Mid-Month Update: Volatility Likely to Pickup in 2017
By: Jeffrey Hirsch
December 15, 2016
I had the pleasure of joining Danny Riley and the rest of our friends at MrTopStep.com for a roundtable discussion on “Trump vs. the S&P 500 2017”. Danny led the discussion that was focused on what you can expect from the markets in the first year of the Trump Presidency. 
Two main themes emerged from this discussion and I believe they are rather instructive and accurate. Number 1: Can Trump thread the needle and execute on all fronts or will he fail? If he succeeds, the market should be off to the races. If he fails, look out below. Second, market volatility is likely to pick up dramatically next year. 
What was most surprising was the massive range that was discussed from a high end of over 2700 on the S&P 500 in a best case scenario to a low in the S&P 1500-1600 range near the year 2000 and 2007 tops. I was most astonished at my friend Danny Riley’s call, which he warned us about, that 2017 would see the largest correction we’ve seen in a long while. 
We will issue our official 2017 Annual forecast next Thursday, but for now here’s how we expect the rest of the month to shake out and a little sneak peek at our outlook for 2017. 
After tomorrow’s Triple Witching Options Expiration, things will likely calm down as volume shrinks ahead of Christmas and after expiration. Stocks will likely drift sideways with a slight seasonal bullish bias the week after Triple Witching, fueled even more this year by window dressing as managers chase gains pushing money into the market to make portfolios look best for clients and rating agencies. 
Then look for the Santa Claus Rally to deliver solid, yet modest gains after Christmas, before yearend, pushing the major averages to new highs. Expect weakness on the last day of the year as traders and managers squaring positions and leave early for New Year’s celebrations. With the market running so hot since the election into yearend, the recently more pronounced “January Break” is likely to kick in as profit taking ensues in the New Year, especially with the prospects for lower taxes in 2017. 
Once Mr. Trump is inaugurated on January 20 all eyes will be on him and the bottom line is that more than ever, the performance of the stock market hinges on this one man’s ability to execute. Economic numbers are on the up as was apparent with the recent FOMC rate increase. Inflation is perking up and rates are on a path to normalization. 
If this man can thread the needle and bring about positive change to the federal government, get massive infrastructure projects rolling across the country in short order, create more real jobs and deal tactically and diplomatically on the international front all while not ruffling too many feathers, we are off to the races.
If not and he slips into a pattern of tangential tweets and commentary below his office and his cabinet and other appointees run into snafus with the Senate as well as instigating trade wars and offending our allies, we could be in store for a nasty bear market beginning around mid-2017.
Whatever your politics or ideology, what this man does or does not do could directly impact your portfolio. It is at times like these that we find history and historical and seasonal market patterns most important, when used in conjunction with fundamentals and technicals. We will continue to provide guidance according to our evaluation of cycles and seasonal pattern combined with our analysis of market and economic data and price and indicator readings.
Are we at a point that’s more like early 1980s or the late 1960s and early 1970s? I think we are much closer to the beginning of the next secular bull and Super Boom then the end. Perhaps the low we had in February 2016 was our August 1982 moment. Trump will tell.
[CHART of S&P 2016]
[CHART of S&P 1982]