Brace Yourself for More Stock Market Volatility Ahead of Comey Testimony

In my opinion, between now and when former FBI Director James Comey testifies before the Senate Intelligence Committee sometime after Memorial Day, the U.S. stock market is likely to see the highest wave of volatility of the year. Besides the conventional measure of volatility, the CBOE’s VIX, volatility in this case will also be measured by wild swings in both directions.

Investors received a little taste of what we can expect over the near-term from Wednesday to Friday last week. On Wednesday, May 17, we saw an emotional reaction to the downside that appeared to be more dramatic than the actual point loss itself. Then on May 18 and 19, we saw prices swing the other way.

Some headlines said last week that traders should be bracing for a massive stock-market sell-off, but I think it’s too early for that, but not too early for a wicked two-sided trade. Sellers are going to be casting doubts on Trump’s ability to implement his economic agenda while buyers are going to claim that strong earnings are going to continue to support the markets with or without Trump. They also claim that tax reform, health care reform deregulation and increased infrastructure spending are the Republican’s agenda and not Trump’s.

If you recall, last week’s huge one-day sell-off was triggered after news that former FBI Director James Comey put together a memo on a conversation with President Trump, where Trump allegedly asked Comey to stop investigating former National Security Adviser Michael Flynn.

The end of the week rally was fueled by the news of an appointment of a special prosecutor to investigate the Trump campaign’s involvement with the Russians and the presidential election. Investors must have read this as a positive because it probably means we are finally going to get to the bottom of this widely speculated situation.

Based on what I saw last week in the market, I suspect that headlines or quotes attributed to Comey and what Trump may or may not have said to him are going to produce violent swings to the downside. At the same time, bargain-hunting buyers will be waiting for these breaks because they believe that ultimately, the truth will come out after the special investigator issues his final report.

Longer-term investors are hoping that former Director Comey’s testimony will help answer some of the questions that have arisen since he was suddenly fired by Trump. Short-term traders, who play both sides of the market and make more money during volatile time periods, are just hoping for a steady stream of headlines that create two-sided trading opportunities.