I suppose it now goes without saying that the fate of the market and the current Republican lead Congress hinges on the passage of a significant tax bill. The GOP and the Trump Administration have repeatedly declared that a new tax bill would be signed into legislation that would cut taxes across the board, including for corporations. If this bill were to pass in a form similar to what has been drafted so far, it would a landmark moment for the GOP and the financial markets.
While the GOP’s fate is another matter, the impact on the financial markets is of primary concern to us as traders. It was clear that the markets are hinged on the results of this bill when the VIX rose over 10% due to a mere half a percentage point decline in the S&P 500. I’ve mentioned previously that the short volatility trade is grossly overcrowded and any significant decline in the markets is likely to set off an avalanche of short covering that will propel the VIX back towards a more normal range. In fact, I suspect it will go even higher due to the number of trades that would need to be unwound and their overall size. For these reasons and more, we can expect very significant volatility in the event that it appears that the bill will not pass. We’ll keep an eye on the situation to see how it develops.