How the Presidential Election is Playing Havoc with Stock-Market Volatility
The current political climate, particularly as we approach the presidential election, is sending shockwaves through the financial markets. The stock market is grappling with increased volatility, particularly as signaled by the VIX index, leaving investors scrambling for strategies. Let’s break down the current situation and identify the implications for investors who adhere to traditional financial principles.
The State of the S&P 500 Index
Despite the tumultuous political atmosphere, the S&P 500 Index (SPX) has managed to shake off some recent negativity and hit new all-time highs. This is notable considering that market breadth—the number of stocks participating in the rally—has not been as robust. In technical analysis terms, this divergence can be viewed as a bullish confirmation for the index itself, though some caution is warranted. Traders should watch the critical support level around 5,670. A close below that mark signals potential trouble ahead.
On the upside, the modified Bollinger Band (mBB) target remains at approximately 5,840 and is on an upward trajectory. The McMillan Volatility Band (MVB) buy signal stays intact, indicating market resilience as it strives to reach that target. However, when evaluating the equity-only put-call ratios, we see a decline, suggesting an overbought condition as put buying is lagging and call buying is rampant. But until a tangible rollover occurs, signaling a resurgence in put buying, these ratios alone do not dictate a sell-off.
Market Breadth and New Highs
In recent trading sessions, breadth indicators have grown weak. The confirmed breadth oscillator sell signals for both the “stocks only” and NYSE breadth oscillators serve as cautionary signs, showing that despite SPX’s rise, the underlying strength is fragile. The recent surge of SPX—gaining 56 points one day and then setting a new high with an additional 40 points—only produced modestly positive breadth, further supporting the notion of a negative warning.
Interestingly, cumulative volume breadth (CVB) continues to achieve new all-time highs, providing strong confirmation of SPX’s upswing. The fact that new highs on the NYSE have consistently outnumbered new lows is another solidly bullish indicator. Still, we keep a vigilant eye on these metrics, as any signs of weakness could spell an end to this optimistic outlook.
The VIX and Volatility Trends
The VIX—the market’s volatility index—has been trending upwards, influenced by what can be aptly described as the “election bump.” As Election Day approaches, it is not uncommon for VIX to rise in anticipation of potential aftershocks on the market. Notably, this trend has persisted because VIX remains above its 200-day moving average, hovering just above 15. However, it is in the “spiking” mode, thus raising the likelihood of confirming a spike peak buy signal shortly. This signal necessitates that VIX close at least three points below its most recent high of 23.14, established on October 8.
Looking at derivatives, the structure remains bullish for stocks. The typical term structure slopes upward, but October and November VIX futures prices are elevated due to expectations of heightened market fluctuations post-election. For steadfast investors, maintaining a core bullish position is advisable as long as SPX holds above 5,670. Furthermore, rolling in-the-money positions can ensure that partial profits are locked in as new confirmed signals appear.
Market Insight: The “Election Bump”
The term “election bump” encapsulates the distortive effects of an election on the VIX futures landscape. As the market nears Election Day, the October VIX futures soar above November and December futures. The heightened prices for October stem from the SPX options tied to the post-election period. Historically, significant events yield anticipatory volatility spikes; however, it’s crucial to judge whether this sentiment accurately reflects genuine market conditions.
We only began to see significant movement in VIX calculations as the election drew near, particularly within the last month when options expiration dipped into the equation. The disparity between nine-day VIX (VIX9D) and the VIX itself highlights the gravity of the so-called “election bump,” serving as a reminder that while the current environment may suggest high risk, discernment is vital in our approach to trading and investment.
Conclusion
As we navigate this turbulent intersection of politics and the stock market, it’s essential to remain level-headed and data-driven. While the S&P 500 showcases resilience, the underlying breadth and volatility indicators caution against complacency. With elections looming, let’s keep our sights set firmly on traditional financial principles, ensuring that our investment strategies remain judicious and informed. Only time will tell how this political cyclone will ultimately impact our markets, but being prepared is half the battle.
