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Trump Tough Talk Sparks Fear in US Stock Market – Schaeffers Research (blog)

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The Dow started the week strong, extending its streak of record highs and daily wins. However, rising geopolitical tensions took their toll mid-week, after President Donald Trump hurled threats of “fire and fury” at North Korea — which responded by warning of a potential attack on Guam, a U.S. territory. As the rhetoric intensified, the stock market logged its biggest one-day percentage loss since May, with the Dow and NYSE Composite Index (NYA) retreating from key millennium levels. And just after this rare stock volatility signal flashed, the CBOE Volatility Index (VIX) closed at its highest mark since the U.S. presidential election on Thursday — keeping this seasonal volatility trend alive, and likely catching unhedged VIX shorts off guard.

VIX Options Traders Rewrite the Record Book

In fact, VIX options volume hit record levels in the wake of the massive stock selloff, which saw the Dow shed more than 274 points over three days, and put the S&P 500 Index (SPX) on track for its worst week since June. Call options continued to be in high demand on the market’s “fear gauge,” too, but with a record net short position on VIX futures, some of this is a result of hedges being initiated against these bearish volatility bets. Regardless, these are some of the best stocks to buy after a VIX spike.

Nuclear Fears Boost Defense Stocks

The Dow’s retreat also had Home Depot snapping its impressive winning streak ahead of the retailer’s turn in the earnings confessional next Wednesday. And while the threat of a nuclear attack translated into a boon for defense stocks, with Lockheed Martin bringing its daily win streak to nine, put buyers bet on bigger declines for South Korea and Japan ETFs — with the two countries caught in the crossfire.

Apple Hits New Highs; Disney Smacks Netflix

FAANG stocks were also in focus, with Apple shares hitting new highs — and drawing a fresh batch of weekly options bulls and positive analyst attention. Facebook, meanwhile, seemed immune to a negative earnings reaction for rival social media stock Snap. On the flip side, Netflix took a nosedive after Disney said it was ending its content deal with the streaming giant to start its own direct-to-consumer platform. Alphabet, meanwhile, made waves after Google fired engineer James Damore, while Amazon claimed Live Nation as its latest victim. 

Earnings Spark Volatility in Retail Stocks

It was a volatile week for the retail sector, as earnings season started to heat up. While Michael Kors stock gapped higher after earnings, a number of its sector peers weren’t so resilient. Shares of department store Dillard’s, for instance, plunged 17.5% — possibly rewarding straddle players — while J C Penney is pacing for a 16% post-earnings loss, after hitting a record low earlier. Accessories designer Fossil also sold off sharply, closing Thursday’s session down more than 20%. With an onslaught of retailers still left to report, XRT options traders loaded up on long puts to bet on near-term headwinds for the sector. 

Travel Sector Dip Creates Buying Opportunity 

Earnings stoked volatility in other sectors, too, with TripAdvisor stock sinking after travel name’s results — though sector headwinds may be flashing buy signals for these two stocks. And while Valeant Pharmaceuticals didn’t make as big of a post-earnings move as some options traders were anticipating, shares of fellow drugmaker Horizon Pharma popped in the wake of its results — while trial data sent these two drug stocks swinging wildly.

Inflation Data Brings Fed Meeting Minutes in Focus

Looking ahead, retail earnings will continue to pour in next week, while the release of the July Fed meeting minutes will also dominate the conversation. Soft inflation data this week has Wall Street wondering about the central bank’s timeline for rate hikes — and whether the upcoming September meeting will result in no action from the Fed.