Why the Post Fed Vol Pop Is Bad News for Stocks
I’ve been quiet while on vacation. When traveling, I prefer to have no trades open (or very few) so I can enjoy what is going on.
As Mark says, “Why let the vacation cost twice as much?”
He and I both have some horror stories of leaving trades open and heading out of town.
Learn from us.
All that said, I am still watching the market, and I did not like what I saw yesterday: a post-Fed vol pop.
I expected VIX to drop after the rate announcement and it did not. That is a problem for stocks.
VIX is now four points higher than the lows on Monday and I am not sure about the reason why.
It could be the budget and debt ceiling or more bad news about banks.
VIX is back in Zone 3 – at a little over 20 as I write this – and here’s what that means for traders.
Zone 3 Is The Third Quartile For VIX (19-23)
Dr. VIX (aka Russel Rhoads) did a statistical analysis of VIX, and it roughly matched my Zones.
That’s good news for me since that’s what I observed over the years.
But I recently adjusted Zone 3’s low end up 1 point to 19.
Three years of higher vol skewed things up.
Zone 3 is bad for stocks because traders are willing to pay up for options now, and they expect things to move more quickly.
Traders don’t pay more for options if they don’t think things will move so this is a surprising development.
After a major announcement, like the Fed Rate Hike, I expected VIX to drop.
This time, it did not. Maybe it’s the bad news that’s coming out, and a lot of SPX weakness started midday Monday on the debt talk.
Because of all that, I’m expecting a bumpy end to the week.
Next week, I will be back to my trades by appointment on Wednesdays at 2:30 p.m. (ET).
If you haven’t joined me yet, sign up right here.
I am currently going through an education series on Fridays about how to make these trades even better and personalize them to your own trading style.
To Your Trading Success,
May 04 2023
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