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.
Not the best grammar but I wanted an attention grabber.
Did anyone catch the volatility markup at the end of the day today? We had fairly solid preopening activity this morning, but news of the budget standoff sent the market into a small tailspin. The volatility players are in the serious business of trying to handicap the outcome of the Fiscal Cliff talks. Yesterday players were pricing in a much better shot of things going through earlier than not. VIX traded as low as 15.57, as it sold off most of the day yesterday. After an aggressive print on VIX settlement this morning, volatility traders started buying options in Jan cycle for the big indexes.
As we discussed on Tuesday, VIX was not just pricing in the cliff, it was pricing in the non-farms that came out today. While the December contract really hasn't moved since then, the Cash Index has come in considerably. The curve closed the day basically back to normal contango, albeit a relatively flat contango.
Well the good news, at least from the markets perspective, is that the ECB outlined some kind of plan for buying and supporting Euro area debt. For the most part, it was the same assembly of loose promises and goodies, but that should be enough to get the animal spirits rolling in Europe until the end of the week. Add to that a pretty decent ADP payroll report that seems to point to employers getting past the tumult of last year’s crisis. The SPX cash closed over 2% for a big relief rally. Here is where it gets weird.
Recently I came across the some chatter amoung some option students about Alpha. Not in the kind hedge funds generate to make the big dough but the more vanilla kind. This isn't the first go around, we have been getting these types of questions from our options mentorting students for some time.