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VIX Oddities and Broad-Market Support: Musings About Today's Market


Central banks, volatility implosion, and another technical level to watch.

1. The S&P 500 Index (SPX) – European Central Bank President Mario Draghi disappointed markets with no concrete actions with regard to the ongoing sovereign debt crisis. The broad-market was trading around 1,360 last week when he made comments that led some participants to believe actions would be taken. Perhaps it's no surprise, then, that the SPX found support in the 1,360 area, before showing marked improvement throughout the remainder of the day.


2. Many wondered why the CBOE Market Volatility Index (^VIX) did not increase sharply on the big downdraft in equities. Our read is that -- similar to a individual stock ahead of the company's earnings report -- volatility in Standard & Poor's 500 Index (SPX) options ticked higher in the days preceding the Fed and ECB. When the outcome of these events were released, volatility essentially imploded, as it does after a company reports earnings. Consider that the VIX moved from 16.70 to 18.93 ahead of the Fed and ECB meetings, a period during which the SPX dropped only six points from 7/27 until Wednesday's Fed day.

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3. Wednesday, the VIX surged late in the day, ahead of the anticipated overnight event related to the ECB. Thursday, no such surge in the VIX occurred with the release of the July employment report ahead of the market's open. Might VIX action in the late afternoon be signaling a positive reaction to the jobs report, just as the late-day surge Wednesday signaled a negative reaction to ECB? There is quite a difference in the VIX behavior in the last hour Wednesday compared to Thursday.


This article by Todd Salamone was originally published on Schaeffer's Investment Research.

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