Volatility Could Be About to Jump Ahead of the Election

Jonas Elmerraji, CMT

Grab your popcorn – the first presidential debate is tonight, and no matter which side of the political aisle you’re on, it’s sure to be a doosy.

Meanwhile, the data suggest that the real volatility to watch between now and election day might be in the market.

According to a study of the VIX Volatility Index over the last six presidential elections from my friend Michael Sacchitello at Extract Analytics, we’re entering a period that’s consistently ushered in higher volatility during election years:

We’ve seen an upturn in the VIX since August, as uncertainty about the staying power of 2020’s equity rally has increased. But while volatility is a little more expensive than it was this time last month, the takeaway is that it could get more expensive over the next month.

If the pattern holds true in 2020, then we should expect an increase in volatility from the first debate up until election day.

Those results look especially consistent between weeks 2-5 after the first debate – none of those prior periods saw a drawdown in the VIX during that three-week stretch.

Considering the VIX’s negative correlation with the S&P 500 on short timeframes, stocks could be in for a grind between now and Halloween.

For traders who want to act tactically here, Extract’s Sacchitello is suggesting getting long vol this week:

"On average, even when the 2008 outlier is removed, the VIX trended higher and did not peak until the week of the election, before relative calm was restored and volatility began to contract again."

It's interesting stuff -- for more details, take a look at Extract Analytics’ Morning Market Squeeze from Tuesday.