DC Thaws: Equities Explode, Volatility Implodes

Some sizeable moves in markets today. Visually:

The best day for Equities since 1/2/2013 which was a relief rally that Congress didn't completely drop the ball on the Fiscal Cliff. There's plenty of blame to be spread around - both sides of the aisle. Suffice it to say I don't think the Founding Fathers ever envisioned situations like this....... then again, they didn't have Netflix to keep them entertained.

Bread and circus.

Moving on......Volatility got monkey hammered today. It's been a while since I broke him out, but he came out of his cage today.

Yesterday I mentioned that it seemed like Equities were bottoming based on the panic in outside markets (short term funding and steep inverse in Volatility term structure). That turned out to be the case. Hopefully you were able to capitalize. The Cash VIX fell more than 15% from over 21 yesterday to 16.5% today. The spread between month 1 and month 2 futures (which rarely inverts) moved from 85 cents OVER to 45 cents UNDER. That is a vol beat-down.

Big picture, the spread between Brent and WTI continued to widen on news of Libyan adultnapping and quick release. Not sure what to make of this right now because I don't buy into the "Europe" is improving meme and we don't have percolating Middle East tensions right now, so there must be something I'm missing.

This spread is wider than it was at the height of the Syria tension in late August. I believe aggressive players should look to be LONG WTI v. SHORT BRENT expecting a retrace to $6.00-$5.50 wide.

Big picture, the S&Ps are back to a $400 premium to Gold. The "spread" has struggled here in the past, but it's difficult to make the argument we can't break through this time. Gold outperformed in late summer when geopolitical issues came to the fore. Then Equities took the lead and it got as wide as $410 just before the last Fed meeting when the chose not to Taper. Perhaps there is a play in here.....maybe not. Careful.

Finally, in less gut wrenchingly volatile markets the relationship between Wheat and Corn MAY be pivoting back in Corn's favor. Seems to be struggling around $2.50 wide.

One final thought - volatility seemed VERY HIGH yesterday when the VIX hit 21. That's because of our short term memories/conditioning bias. Don't get me wrong....it WAS high, relative to March, but those were 7 year lows in historical and implied equity volatility.

Here's a 2 year look at the VIX:

5 year look - it's all about PERSPECTIVE.....and in DC the PERSPECTIVE IS SHORT TERM. In the House of Representatives they are CONSTANTLY in campaign mode because they're up every 2 years. Kick the can deals will work until they don't and at that point you better have some tail risk insurance.

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