The beginning of 2017 couldn't be much more placid for the broader equity markets; the S&P 500 has spent the last 11 trading sessions trading within a ~1% range as realized volatility has declined by nearly 40% since November:
SPY (Daily)
There is no doubt that periods of market calm tend to give way to periods of elevated market volatility. In the last week we have begun to see a subtle divergence as the VIX (S&P 500 Volatility Index) has begun to creep higher even as the S&P has remained range-bound and realized volatility has continued to decline.
Additional subtle divergences such as weakness in financials and small caps combined with extraordinarily bullish sentiment offers a potentially toxic mix as we prepare to welcome the inauguration of Donald Trump as U.S. President tomorrow:
Investor's Intelligence Bullish (green) & Bearish (red) Sentiment:
This is a market waiting for someone to light a match...
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