The market moves triggered by President Donald Trump’s foreign policy pronouncements are helping to shake up a long-established pattern in equities.
Traders are used to stock markets grinding higher during bull-runs, which are typically interspersed with sharp gaps lower during bouts of weak sentiment. But the combination of Trump’s turbulent second term and a 2022-style markets playbook threatens to trigger more episodes where that sequence gets flipped on its head.
For example, Wednesday’s jump in the S&P 500 Index following news of a ceasefire meant that registered realized volatility on up days has surpassed down days since the first Iran strikes.
More Trump press conferences and social media posts focused on military deadlines or tariffs have the potential to make patterns of grind-lower and eventual snap-back more prevalent for stocks.
Investors are accustomed to higher upside volatility in individual stocks around earnings days, when big positive surprises are equally as likely as negative ones. This is often reflected in pricing of the option volatility skew into results announcements, where upside call options can become bid relative to puts over a company event — an inverted volatility skew.
At the index level, that dynamic is less common. However, during the Iran war zero-day options have at times reflected the option market’s anticipation of upside surprises.
That’s been especially true of weekends when critical war-related decisions are often made. The result, when traders respond to headlines, has been index moves more reminiscent of individual stock reactions on earnings day.
Societe Generale SA derivatives strategist Jitesh Kumar said Wednesday’s extreme move in the Euro Stoxx 50 index of blue chips was likely driven by cleaner positioning, low liquidity and FOMO.
The fact that upside volatility is exceeding downside suggests that investors remain under-positioned in European stocks, despite maintaining a broadly constructive view on the region, he said in a client note.
Written by: Christian Dass @Bloomberg
The post “Stocks Are Grinding Lower and Gapping Higher Under Trump” first appeared on Bloomberg