Market Commentary
I’m sure my CNBC colleagues will all have viable points regarding today’s market action; namely the Fed’s decision NOT to begin tapering its monthly bond and MBS purchases (QE). In my opinion, today’s decision solidified Janet Yellen’s nomination for FOMC President. I’m taking bets on Yellen, paying 2 to 1 🙂
But before I address that topic, those of you who watched this week’s video update might remember me citing an odd occurrence in the “option horizontal skew.”
When I was reviewing this data I was dumbfounded by the fact that it was EXTREMELY flat given the upcoming circumstances. In the video, this was represented by that very straight horizontal line just above the option chains when we were talking about volatility.
I went back on Monday and studied this abnormality and while I initially chalked it up to indecision amongst market participants, I realized that assessment was incorrect.
If the market truly was pricing in an unknown and perhaps highly volatile move (if tapering would have occurred), then we should have at least seen a small bump in the implied volatility of this week’s options or even those expiring in the regular September or October cycles, but there was nothing.
Sure put options (bets on the downside) were a little more expensive, but that’s fairly normal. It was the fact that iVol skew was so flat and showed no indication of uncertainty which makes me think that maybe the smart money really did have a clearer picture than the rest of us.
Of course, this is all hypothetical, but even “unknowns” like today’s decision are marked by increased iVol…and we didn’t have much of that at all leading into today.
The majority of those bets on volatility probably paid off today as the VIX dropped another 1.5% to 22.17%.
Maybe it’s just that the media and popular opinion had it completely wrong; we will never know. I do find it interesting to ponder these theories and take note for future clues.
So yes, the Fed surprised most of us by deciding NOT to begin tapering. Their reasoning was simply that they have not seen the economic growth much thought they have (I agree that growth is abysmal). “The Committee sees… growing underlying strength in the broader economy,” its statement said. “However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
The FOMC also revised their 2014 inflation estimates lower which makes me think twice about the other global recovery everyone keeps referencing. Call me crazy, but if China’s about to drop another round of insane paper printing stimulus on their local governments and most major central banks are still printing, then the only way to lower inflation is lower consumption (i.e. slower or non-existent growth).
The markets now have to wonder if there is something missing in their upbeat analysis of the U.S. and global economies. This may actually send stocks slightly lower after we finish with this technical breakout which should add another 1.5-2.5% onto the S&P’s current rally.
After starting in the red, the Dow Jones leaped to an intraday record of 15,709.58 and ended at a record 15,676.94, up 147.21 points, or 1%, with Alcoa (and many of its peers) leading gains that included 29 of its 30 components. The S&P 500 rose to an intraday record high of 1,729.44, ending at 1,725.52, up 20.76 points, or 1.2%. The NASDAQ also added 37.94 points, or 1%, to 3,783.64.
With our dollar getting pummeled, the price of gold jumped $54.40, or 4.2%, to $1,363.80 an ounce in electronic trade, after the metal settled down $1.80, or 0.1%, at $1,307.60 an ounce.
Crude also rose 2.5% to $108.07 on the weaker USD.
Unemployment claims, existing home sales and the Philly Fed are due out tomorrow.
