The last post of 2012 is a little bitter sweet. Overall a good year for equity returns but I can’t shake the feeling that we missed something and the market is holding back. Most of the big issues of 2012 are not on the front page anymore. Much like the end of 2011 a few loose ends are hanging around. One thing I find telling is that the bond prices (measuring by the TLT) did not continue their move to outpace equities. The Fed is going to keep buying but that rally looks like it is coming to an end. The most crowded trade of 2012 is ending up around nowhere as I have TLT up around 1% YTD before dividends. Here is my last snap of equity volatility going into 2013.
It's been interesting to watch this fiscal cliff debacle develop. A week ago, I had the market pricing in a 92% chance of a deal getting done. Yesterday morning, the market was pricing at about an 80% chance of a deal getting done. Today, that number remains close to 80, although slightly below that now, near 75%. In fact, we can clearly see in this list of SPX weekly option vols what is driving up the VIX:
I would point out that the last time the spread got this insane, the VIX went UP, not down. The other piece of data is the VIX term structure, which is still normal but barely. Cash is is trading all over the place due to holiday's and the fear of the immediate:
While there is posturing that normally goes on in Washington, then I guess there is another level of POSTURING when things get serious. I am now beginning to think that Beltway politicians are the most overplayed relative to their work output. I have not seen a lot of work output and they are all leaving for vacation. I hear Nero’s fiddle playing in the background.
This morning we had another continuation of the Cliff Dwellers saga. This is where the market participants watch and see what the Executive Branch and Congress are going to say and then hit the sell button. It played out it in great fashion this morning on the leftovers from the hardening position talk on both sides in our esteemed government. Note the brisk selloff in the SPY this am. The SPY touched 139 and then proceeded to rally 1.7%+ to close 141.54. What happened?
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There is a pattern beginning to shape since the election and for the most part it is not good for equities. The day before the election was a near time high for stocks and the market has not sniffed that again. The European situation is mostly the same so I don’t think it is there. The problem is here and what all market participants fear which is the total inaction of the government to get its house in order. Mind you I don’t think it is a 1250 SPX type problem but more of a slow melt until a resolution and most likely a rally. The morning economic news is a little brighter each day followed by a steady selloff after any politician opens their mouth.