The hedges have been coming off today as the financial markets react to FBI director James Comey’s second letter on the FBI’s perusal of a trove of email’s on a laptop that was shared by Clinton aide Huma Abedin with her estranged husband (and former Dencratic Congressman from New York) Anthony Weiner. It’s not so much that Wall Street loves Hilary Clinton as that the markets fear the unpredictability of Donald Trump
The CBOE S&P 500 Volatility Index (VIX) soared another 8.79% today to 18.56 on news that a ABC News/Washington Post poll put Donald Trump ahead of Hilary Clinton 46% to 45%, and on another inexplicable release from the FBI, this time of the record of its closed 2005 investigation of President Bill Clinton’s pardon of fugitive financier Marc Rich. On October 24 the VIX closed at 13.02. But that was before the end of election political storm broke. That’s a 42.5% move to the upside
Given all the negatives I listed about the outlook on the current market in my post “Three moves for a vulnerable market” on Tuesday options to hedge volatility seem cheap. Which suggests a solid opportunity for profit if volatility picks up as we get closer to the December 14 meeting where the Federal Reserve is likely to raise interest rates.
Just enough bad news today to put an end to this week’s post-Fed meeting rally. As of 3:30 p.m. New York time, the Standard & Poor’s 500 was still up 1.3% for the week. But the index is down 0.48% today. Oil is off even more with West Texas Intermediate slinking 3.04%
The Federal Reserve is at it again. Today two high-profile Fed members, William Dudley, president of the New York Fed, and Dennis Lockhart, president of the Atlanta Fed, both talked up the odds for an interest rate increase as early as September and certainly sometime before the end of the year.
German investor confidence fell in July on worries over the United Kingdom’s vote to leave the European Union. Released today the ZEW Indicator of Economic Sentiment for Germany, which looks six months ahead ( in other words into early 2017), fell to -6.8 from 19.2 in June. On the other hand, the International Monetary Fund, looking only at 2016, doesn’t see much danger from Brexit–in that time frame–outside of the United Kingdom itself.
In the short term volatility itself will bring more selling as computerized trend-following strategies designed to limit risk create more selling. When the price trend turns negative–as it has today after four previous days had left the S&P ahead by about 2%–these strategies say sell in order to keep up with index volatility and to limit the size of future losses
