I was all set to talk about how well the markets digested the last two days worth of gains today… that was until the last 30 minutes of trading happened. That is when the indexes began selling off, with SPY falling from near $145 to end around $144.70. This is a little ironic because on Monday we saw the exact same type of close, except in the opposite direction. On Monday I said I wanted to see follow thru into Tuesday’s open, and that’s what we got. So now for Thursday I’d want to see the same type of follow thru to the downside if I’m going to get bearish, otherwise it’ll be a sign of strength if the bulls put a stop to the selling tomorrow early in the session.
I’m really only focused on one thing after today’s action and that’s something I deem the December volatility trade
- The everlasting volatility trade — The VIX shot up to its highest daily closing level since 11/15
In what has become a familiar scene the last since the S&P500 regained the 1,400 level near the end of November, the VIX has made another sharp move higher. This time the VIX gained 11.5% to finish at its best level since 11/15. The only problem is that the last time the VIX was up here, SPX was around 1,360. We’ve seen on three occasions in the last 2&1/2 weeks where the VIX has shot above 16, hinting that a big sell off might be forthcoming, only to see a further rally in the indexes.
What is odd about this latest spike is it made up for two days worth of declines with just one big up day. Had the market not sold off the way it did the last hour of the day I would be inclined to say that we are setting up for a volatility erosion rally to end the week. However, the markets seemed to respect this increase in volatility going into the last hour of the day so there could be more to the story this time around on the bearish side. If you’re a bear it’s pretty simple, you should get a 100 point down day tomorrow if the VIX is to be trusted.
The markets have been enjoying a nice unimpeded rally off of the 11/16 bottom but December keeps seeing volatility creep higher. I’ve been burned “guessing” before and so far what we’ve seen with these spikes in volatility this month is that they have been paving the way for further moves higher. I do have a strange feeling that this spike may mean something more. Maybe the VIX is signaling an expectation of an agreement to avoid the fiscal cliff not being reached by year end.
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