What’s Behind the Surge in Stock Market Volatility? 3 Things You Need to Know

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The VIX is up 56% since our election call last week, once again the crowd was way off sides.
“Despite relentless attacks, Trump’s polling data has actually improved in the last two weeks.  According to the Media Research Center, over 90% of Trump media coverage over the last 12 weeks has been “Hostile”. We want to be long volatility (VIX) heading into the election.  If Trump’s chances surge from 25% to 65% back to zero the day after the 2016 Presidential election, there’s a substantial amount of money to be made long volatility, short the Mexican Peso (Long USDMXN) and long Healthcare sectors.”
From the Bear Traps Report, October 26, 2016

 

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Donald Trump and Market Volatility

Trump’s Surge in the Polls, Comes with Stock Market Volatility

We’d like to personally thank the thousands of journalists who were instrumental in helping markets mis-price risk.

trump-vix

RCP = Real Clear Politics average of over 15 national polls

VIX = The Chicago Board Options Exchange Volatility Index reflects a stock market estimate of future volatility

As you can see above, stock market volatility is directly tied to Donald Trump’s election fortunes.  As “The Donald” has surged in the polls, so has volatility in the markets.  Over 1000 journalists globally have conditioned investors that this election is over, equity markets are NOT prepared for a Trump Presidency.

Here’s what market pros are watching.  Activity in the VIX futures market and the Mexican Peso speak to a market volatility spike in the near term for U.S. equities. In the below chart, the spread between the 2 month VIX future and the 8 month is converging, just as it did Pre-Brexit. This is a classic vol spike early indicator. Get long and stay long volatility over the next two weeks.”

Quote from Bear Traps Report, October 31, 2016

Flattening VIX Curve, A Market Crash Omen

vix-futures-new-3In this chart we see how much flatter (green line above) the VIX curve is today than it was last week (blue line) and even in August (orange line).   Elephants leave footprints, capital is piling in on purchasing near term insurance on the stock market, the green line says it all. 

This summer, the market was complacent and ignored coming risks.  Longer dated VIX contracts traded much higher than those in the short term. This gives you a very steep VIX futures curve as we saw last week. The market was not paying up for near term volatility as it was heavily discounting risks such as the U.S. election. The curve began to flatten yesterday, which gave us a proprietary risk signal that further volatility and weaker equities would be coming next.  Today we got it, as the short term VIX contract heavily outperformed the longer dated contract.  This was a market sell signal we shared with clients this morning.  Institutional investors were buying near term protection in the face of uncertainties such as Trump, Italian credit risk and a lower oil price, events we expect to continue.

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As we advised clients yesterday, a sharp flattening of this curve leads to risk reduction across asset classes. Today, we saw that play out with equities and credits selling off.

Elephants Leave Footprints, Look for the Clues

ux2-ux8-speed

Here, we see the convergence in the 2 month VIX future and the 8 month VIX future. Money is piling in on the 2 month, meaning people are paying up for short term insurance on the market. The 2 month VIX future is getting bid up, becoming more expensive. This shows the markets more near term fears.

Pick Up our Election 2016 Trading and Investing Themes Here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Here’s our appearance on CNBC today

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