The Pre-Election Period Starts Today - Market On Open, Monday 15 July
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Worries, Rising
by Alex King
Normally what happens in advance of an Event in financial markets is that worries rise into the Event, then once the outcome is known, worries settle down. Worries rising means risk asset prices down, implied volatility up therefore index puts expensive to buy, and Vix up; worries settling down means risk asset prices up, realized volatility < implied volatility, leading to a drop in put prices and in the Vix.
Now, I don’t know if we are going to see this happen into, through and out of the Presidential election but for now I suspect that we are. I am not sure it matters all that much to markets which of the two parties win the race - markets have risen under GOP and Democrat Administrations and I think that will be true in this case too. Anxiety levels will rise on both sides into the election with each side decrying the End of Days if the other side gets in - and most likely whoever wins it won’t be the End of Days, hence the potential for rising volatility on the way in and collapsing volatility on the way out.
Right now, equities continue to climb, the 10yr yield is rising too, meaning bonds are selling off some, the Vix is up a little but not much. So no great worry in sight at this present time. As always I believe it is good to react, not to anticipate, so I myself remain heavily net long with just a few short hedges in place; if the trend changes I intend to add to those hedges, and if the market moons I will eat the minor loss on those hedges. No need to decide right now - price will lead the way.
So Let’s Get To Work
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