the short-term technical assessment.

Coming from a Wall Street quant – one who didn’t even know he was reading political tealeaves – this analysis should cheer a potential Romney investor. Or Romney himself.

But what about President Obama? How might his campaign fare amid a refueled Romney rally? To get a sense of the incumbent’s prospects, we took a longer view, analyzing the “Obama to be reelected” contract over all of 2012. Here’s his InTrade chart:

Turner sees in the data a classic technical pattern: the triangle. But he also sees this zig-zag price movement compressing, and soon to break. “It will eventually get broken on the upside or the downside,” he said. “Odds are that there’s an apex of the triangle going into September.” And when Obama’s odds break, they’re going to break fast. The triangle is “like a rubber band wound up in a toy propeller,” Turner says. “Once you release it, it spins a lot faster than the energy you put in.”

But of course, the Obama contract is complementary to Romney’s, which we already expect will break to the upside going into September and October. After revealing the nature of the two stocks to Turner, his analysis grew more confident. “If we’re expecting that the path of least resistance for Romney is up, my guess is that the Obama triangle breaks to the downside going into September and October of the election.” If Obama’s swinging contract breaks low, there’s a strong chance he will go below 50.

That bad news for the president corresponds to past market trends: the fate of the incumbent tends to follow the S&P 500. According to analysis from Riverfront and others, the S&P should grind higher into September, but start lagging October and November. “9 times out of 10, the incumbent rides with the S&P,” says Turner. Putting it all together, “you would expect Romney’s contract to break to the upside with a downside break to the Obama triangle.”

InTrade prices aren’t magic numbers, and shouldn’t be quoted as gospel. But by distilling thousands of headlines, polls, and spin cycles into simple dollar bets, its stocks compress a lot of conventional wisdom – and may even indicate how that wisdom stands to change. And, as the above charts show, the famously finance-savvy Romney may see his own stock rise in the weeks and months to come.

Despite a bad month for Romney, the market’s behavior indicates that the race can and will get closer in the fall. For all the prognostications of armchair calculators, who see Obama running away with the race, the money tells a much different story.