Fiscal Cliff and Markets in the Middle of Range

Fiscal Cliff Moving the Markets

Since the US election result was announced (on 7 November) the markets, especially in the US, have been obsessed with the “fiscal cliff” issue. The events with the greatest market moving power have been various speeches by US politicians, while the developments in Europe and other topics closely watched in the recent months have moved a bit to the background.

Not that the fiscal cliff issue is unimportant – it is definitely a huge fundamental and structural factor for the markets and for the economy. But I think that due to the facts that 1) more than enough has been said and written on that topic and that 2) US politics is not particularly my edge, I will only look at the markets from the technical and price action perspective.

S&P500 in the Middle of Range at Strong Technical Level

If you are following the markets closely you know that the markets dropped during the rest of the election week and the week after, and then recovered during the following week, which also happened to be the week of Thanksgiving Day holiday.

S&P500 since the elections

We are now in post-election week 5 and US equity indices have been staying close to the post-election highs (highest S&P500 close on 30 November at 1416) and close to the last pre-election close of 1428 (6 November).


The current area around 1400-1420 on the S&P500 is an important longer-term level. It was the high of the first half of 2012 (March to early May), then the market was trading here again in a very narrow range for most of August, then this level served as support before the elections, and now we are here again. It also currently corresponds to big round numbers on the Dow Jones (13000) and NASDAQ Composite (3000) that we keep on seeing again and again.

VIX Up from the 15’s

The VIX (CBOE Volatility Index) is now also approximately in the middle of a range after 3 consecutive up days beginning on last Friday. The range has been in place since summer, its low is about 13.5 and its high about 19. Since early October the low of the range has been just below 15.

We have not seen VIX above 20 since July – and that was only a very short visit above 20. We have not seen VIX trading above 20 consistently for a longer period since June.

VIX (CBOE Volatility Index)

Anything close to or below 15 on VIX is a buy volatility area for me now, because of the favourable risk-reward profile. Of course it doesn’t mean that you can’t lose on that speculation – fiscal cliff is resolved, markets soar, VIX drops to the 13’s. Keep in mind that seasonally December and January are bullish on equities and with low volatility bias.

Also note (if you are less experienced with VIX trading) that you can’t simply buy the VIX index, because that is just a number. You can trade it using VIX futures, VIX options, VIX exchange traded products (like VXX or XIV), or you can trade volatility using SPX or SPY options. The problem is that it is not a secret that being long VIX when it’s near its lows is a good position and therefore it comes at a cost (usually the longer you are holding it, the more it costs).

VIX Futures

With VIX futures the cost is the contango – futures contracts with more time to expiration being more expensive than those with less time to expiration and than the spot VIX – visually reflected in an upward sloping VIX futures curve.

VIX futures curve

In the recent days the December futures contract has been priced approximately the same or even lower than spot VIX. For example on yesterday’s (Tuesday) close spot VIX was above 17 and December futures in mid 16’s, which can be interpreted in a way that the market expects the VIX index to go down a bit before the futures expiration (2 weeks left). When spot VIX was close to or below 15 on the other hand, the futures were trading a bit higher (lowest intraday low has been 15.20 on the December contract).