Stock Market Volatility Is Falling: Blame Trump? - trump volatile

Stock market volatility has been absolutely smashed. That's bullish for stocks.

Blame Trump?

#Trump #VIX #Volatility

Since Election Day, the VIX, an index which represents investor's expectations of future stock market volatility, has fallen -38%. Falling stock market volatility is bullish for stocks as it indicates investor level of comfort in further upside. Conversely, volatility rises in times of uncertainty.

The Trump connection is interesting. Based on yesterday's closing price, the last 60-days of trading have been the least volatile (rolling 60-day) time period in the Dow and Nasdaq ever, writes Hedgeye Macro analyst Ben Ryan. As you can see in the Chart of the Day below, of falling Nasdaq stock market volatility, investors are clearly betting Trump's policies will push equity markets higher. 

And head higher they have. Year-to-date, every major sector in the S&P 500 is up, with the exception of energy which is down just under 5%. The S&P 500 itself is up almost 3%. The technology sector is leading the way and is up almost 6% on the year.

Stock Market Volatility Is Falling: Blame Trump? - 02.08.17 EL Chart

A Rough 2017 for Short Sellers 

#HedgeFund #Short $SPY

Falling volatility has been been great news for long-only fund managers, writes Hedgeye Director of Research Daryl Jones in this morning's Early Look, "But as for the hedge funds who take part in the dark act of short selling, not so much."

According to WSJ this morning, over the last month the 50 most heavily shorted stocks in the S&P 500 are up more than 6% versus only 1.8% for the index itself.  "Another reminder to screen for low short interest as a style factor when selecting shorts," Jones writes.

Falling Volatility = Bearish (Complacency) or Bullish (Confidence) 

To be sure, there's a complete opposite read through on falling volatility. It can obviously be a sign of investor complacency.

But there are other signals to consider. Stock market volume on up days continues to rise (i.e. investors are confidently buying the move). Yesterday, the Nasdaq hit an all-time high. Total equity market volume was up +30% versus the one month average.

Bottom Line

Price, volume and volatility all confirm the bullish trend in the U.S. stock market (to say nothing of our positive outlook for the broader economy). That's why we keep making fresh all-time highs in the Dow, Nasdaq and S&P 500. We don't expect this trend to change.