"Fear tends to manifest itself much more quickly than greed, so volatile markets tend to be on the downside. In up markets, volatility tends to gradually decline."
-- Philip Roth
Although pundits have done an extremely poor job of predicting market reactions to the Trump Administration, there are signs that they may be correct about an increase in volatility. The thesis is that the uncertainty of implementing policy would be a concern and cause some bigger market swings to occur.
Since the spring of 2016 the market has had a historic lack of volatility for long stretches of time. Despite the drama of Brexit and the presidential election, there have been times when the indices have traded in extremely tight ranges. Even when there is movement, it tends to be lopsided, without the back-and-forth action that used to occur with greater frequency.
Currently, the S&P500 has not had a pullback of greater than 1% in 80 trading days. There have been no major drops in months, which makes the bulls happy but makes for a challenging trading environment.
Part of the reason for this lack of volatility is structure. The way computer algorithms and ETFs operate lead to dips being quickly bought and momentum being sold. The market stays pinned down as the computers knock out millions of trades for pennies.
This past week we have seen some shift in the level of volatility. The long awaiting break of the 20,000 level of the DJIA failed, and then after two days of selling pressure the indices bounced back on the back of a very well received earnings report from Action Alerts PLUS charity portfolio holding Apple (AAPL) .
The bulls are hopeful that Facebook (FB) will step up and keep the momentum in big-cap technology running, but the reaction to FB is not quite as buoyant. Several other earnings reports last night are producing negative responses. Shutterfly (SFLY) , Qorvo (QRVO) and Cirrus Logic (CRUS) are all down sharply and helping to put pressure on the semiconductor group.
The bears remain convinced that it isn't earnings, the Fed or economic news that is going to be the catalyst that caused a market top. They are focused on the reaction to Donald Trump. The theory is that he is going to disappoint in a number of ways, and that is what is going to kill this market.
Reading through the headlines in the morning shows how this view has taken hold. "The Honeymoon is Over". "Chaos in the Trump White House" and "Dollar Drops on Trump Anxiety" are just some of the themes that are being reported.
In view of how consistently wrong the folks in the news media have been about everything Trump-related, you have to question some of the assertions, but they are still likely to lead to increased volatility. This reporting builds a huge wall of worry. When the pessimism turns out to be wrong, there are conditions for upward spikes, but when the worries prove correct many are ready to hit the eject button and move to the sidelines.
We have some downside action this morning, as earnings and the weaker dollar are having an impact. There is the monthly jobs news tomorrow, which may also cause some positioning to occur today.
Overall, the indices remain in an uptrend, but volatility is finally picking up. The bears will see that as an indication of a market top, but opportunistic traders will welcome some bigger market swings.