By Steven M. Sears

The stock market appears to have entered a Trust in Trump phase on Super Bowl Sunday. Rather than opening lower Monday after President Trump surprisingly revealed steel tariffs en route to the game, investors shrugged it off and stocks rallied.

Tuesday began with some stock weakness that pundits pinned on those tariffs, but it probably had more to do with global trading patterns and pending inflation data.

The market movement was reminiscent of sentiment shifts during the 2007-09 financial crisis. Back then, investors who understood that the widespread fear of financial Armageddon was misplaced made a lot of money, as the world's governments couldn't let that happen. Anyone who recognized that fact took part in a generational moneymaking opportunity.

It's premature to conclude that Trump's second administration is a profound wealth-creation event like the aftermath of the financial crisis. But it does seem that investors are starting to realize that Trump isn't an existential threat. In fact, he may just be a generator of tradable volatility for stocks and indexes.

If so, investors could develop a broad comfort with the U.S. stock market -- one that extends beyond the handful of Big Tech names that seem able to withstand trade wars and other Trump eruptions that could disrupt the market's equilibrium.

If this view proves accurate, the SPDR S&P 500 exchange-traded fund (ticker: SPY), at a recent $605, should bounce higher after having struggled in recent sessions to decisively rally.

Anyone who believes a breakout is imminent could buy the ETF's March $610 call option and sell its March $595 put option. The risk-reversal strategy -- that is, buying a call and selling a put with a similar expiration but lower strike price -- reflects the view that the market will soon realize that Trump is good for all stocks, not just a select few.

The strategy monetizes the fear premium now baked into S&P 500 put prices, with so many investors buying puts in anticipation of a stock market decline.

If the ETF is at $630 at the March expiration, the call is worth $20. If our bullish view is wrong, investors must buy the exchange-traded fund at $595 or adjust the position to avoid assignment.

Though the suggested ETF trade is simple, it is predicated on a substantive change in investor behavior and perceptions.

Since Trump's election, many investors have spent even more than before buying stocks with defined risk and reward characteristics, such as plays on artificial intelligence or finance. Those stocks are considered somewhat immune from standard market concerns, including inflation, trade wars, and even interest rates, which can oppress broad-based indexes.

The demand for macro-proof stocks, especially from hedge funds and retail investors, has created pockets of sharp outperformance in the U.S. market as the broader market has lagged behind.

So far this year, for instance, the S&P 500 ETF is up 3.2%, compared with 6.4% for both the Financial Select Sector SPDR ETF $(XLF)$ and the Health Care Select Sector SPDR ETF $(XLV)$.

The S&P 500's performance compares even less favorably to some top China proxies. The iShares China Large-Cap ETF $(FXI)$ is up 10% this year, while Alibaba Group Holding and PDD Holdings are up 33% and 21%, respectively.

Our view on Trump remains the same -- that maximum power creates maximum volatility, and that the president's lack of deference toward Wall Street could keep stocks from quickly recouping any losses.

Should that come to pass because Trump's policies backfire, the Federal Reserve will likely once again lower interest rates to unusually low levels, jump-starting the financial engines of the world's largest economy.

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(END) Dow Jones Newswires

February 14, 2025 21:30 ET (02:30 GMT)

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