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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.
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
In 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.Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here
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.
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.Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here
Here’s our appearance on CNBC today