President Trump was inaugurated yesterday. Normally, the market would not be too concerned about that event, but this year was different. Trump’s strong talk about trade has the market worried about a trade war. On Friday morning, the markets traded higher until Trump’s inaugural address, then the major indices gave up most or all of their gains after Trump reiterated some of his trade rhetoric. I am presuming his comments are only a negotiating tactic. Business people always ask for the moon, but never expect to receive that extreme. The Standard and Poor’s 500 Index (S&P 500) opened Friday at $2270, and traded as high as $2277 before pulling back to close at $2271, essentially flat on the day.
S&P 500 has been trading in this sideways channel of $2240 to $2277 since early December. The market has paused to reflect on the probabilities of the new administration’s economic proposals becoming a reality. It is hard to predict how long we may trade within this sideways channel. This market has proven very resistant to bad news, having withstood recent terrorist attacks both domestic and abroad. So I am not in the doomsday camp. This market needs some solid economic news to push it higher, e.g., passage of a tax reform bill. This sideways trading action is also reflected in S&P 500’s trading volume, which has been running below average all year. This underscores the “treading water” we have observed in market prices.
The S&P 500 volatility index (VIX) declined all of last week, even dipping below 11% on last Friday, 1/13. But the VIX started rising earlier this week, hitting an intraday high of 13.3% on Thursday, presumably reflecting some uncertainty leading up to the inauguration. But the VIX fell Friday, closing at 11.5%, down 1.2 points on the day.
It fascinates me to see the bipolar response of this market to a Trump presidency. On the one hand, his comments about lowering taxes and reducing bureaucratic regulations are received enthusiastically. But some of his other comments, notably about trade tariffs, make the market nervous. Layered on top of these issues may be some concern about the “establishment” politicians resisting the changes Trump has proposed and creating a legislative stalemate.
The overall market has been trading sideways since early December, but we aren’t seeing much negativity in the market’s technical indicators. The dividend yield of the Dow Jones stocks is roughly in the middle of its five-year range. The CBOE put/call ratio is a little high, but this is a contrarian indicator so a high put/call ratio is actually bullish. Consumer sentiment levels are near record highs, and the willingness of consumers to spend money is a basic requirement for a strong economy. Despite the harsh rhetoric and the anarchy in the streets, the Trump administration is creating positive expectations on the part of ordinary working people. Unless we see support levels begin to be broken, we should assume continuation of the bullish market trend.
This market remains nearly ideal for classic delta neutral options strategies, such as iron condors and calendar spreads. A diagonal bull call spread is also a good strategy for stocks with strong price patterns that may be on the verge of breaking out higher if and when this sideways market breaks, e.g., Applied Materials Inc (NASDAQ:AMAT), Cognex Corporation (NASDAQ:CGNX), and Boeing (NYSE:BA).