The data are more placid than the people.
When next we write, elections will be over. We may still be waiting for the data but we’ll have had an election. Good data is everything. Story for another time.
The story now is how’s money behaving before The Big Vote? Depends what’s meant by “behave.” The Wall Street Journal wrote for weeks that traders saw election turmoil:
-Aug 16: “Traders Brace for Haywire Markets Around Presidential Election.”
-Sep 27: “Investors Ramp Up Bets on Market Turmoil Around Election.”
-Oct 3: “Investors Can Take Refuge from Election Volatility.”
Then the WSJ’s Gunjan Banerji wrote yesterday (subscription required) that volatility bets have turned bearish– now “low vol” rather than higher volatility. Markets see a big Biden stimulus coming.
It’s a probable political outcome.
The shift in bets may be about prices, not outcomes. When there is a probability somebody will pay you more for a volatility bet than you paid somebody else for it, bets on volatility soar. It hits a nexus and reverses. Bets are ends unto themselves.
On Oct 26, S&P Global Market Intelligence offered a view titled, “Hedging costs surge as investors brace for uncertain election outcome.”
It says costs for hedges have soared. And further, bets on dour markets are far more pronounced in 2021, implying to the authors that the market fears Covid19 resurgence more than election outcomes.
Two days, two diametric opposites.
There’s the trouble. Behaviors are often beheld, not beatified.
One of our favorite targets here in the Market Structure Map, as you longtime readers know, is the propensity among observers to treat all options action as rational. The truth is 90% of options expire unused because they are placeholders, bets on how prices change, substitutes. They don’t mean what people think.
S&P Global says the cost of S&P 500 puts has risen by 50% ahead of the election. Yet it also notes the open interest ratio– difference between the amount contracts people want to create versus the number they want to close out– is much higher in 2021 than it is around the election.
The put/call ratio can be nothing more than profiting on imbalances. And what behavior is responsible for an imbalance, valid or not? Enter Market Structure Analytics, our forte. You can’t look at things like volume, prices, open interest, cost, etc., in a vacuum.
Let me explain. Suppose we say, “There is a serious national security threat from a foreign nation.”
Well, if the foreign nation is Switzerland, we laugh. It’s neutral. Has been for eons. If it’s China or Iran, hair stands up.
Context matters. I said the behaviors were more placid than the people. I mean the voters are more agitated than the money in US equities.
Standard deviation– call it degree of change– is much higher in the long-run data for all behaviors, by 20% to more than 130%, than in October or the trailing 30 trading days back before September options-expirations.
Meaning? Eye of the beholder. Could be nothing. Could mean money sees no change.
Remember, there are four reasons, not one, for why money buys or sells. Investment, asset-allocation, speculation, taking or managing risk. None of these shares an endpoint.
Active money is the most agitated and even it is subdued. But it’s sold more than bought since Sep 2. I think it means people read the stuff other people write and become fearful. It’s not predictive.
The other three behaviors show diminished responsiveness. Yes, even risk management.
I could read that to mean the machines that do things don’t see anything changing. The machines may be right in more ways than one! The more things change, the more they stay the same.
One thing I know for sure. I’ve illustrated how headlines don’t know what’s coming. It’s why investor-relations and investment alike should not depend on them.
The data, however, do know. And every investor, every public company, should be metering behavior, be it volatile or placid. We have that data. I just told you what it showed.
Now, we’ll see what it says.
Oh, and this is placid to me, the Yampa River in CO, anytime of the year, and this is Oct 27, 2020.