CME Equity Wrap

December 16 PM Equities Commentary: Jared Levy

Market Comments

Stocks shifted course early on and turned bullish as the Empire State Manufacturing Index rebounded in December after a slump in November, though by less than expected. Markit’s U.S. purchasing managers’ manufacturing index rose further into expansion at 54.4 and Industrial production jumped 1.1% in November, its biggest one-month gain in a year and surpassed its pre-recession peak.  The reading was almost double the 0.6% expected by economists and much stronger than the 0.1% drop last month.

The reality is that investors have [mostly] come to the conclusion that the FOMC will NOT begin the taper on Wednesday and got back to buying after a 4 day, 2% pullback.

The bond market tells most of the story (that the taper is probably not coming Wednesday) even though it took a couple high profile analysts to supposedly prove to the markets today that a taper is all but off the table until at least January.

Monday’s broad-based gains on the S&P 500 were led by energy and technology sectors ahead of tomorrow’s gasoline inventories.

The S&P 500 broke its four-day losing streak and closed 11.22 points, or 0.6%, higher at 1,786.54. The Dow also finished higher for the second-straight session, up 129.21 points or 0.8% higher to 15,884.57 and the NASDAQ gained 54 points, or 0.7%, rising to 4,029.52.

One thing that I did find interesting was the VIX (volatility index), which actually rose today despite the rally.  Remember that volatility generally falls when stocks rally and spikes when they drop.

As an options trader, I can think of two reasons why VIX jumped today:

1. VIX options will expire Wednesday morning and tomorrow will be the last day that traders can exercise those options that will be marked on Wednesday morning ahead of the report.
a.Sometimes things can get a little squirrely on expiration, especially as traders reposition and roll their risk/trades to next expiration.

2.Traders are simply buying protection in the form of volatility (vol as we call it) as many do expect at least a mention of taper or possibly some initial framework of the taper to be announced.  Keep in mind that even the revelation of minor taper details could spook shaky markets and buying vol is a good way to hedge a portfolio that might have a short term blip lower.

As idiotic as all this taper talk may sound, it’s a viable rationale for the odd market behavior, for the simple reason that we DON’T know EXACTLY what it will look like or how  aggressive it will be.

Once market participants have that data, they can then apply all the theories, models and argue over a fair price.