Volatility in December

Well that elevated quickly.  We went from SPX 5930 to 6049 over 3 trading days, in normally a slow time of year, and then gave back a huge chunk of the gains as there were no bids on Friday.  I don't like to make a big deal out of a couple of weeks, but the way the market is selling off is eerily similar to what happened in late 2021.  In 2021, despite a rising market, the VIX was regularly in the high teens, low 20s.  But this market has seen VIX in the low teens for most of the year, and realized vol has been low, until this month.  And its not as if the market is that much off the highs, we're around 2 percent off of all time highs, so its unusual to see VIX jump so much this month, in what should be a less volatile time of year. 

While we did get that low volume bounce last week, I wasn't able to capitalize on it.  The plan was to sell either last Friday or Monday of this week, expecting a grind higher for a few more days.  It is a change of character to see the market go down after a quick rally so soon after having flushed down only a few days prior.  Usually the market will linger near the highs for at least a few days after the sharp rally as the latecomers buy, but not this time. 

It show that saturated long positioning seems to be weighing on the up moves, and any small bit of concern among investors is enough to create sharp selling.  The move higher in yields seems to have dampened the risk taking psychology that was pervasive before the FOMC meeting.  You still see pockets of rampant speculation as retail investors chase momentum in small cap pumpers, but the move back under $100K for Bitcoin is a barometer of less risk appetite for the moment.  

On CNBC, the consensus view was that the low volume move lower was no big deal, and not to take too much meaning from a low volume, slow moving time of the year.  From past experience, I would take the opposite view.  The action in December is often a preview of things to come for the next year.  In December 2021, you saw a sudden rise in volatility and very weak breadth, a precursor to the market weakness to come in 2022.  In December 2014, you had quite a sharp pullback out of nowhere, and that was a prelude to a choppy and weaker 2015.  

There could be some selling in the next 2 trading days, as the last day of the year is actually not that bullish historically.  There could be some front running of capital gains tax related selling in early January, as well as late rebalancing flows looking to sell equities and buy bonds.  I do expect the bulls to come back in early January, so I don't expect really severe selling until after the Trump inauguration.  

The options market still shows a lot of call buying and over lack of put hedging among investors.  The ISEE index remains in nosebleed territory, and only briefly went down during that post FOMC selloff.  Its right back to where it was when there was hardly a worry in the world.  

ISEE Index

After the heavy selling in the bond market over the past few weeks, we're now at 10 year yields around 4.60%, which make it interesting for an intermediate term trade.  I will be looking to buy bonds early this week as the lack of bids seems to be year end liquidity related and I expect buyers to come back in January.  I am not so optimistic on the US economy as compared to the crowd, and think the Fed can quickly change their tune if you see lower inflation prints or a slightly weaker labor market.  

I don't think this market is strong enough to just come right back after just 1 day of selling.  There is no real support at this 5950-5970 level.  You need to get back down to the 5850-5900 zone to get more motivated buyers to step in.  While I am long, I will likely trim some of my position today to setup to buy lower and/or to buy bonds.