VIX, the CBOE S&P 500 Volatility Index, and VIX ETNs spiked higher today as the world’s most sophisticated players eye tomorrow’s election.
Much has been written about which sectors and stocks will benefit from the outcome of tomorrow’s election, however, participants in the CBOE options volatility world are placing their bets on the likelihood of increased stock market volatility and potentially lower prices for equities and higher prices for VIX ETNs in the days ahead, regardless of who wins the Presidential election. DIA, SPY Election Despair in 2013 No Matter Who Wins
On election eve, VIX popped to 18.42, still well below its long term average of the mid-20s, however, well above recent lows in the mid 14 range.
chart courtesy of StockCharts.com
In the chart of VIX above, we can see how the index has made a recent sharp reversal and now resides above both its 50 and 200 day moving averages which would anticipate higher volatility, higher VIX ETN prices and lower equity prices ahead. VIX has rarely had a year like 2012 in which it hasn’t traded above 30 which makes one wonder if higher prices for VIX aren’t ahead since it tends to be a mean reversion type of index. How High Might VIX Spike.
Also, VIX ended Monday’s trade in “backwardation,” a term which means that shorter term futures contracts are more expensive than longer term contracts and this is a situation that has only occurred on three previous occasions. This means that market players see more volatility in the short term than over periods beyond thirty days from now.
Another example of short term nervousness was the skew in favor of VIX call options today on the CBOE with more than 65% of options trades being calls which represent investors betting on higher prices for volatility and lower prices for equities ahead. Today’s action was also unusual in that equities, VIX and VIX ETNs all rose on the same day rather than moving inversely to one another in their usual fashion.
This indicates that the most sophisticated traders in the world are betting on more volatility, higher VIX prices and lower equity prices ahead.
Furthermore, VIX has been well below its recent averages which historically would indicate that President Obama will win re-election. Bloomberg
With volatility at levels comparable to today’s, incumbents tend to be favored going back as far as 1900. Plus, incumbents tend to win reelection when the stock market has had a positive year as it has so far in 2012. However, the major indexes have yet to surpass their all time records which would tilt the odds in favor of an Obama defeat. Also, no President has every been re-elected when unemployment is higher than 6%. Bloomberg
Bottom line: In a few short hours the outcome of the Presidential election will be known and investors will be digesting what it means for their portfolios. However, technical indicators and the behavior of VIX point to higher volatility, higher prices for VIX ETNs and lower equity prices ahead. Seasonal elements show us that the first year of a new President’s term is typically negative for stocks, and the uncertainty of the rapidly approaching fiscal cliff could also lead to higher volatility and lower stock prices ahead. Added all together, these factors point in the direction of higher volatility and lower stock prices, particularly in 2013, no matter who wins the 2012 Presidential election.