Best of the Week
Most Popular
1.Oil Wars 2016 - US vs Russia vs Saudi Arabia vs Iran - Nadeem_Walayat
2.Crude Oil Price Crash Triggering Global Instability, Trend Forecast 2016 - Nadeem_Walayat
3.Stock Market Crash - Last Week was The 2nd and Final Warning... - Clive_Maund
4.Stock Market Crash Apocalypse or Bull Market Severe Correction? - Nadeem_Walayat
5.TShipping Said to Have Ceased… Is the Worldwide Economy Grinding to a Halt? - Jeff_Berwick
6.Crude Oil Price Crash Catastrophe, Independant Scotland Literally Begging to Rejoin the UK - Nadeem_Walayat
7.Summers: Global Economy Can't Withstand Four 2016 Fed Hikes - Bloomberg
8.Gold And Silver: New World Order: Public Be Damned, Preferably Dead - Michael_Noonan
9.Rigged U.S. Ttreasury Bond Market Double Barreled Hidden Q.E. To Infinity - Jim_Willie_CB
10.Major Stocks Bear Market Awakening - Zeal_LLC
Last 5 days
It's Stock Market Panic Time! - 9th Feb 16
Gold Stocks Picks for Patient Pickers - 9th Feb 16
Oil Price Collapse U.S. Recession Odds 2016 - 9th Feb 16
Preparing for Crisis - It's About Risk Mitigation and Capital Preservation - 9th Feb 16
Top Silver Mining CEO: Don't Laugh, We Could See Silver $100+ - 8th Feb 16
Gold, Investment Leadership Changes Permanent? - 8th Feb 16
Stock Market Panic Decline Begins... - 8th Feb 16
How to Save Money By Growing Your Own Homegrown Tomatoes Indoors From Seeds - 8th Feb 16
US Economy Slides One Step Further Towards A Recession - 8th Feb 16
Gold Bear Market Bottom : Mr. Bear has left the PM Sector for Greener Pastures - 8th Feb 16
Stock Market At Important Support - 8th Feb 16
David Cameron Humiliated in Poland Over Refusal to Stop Taking UK Benefits, BrExit or Super State? - 8th Feb 16
Why Crude Oil Prices Could Continue FALLING From Here - 7th Feb 16
Stock Market S&P, NAS Best, Most Reliable Answers Come From The Market And You - 7th Feb 16
Stocks Bear Market Continues - 7th Feb 16
Silver COT Paving Way for Sustained Upside Breakout Sharp Rally - 7th Feb 16
US Dollar Double Top, Gold Prospects Brightening Rapidly - 7th Feb 16
Gold And Silver - Is A Bottom In? Nothing Confirmed - 7th Feb 16
Gold Stocks Something has Changed - 6th Feb 16
UK Interest Rates, Economy GDP Forecasts 2016 and 2017 - 6th Feb 16
Gold Price, Mining Stocks Rocket Higher - 5th Feb 16
Crude Oil Price Bottoms and Blues - 5th Feb 16
Gold and Silver: Ripe for a Recovery! China May well Change the Game - 5th Feb 16
How Pension Plans are Responding to Financial Repression - 5th Feb 16
Senior Gold Producer Goldcorp Takes Large Stake in Nevada's Gold Standard Ventures - 5th Feb 16
Tips for Smart Oil and Natural Gas Investing 2016 - 5th Feb 16
Another Corporate Giant Is Leaving the U.S. – What This Means for You - 4th Feb 16
TPP is Economic Warfare, Trade Can Make Everyone Worse Off / Governments are Stupid - 4th Feb 16
Gold and Stock Markets Inflection Points Galore - 4th Feb 16
Putin Cries Dyadya (Uncle), Is Saudi Arabia Listening? - 4th Feb 16
Gold Price Golden Bottom? Video - 4th Feb 16
Look North for Value-Priced Growth in Healthcare Biotech Stocks - 4th Feb 16 - TLSReport
BrExit EU Referendum - Britain's FINAL Chance for Freedom From Emerging European Superstate - 4th Feb 16
HUI Now Confirming Gold Price Move Higher - 4th Feb 16
Crude Oil Price Forecast 2016 As Good As It Gets - 4th Feb 16
Gold and Silver More 'Flight To Safety' Active February - 3rd Feb 16
Raytheon Company: A Defensive Stock for a Defensive Market - 3rd Feb 16
Is Silver Really a Weak Link - 3rd Feb 16
Gold to Beat Stocks 2016? - 3rd Feb 16
David Chamberlain Cameron, Britain's Last Chance for Freedom From Emerging European Super State - 3rd Feb 16
EU UK Draft or Daft Agreement By Donald Tusk to Members of the European Council in Full - 2nd Feb 16
Europe: Why It's Going to Get a Lot Worse Before It Gets Better - 2nd Feb 16
The Next Generational Bust Is Coming, Stock Market 70% Collapse - 2nd Feb 16
The Coming Stock Market Decline May be a Monster - 2nd Feb 16
S&P 500 Has Likely Entered a New Bear Phase - 2nd Feb 16
How and Why To Move Your Assets Offshore Before the Financial Collapse - 2nd Feb 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Financial Crisis 2016

What the Stock Market VIX is Saying About the Fiscal Cliff

Stock-Markets / Stock Markets 2012 Dec 07, 2012 - 09:24 AM GMT

By: J_W_Jones

Stock-Markets

The past few weeks have been full of a constant barrage of press conferences and public statements from the charlatans in Washington D.C. Politicians cannot pass up a chance to get in front of the cameras and the media has used the “fiscal cliff” as a mechanism to scare average Americans further about their future.


Interestingly enough, amid all of the nonsense that has been going on stocks have remained resilient. I think sometimes its important to just step back away from the media's noise and just look at some price charts for more clarity. The S&P 500 Index has been trading in a relatively tight range now for over 6 trading sessions as shown below.



As can be seen above, the S&P 500 is struggling to breakout of the 1,400 – 1,420 price range. It is not mere coincidence that the Volume by Price indicator is illustrating the most trading volume having occurred in and around that price range. So what does the recent action mean in light of the supposedly pending fiscal calamity?

Everyone that is looking for this monster move when the announcement is finally made may be waiting for a while. It is without question that the broader marketplace is clearly aware of the fiscal cliff. It would make sense that Mr. Market may have priced in some of the uncertainty. Furthermore, if there was significant concern we would be seeing prices starting to sell off by now.

Markets do not like uncertainty. However, what is certain is that during the end of the year the bulls usually have the upper hand. The reasons are fairly simple, but they usually hold sway most years. Due to the holiday season, many traders take vacations and leave their trading desks. Because traders are largely absent, volume levels start to decline as the holiday season approaches. Typically volume levels do not normalize until January of the new year.

Low volume levels typically synch up with low volatility levels. When those two forces align together the bulls will almost always have the upper hand. Is it any wonder that this time of year the financial media begins discussing a “Santa Claus rally”? Of course not, but Santa Claus is really just light volume levels and low volatility levels in this case.

Recently volatility has been pretty choppy, but the Volatility Index is not showing considerable fear regarding the fiscal cliff in the near term. In fact, the VIX is trading in the middle of its recent range as shown below.



At first glance, this chart does not appear to be warning us about fear at the moment. However, certain aspects of the Volatility Index (VIX) are largely unknown to the retail investor. The VIX is a guide for volatility in the present, but it does a poor job of projecting future volatility. Simply looking at the VIX's current price is not the appropriate way to gauge market volatility expectations in the future..

The Volatility Term Structure is a better way of understanding what the Volatility Index is saying about the future. Wikipedia lists the following definition for volatility term structure:

             “Volatility term structures list the relationship between implied volatilities and time to             expiration. The term structures provide another method for traders to gauge cheap or expensive       options.”

The current Volatility Term Structure chart is shown below courtesy of www.cboe.com:


 
As can be seen above, the forward Volatility Term Structure indicates that volatility is expected to go higher in the future. This is not all that uncommon, but I think what is more important is the rate of change in the near term.

When we look at this chart, the term structure indicates that Volatility levels roughly 4 months  out (March 2013) are nearly 13% higher than they are today. By June of 2013, volatility's rate of change is well over 20% higher than it is today.

It is important to understand that volatility does not necessarily mean risk. Volatility typically increases when equity prices are falling, however volatility levels can rise for a variety of reasons. Uncertainty about the outcome of an event like hitting the debt ceiling could push volatility levels higher without sending equity prices sharply lower. The point is the term structure just provides clues as it is not the holy grail about looking in the future.

What the Volatility term structure does tell us is that the marketplace expects a significant increase in overall volatility in the next 3 – 6 months. What I think the Volatility Term Structure is conveying presently is that decisions regarding the fiscal cliff and the debt ceiling will impact market prices, However the real impact may not be felt until later in the 1st or 2nd Quarters of 2013.

Most economists believe that if we do go over the fiscal cliff and taxes go up for everyone that the U.S. economy will be in recession within 6 – 9 months. Clearly as shown above, the Volatility Term Structure likely agrees with the economists assessments and the economic conditions in the next 6 to 7 months could possibly turn for the worse.

All we can hope for is that the politicians can compromise on a plan that will remove uncertainty from the marketplace without compromising the economy. Something tells me that is not likely to happen, but here is to hoping that I'm wrong!

Happy Trading!

Risk-FREE 30-Day Trial

only $1 for the first 30 days!

JW Jones
www.TradersVideoPlaybook.com

J.W. Jones is an independent options trader using multiple forms of analysis to guide his option trading strategies. Jones has an extensive background in portfolio analysis and analytics as well as risk analysis. J.W. strives to reach traders that are missing opportunities trading options and commits to writing content which is not only educational, but entertaining as well. Regular readers will develop the knowledge and skills to trade options competently over time. Jones focuses on writing spreads in situations where risk is clearly defined and high potential returns can be realized. 

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History