Traders Brace for Volatility as Polls Tighten

The gap between polling results and odds of success for candidates has decreased in recent days, making it more likely that the US stock market indices will experience higher than typical volatility.​

The Real Winner for Traders

According to the latest surveys from pollsters completed over the weekend, a close result appears most likely with millions of people already voting. The average of the polls is well within the margin of error, showing Republican Donald Trump leading Democrat Kamala Harris by just 0.1% in the popular vote and 0.8% in key "battleground" states. Polls also indicate Republicans gaining Congress by narrow margins of two seats in the Senate and a 0.4% lead in the generic House ballot.

Given the uncertainty, markets are pricing in increased volatility as the most probable winner. Options markets show implied volatility for the benchmark S&P 500 index of up or down 2.5% depending not just on the election outcome but also on whether the results provide clarity on Wednesday or continue with counting and legal challenges dragging on for several more days. The call-put ratio spiked to 1.61 recently, its highest level since August 5th, when the market briefly collapsed following surprisingly weak US employment data for July. In usually calmer currency markets, implied volatility has risen to its highest since the minor banking crisis in early 2023 for the EURUSD, while for the British pound, it is at its highest since March.​

Indications for the Options

Traders and political pundits closely examine every sign that the election may shift in one direction or another. There have already been some reasons to suggest that this election will not follow the pattern of previous votes. For example, reports show swing states with record early voter turnout numbers. Also, over 75 million people have already voted before election day. Analysts have pored over the voter data to understand it as both campaigns claim signs that they are doing well. Typically, Democrats participate more through early voting. However, the early data for this election suggests that Republicans are voting early at higher rates than in the previous election. While turnout from the party's supporters is important, it alone does not determine the outcome, as undecided or independent voters hold the margin of error in the polls.

A lot of attention was given to a poll released over the weekend suggesting that Harris was polling higher than Trump in Iowa. Iowa usually votes Republican, and earlier polls showed him winning, but betting odds tightened ahead of the weekend. This followed disappointing employment data and the fading of the view that the President's policies boost markets. Beyond the short-term volatility, analysts point to historical trends suggesting that stock markets tend to rise after elections regardless of who wins. The Fed will announce its interest rate decision two days after the election and is expected to cut rates. So, the markets may return to responding primarily to economic data.​

SPX500 Sitting by Support

The S&P 500 index may see a short-term pullback to around 5670 and 5400 following an impulse move to the peak of 5930. If downward pressure continues, stronger momentum may take the index as low as 5120 points, bringing it closer to an official 10% correction to the 5000 mark. Conversely, if 5750 acts as short-term support, SPX could bounce back towards 5930, raising the possibility of prices extending higher to the 6000 handle and ultimately round levels beyond, such as 6250 and 6500.

Source: SpreadEx / SPX500

The US stock market is expected to experience higher volatility due to the tightening polls between candidates and the decreased gap between polling results. Options markets imply a 2.5% volatility move on either side of the S&P 500 depending on whether election results provide clarity on election night or continue with legal challenges and more uncertainty. As traders closely watch swing states for signs of which candidate may gain an advantage, history suggests that the stock markets tend to rise after elections regardless of the outcome.