Jefferies told investors to go long market volatility because the environment is ripe for a big move with the VIX near decade lows amid record high bets against Treasury bonds.
The CBOE Volatility Index, or VIX, is a key measure of market expectations of near-term volatility conveyed by stock index option prices.
The VIX has been quite stable recently in the low-teens range after the November election. Traders betting on higher volatility repeatedly have gotten burned with the VIX down more than 40 percent in the past 12 months through Monday.
"In a busy week, all attention will be on President Donald Trump who will deliver his first State of the Union Address on Tuesday night. More important, in our view for equity investors, is how the largest net short position on Treasury futures in history unfolds alongside a peaking in the long-term correlation between U.S. equities & bonds and decade low realized volatility," Sean Darby, chief global equity strategist at Jefferies, wrote in a note to clients Monday.
"There have been expectations that the President would deliver evidence of concrete progress on his fiscal programs, especially tax reform and tax cuts. However, that does not appear to be likely," he added.