If history were to repeat, we are set to see a rise on the bourses as during four out of five of the last election years, we have seen a rise in Nifty in the 7 days after election results, with the least of the gains being 2.74%. See data in table below. But history rarely repeats, does it? At least not in the same fashion, or when we expect it to. Well, look no further if we are searching for the reason why history is likely to be challenged; just look at the odds at stake. The ruling party is aiming for a record seat count never seen before, while the opposition is confident of a surprise, which is difficult to add up on the face of it.
Nifty 50’s performance shortly before election results
| 2019 | 2014 | 2009 | 2004 | 1999 | |
| 7 days | 4.60% | 7.07% | -0.33% | -4.57% | 0.37% |
| 30 days | 0.62% | 6.38% | 18.11% | -2.23% | 4.15% |
| 6 months | 10.44% | 15.09% | 20.71% | 0.72% | 31.95% |
Nifty 50’s performance shortly after election results
| 2019 | 2014 | 2009 | 2004 | 1999 | |
| 7 days | 2.99% | 2.74% | 12.12% | -5.98% | 5.74% |
| 30 days | 0.62% | 5.41% | 19.16% | -14.05% | -2.11% |
| 6 months | 2.86% | 17.78% | 37.32% | 15.07% | 8.92% |
VIX before and after election results
Nifty’s price performance (normalised) before and after election results
VIX at year’s peak; Nifty just doesn’t care
One of the main reason why we feel historical trends stand to be challenged, is how Nifty and VIX have behaved. For one, VIX has not yet risen as much as it did in the last two election years. But in relative terms, VIX has jumped the most, as it rose from a near record low of 10 to 20 and above, thus registering a 100% jump in the volatility indicator. This sharpness in rise in VIX was not seen in the previous election years though the absolute value of VIX was significantly higher. Secondly, while the run up to elections saw rise in Nifty in the last week before results, it happened in a falling VIX environment in 2019, but now the rise in Nifty to record peaks has unfolded in a high VIX environment, with VIX holding almost steadily above 20 all throughout the second half of May.
Everything is not the same
Three important aspects which has probably shaped VIX and Nifty’s behaviour in the run up to election results are yet to be given weightage while predicting the performance after results. One is the halving of Nifty’s lot size from 50 to 25. This has probably led to tighter bids asks, thus avoiding the rush to far Out of the Money (OTM), and thereby a softer VIX than what might have been. More importantly voting results are scheduled for 4th of June, which is a few days after expiry of May’s monthly contract, and a couple of days ahead of June’s first weekly contract expiry. June’s monthly contract expiry is on 27th. Thus, we have three active contracts on which traders have tried placing their bets, but none with proper running period to make optimum use of the big event. Lastly, weekly options on Nifty were just launched in 2019, and the depth and dynamics of options market today is certainly at different level giving traders a breadth of alternatives to hedge as well as place directional bets.
These aspects raise the possibility of a break away from historical trend. So, the contrary bets for the week after results announcement are:
- A higher VIX for a longer time, unlike the usual collapse of VIX immediately after an event
- Wild swings in Nifty for an extended period, unlike the usual steep fall or steep rise immediately after the event.
