01.05.2017
By Terry Flanagan

OPINION: Buy the VIX

The stock market is never fully rational or understandable in its short-term movements.

The market rises. The market falls. It overshoots where it “should” be. It undershoots where it “should” be. And then it reverses course and does it all over again, most likely in a very different but similarly capricious way.

Over the long haul (i.e. years), stocks should rise in line with corporate earnings and economic growth expectations. But in the near term, it’s a fool’s errand to predict where indices will be tomorrow, or next week, or next month.

But the market has been especially neurotic of late.

How so, you ask?

Allow me to direct your attention to the U.S. presidential election of Nov. 8, 2016, in which Republican Donald Trump surprisingly defeated Democrat Hillary Clinton.

Before that fateful Tuesday, a Trump victory was seen as a wet blanket for the market. Citigroup predicted the S&P 500 would slide by as much as 5%; economics professors prognosticated a market decline of 7-10%; Bridgewater Associates, the world’s largest hedge fund, said the Dow Jones Industrial Average could crater almost 2,000 points, or a bit more than 10%, in one day.

Indeed, the stage looked to be set for a bear market on election night, as when it was becoming clear that Trump would win, DJIA futures were reportedly down in the 600-800 point range.

But since the sun rose over New York’s Trump Tower the next morning, market action has been the opposite of what was expected. The Dow rose more than 250 points on Nov. 9, and has since tacked on another 1,200 points or so to flirt with the elusive Mount 20K. The S&P gained more than 1% on Nov. 9 and is up about 7% since Election Day.

What caused expectations of a Trump presidency to change — from a loose cannon who poses significant risk to the U.S. and global economy, to a regulation-busting, business-friendly CEO in chief — literally overnight?

Darned if I know. Nor do I know which version of President Trump we’ll see for the next four to eight years.

But I do know that in life most things fall in between the rosy and the dire scenarios. Which means there will be some market adjustments from here, as traders and investors are reminded that President Trump is still largely a wildcard, economic and geopolitical risks remain abundant, and the market’s currently placid waters are too, well, placid.

So as we enter the new year, stocks may rise or they may fall. Either way, the CBOE Volatility Index (VIX), currently at a rock-bottom 11 handle, looks like a bargain to me.

    

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