Wednesday Fed Reversal Sent VIX to 17 before December Expiration

The Fed Reversed the Markets to the Downside

We have seen another week full of politicians negotiating (or failing to do so) and speaking, but nothing really changed in that area. In absence of any remarkable progress in the fiscal cliff negotiations, the Wednesday Fed announcement was the key milestone for global markets, affecting all major asset classes. It was one of the most interesting Fed meetings this year (the word “unemployment” occurred with record high frequency and record high prominence).

First the markets rallied on the announcement, but later reversed to the downside as Bernanke was speaking in the afternoon. In the end it turned out to the be the reversal of the whole week, splitting last week’s action to equally sized halves: the bullish Monday to Wednesday noon and the bearish rest of the week. The S&P500 index ended the week in the 1410-1420 area (again) and the big picture hasn’t actually changed.

S&P500

S&P500 since February 2012. Not much changed last week – we are still in the middle of the 3Q range.

S&P500 in December

S&P500 since late November. The last 2.5 trading days saw the most serious down move of the last 3 weeks. Which way are we going to leave the 1410-1420 area?

VIX

VIX (CBOE Volatility Index)

After 7 trading days the spot VIX made it to 17 again. The lows on Tuesday and Wednesday were around 15.50.

VIX in December

VIX Futures Curve

Only two trading days remain until December VIX options and futures expiration. The expiring contract now almost mirrors the spot VIX. The next two months, January and February, were the weakest of the whole curve on the last two days – they remained almost unchanged, while December rose by 0.75 and the long end by 0.35-0.40. The middle of the curve was also the weakest week-to-week.

VIX futures curve