Jitters Ahead of Fed

This morning’s equity trade appears to be a bit cautious ahead of the release of the FOMC minutes later this afternoon.  Overnight I heard a descent amount of chatter echoing many of the concerns I laid out yesterday regarding the ultimate size of any Federal Reserve monetary intervention compared to that which the markets are expecting.  This new concern, no doubt, is causing some to take a step back today and reevaluate the risks inherent in their current positions.

So far today, the U.S. Dollar has continued its bounce of trend line support and is up another 0.31% as judged by the Dollar Index.  This strength is likely putting little pressure on gold prices, which are currently down a modest 0.40%, and adding to the caution already in place in the equity markets.  Treasuries are finding a slight bid this morning with yields down anywhere from 0.5 to 2.25 basis points.  Taken together, these markets are reinforcing the ‘wait and see’ attitude ahead of the FOMC minutes.  And while this release will likely prove to be the catalyst for today’s price action, I continue to suspect that the published minutes will need to contain fairly aggressive intervention language to move the markets meaningfully higher given where expectations currently lie.  Risk, at this point, is solely on the downside for most asset classes in my opinion.

One thing I didn’t mention yesterday was the performance of the VIX.  For those unaware of this index, the VIX is simply and index that tracks investor sentiment via options traded on the S&P 500 index.  More widely known as the ‘fear index’, the VIX tends to rise when investors get skittish about stock prices and fall when there is more euphoria surrounding them.  As you might expect, this index has been falling as the S&P 500 has risen over the last month or so.  However, the VIX dropped dramatically yesterday to a reading under 19.  For reference, a print under 20 is usually considered to be fairly low.  So with this drop, it appears to me that investors are getting a little too comfortable with equity prices.  To be sure, the index could drop farther, but given the fact that numerous equity market tops have corresponded with a VIX readings below 20, this is a development that is worth keeping a close eye on.  And given the overhead resistance that is looming around the 1,175 level, the fact that the VIX is sending up a warning flag is yet another indication that the equity market is ripe for a correction of some sort.

Until later…..