In June, the Brexit vote rocked the markets. This week, the outcome of the 2016 Election will do the same. Both are binary events with extreme outcomes that will trigger emotional responses. But that’s about where the similarities end.
Remember the worry over Brexit prior to that critical vote? Of course not! There was none. Leading up to the vote, no one was convinced voters would push the referendum through. In fact, lawmakers thought it was a joke, and many ridiculed the entire process (until it came back to haunt them).
Volatility was strikingly low leading up to the vote and few traders or investors were buying protection. But then the Brits got their wish, and their currency (and the markets) went into a tailspin for a few days. Those who were bullish on the outcome or remained completely complacent paid the price in the short term.
Of course, just three days after the vote, market volatility corrected. Not only did markets recover all of those losses, they continued on a deep run toward all time highs (around 2,200 on the SPX 500).
Compare that to the run up to the 2016 Election, and you’ll be hard pressed to find a trader who’s being complacent. Fear has been priced into the markets. The markets have pulled back sharply, and the VIX (volatility index) has spiked beyond 20%. With sentiment as poor as can be (the fear gauge index is at 14, which is near extreme bearish readings), there is a good setup for markets to turn higher.
But first, the explosion in volatility is going to have to play out before a return to “normal” behavior. Hold onto your hat – and maybe your seat too. It’s going to be a bumpy (and likely painful) ride this week.
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