Editor's Note: Todd posts his vibes in real time each day on
Buzz & Banter
Early morning markets were higher on the breaking-yet widely
anticipated-news that Janet Yellen has been chosen to replace Ben
Bernanke at the helm of the Fed. Yellen, who has served as vice
chair since 2010, is known to have white feathers sewn in the seam
of her pantsuit, symbolic of her dovish policy inclinations.
S&P futures popped six handles last night on the news, although
we know that following an outsized move, the market tends to probe
the prevailing direction -- in this case lower -- at least once the
following session. That is the near-term script as attention again
shifts to the world's wildest realist show that continues to play
out in Washington.
The longer this stalemate lasts, the more the probability of
a credit default will be priced into the
. It's a long shot on a deep dive but it's called a
of price discovery for a reason; and the fact that
many have assigned a zero percent likelihood
of this happening -- and
certain political contingencies view this as
-- is adding spice to an already tenuous market mix.
Has fear trumped greed, particularly given the year-end performance
anxiety that is percolating in the marketplace? There's been a lot
of chatter about the 57% rally in the
(INDEXCBOE:VXO) since September 20, which is the widely watched
"fear index" that often works as a contrary indicator to the
Conventional wisdom dictates that this proxy trades higher as more
and more hedges are put in place, increasing volatility levels and
layering short exposure into the market that must ultimately be
It has proved true time and time again; spikes in the VXO are
ultimately unwound as the tape trades higher. This is demonstrated
in the first chart below, which tracks the VXO vs. the
(INDEXSP:.INX) over the last 20 years.
There are two items of note in the current construct. First, the
VXO is trading near 20, which is 10% below where it was this
summer, when it was traded above 22. That particular move in the
VXO -- an 85% increase from the May low -- coincided with a 5% move
lower -- from all-time highs -- in the S&P.
Second, I'll share the 20-year chart of the VXO, where spikes in
the index coincide with past crises. You will notice multiple pops
in 1997, 1998, 2001, 2002, 2010 and 2011 -- and a spike above 100
during the first phase of the financial crisis in 2008.
Given liquidity is the opposite of volatility -- a large order will
move a thin stock -- there is a case to be made that the massive
liquidity injection by the government has quelled, or will quell,
forward volatility. That may play through, although market veterans
will tell you that the most dangerous four words in finance are
"this time is different."
-- the 11-month uptrend, and IF the bulls are going to turn the
near-term tide, this is the level that they'll do it. If the
nonsense in Washington plays out into the weekend, we could see
perhaps all the way to the 200-day.
-- the August low for the financials -- was broken yesterday, and
that warrants attention; as go the piggies, so goes the poke.
) remain stocks to watch in that complex.
- Sometimes the ability not to trade is as valuable as trading
ability. There are a lot of funds chock full of emotion who need
to do something between now and year-end, and many of them are
standing in a circle shooting at each other. If you have the
option of being selective and picking spots, you've got a
competitive advantage that you should employ, or at least that's