Few traders can forget 2016.
The stock market was in a downtrend. It wasn’t a bear market — but it wasn’t a raging bull.
It was also a presidential election year.
Pollsters and pundits predicted more of the same. Hillary Clinton was favored to beat Donald Trump. It looked like the slow growth economy that had defined most of the 21st century would continue.
Then, the unexpected happened.
Trump won.
Experts warned that his victory would cause a bear market — the opposite happened.
Stocks soared.
Politics’ Influence on Markets
Both trends make sense.
There’s a chance Clinton’s policies would have been similar to Obama’s, so it’s logical to think 2016’s lackluster market would have carried on.
But when Trump won, traders expected change.
They got it. Stock market volatility reflected that.
This pattern unfolds in other countries as well.
Italy faces a significant challenge as a parliamentary republic with a prime minister.
Stability and Italy don’t go hand in hand. Since 1945, the country has had 66 different governments.
It may need number 67 here soon.
How Italy’s Mario Draghi Moved Markets
In 2021, the former President of the European Central Bank, Mario Draghi, became prime minister with a nonpartisan cabinet.
Now, normalcy is returning this year as partisans fight over necessary spending. Italy is broke, and spending is a problem.
Thursday, Draghi resigned. Italian politics are sure to make the headlines for the rest of the summer.
The stock market says this could become a crisis. The iShares MSCI Italy ETF (NYSE: EWI) is more than 30% off its high. The chart shows Draghi had a short-lived impact on stocks.
Draghi‘s Impact on Italian Stocks
The volatility-based momentum indicator is at the bottom of the chart. It turned bearish before the crisis of his resignation hit the headlines.
I expect momentum to turn up before the political situation is resolved.
Bottom line: As traders, we should watch Italy and other European markets. They should offer significant opportunities.
As the political crisis spreads from Italy across the continent, there will be opportunities in put options.
That’s OK because, as traders, we can use put options to benefit from declines.
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