The situation is increasingly turning more dicey as markets are shifting into pre-panic mode with only six days to go until an almost assured presidential election train wreck. You wouldn’t really think so just looking at the price action over the past week but under the hood pre-election hedging activity has left tell tale signs of a busy winter in the making.
With the presidential elections drawing near the worrywarts are beginning to hedge their bets, may this be in real life by boarding up your storefront or virtually/financially by protecting your assets from a potential wipeout. In normal times – meaning pre 2020 – investors and speculators would usually look at ways to protect against election day whipsaw. This is what we saw in 2016 for example where conflicting reporting plus misinformation caused equities to push wildly in both directions. However everything I am seeing points toward this time being different.
I watched a post debate panel this morning and the one big take away after hearing comments from undecided voters from both sides of the isle was that people are sick and tired of the non-stop drama. Exhaustion runs high and if there is one sentiment that everybody shared is that they just want to get back to work and their respective lives for that matter.
With another ‘stimulus’ bill inching its way through Congress the Dollar has taken yet another tumble while 10-year treasury yields jumped 0.81% in anticipation. I’m just thinking out loud here but wouldn’t it be more honest to simply call it the ‘Big Tech Pump Up’ bill and then to transfer the money directly into Amazon’s corporate account. Just the other day I was talking about shorting big tech if Trump gets his 2nd term but now I am not so sure anymore.
For all intents and purposes 2020 has already been the most contentious and violent U.S. election season in living memory. With a nation in a state of a cold civil war one would assume that the financial markets would take note. And under the hood they did indeed respond by keeping implied volatility elevated throughout the year. However, with the exception of a much overdue correction earlier this month we currently seem to be in a pre-election holding pattern. What should we make of that and where are we heading next?
The past four sessions turned into a wild ride but as of the Friday open the SPX has been getting nowhere fast and finds itself almost exactly where it started the week. This puts us in a very interesting situation for one main reason: With a monthly and a weekly contract expiring this morning, a 70 handle EM range, and quite a bit of gamma risk there is potential for a significant move today.
Financials kicked off the final earnings season of 2020 and as a card carrying manic market megalomaniac it is incumbent on me to start parsing for potential IV squeeze victims. Much to the chagrin of some of you directional cowboys that is my favorite play but I would be remiss to not point out that implied volatility is not the only way to play earnings. But let’s take things from the top by looking at the overall market:
Something pretty interesting happened over the weekend as I was cruising Airbnb for potential weekend get-aways here on the Iberian Peninsula. Since I’ve always been a stingy bastard I’m not ashamed to admit that I was pretty perplexed by the exorbitant prices that I simply couldn’t square with the glaring lack of demand in tourism Spain currently is experiencing. Part of that of course is due to recurring and erratic COVID-19 lock downs and various other entry restrictions here in Europe. But some of it is also purely self-inflicted as excessive price gouging over the past years already started to be a topic of contention among visitors back in 2019.
It’s Friday morning before the open and the SPX is pinned right at the edge of the weekly expected move (EM). The ES futures pushed a little bit higher overnight but are now treating water awaiting further instructions. Which makes it a textbook example of the very phenomenon that has driven equity markets to the edges of the weekly EM since the introduction of weekly options by the CBOE in 2016. But what exactly is causing this phenomenon, or market behavior in the first place?
In my Monday post I promised you a volatile week and judging by the past two sessions the market does not intend to disappoint. If you take what historically is already the most volatile week of the entire year, add a heaping of political brinksmanship, a controversial presidential election process, ongoing riots, burning cities, an impending release of classified information by the DOJ, and a healthy dash of good old fashioned MSM hyperbole, then you’ve got yourself a veritable tinderbox of market volatility just waiting to be unleashed.