Volatility Indexes Moved Lower Ahead of Fed

It’s not often you see the volatility indexes move lower a few hours ahead of  a Fed Announcement but that’s exactly what happened yesterday. That, along with bond prices dropping and the market having a two day run, was basically an all-in bet that Yellen would continue to reward investors on any announcement or speech she made.

As I mentioned yesterday, any hint of disappointment in the Fed release would lead to a pullback and that is what we saw.

Here’s the scenario now: the major hedge funds have been long and leveraged shorter term paper (bonds). This has essentially been a risk-less trade for them as the Fed repeatedly stated they were not raising rates. Now that the Fed has put a more definitive date, these long and leveraged positions need to be unwound (they were literally getting unwound as she was speaking yesterday). Unwinding major positions like this normally takes 2-3 weeks at a minimum. If this is true then this market pullback could be larger than normal.

The market is neutral today. Another day down will get it oversold but keep in mind the scenario mentioned above.

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