Looking to the Futures

Historically there has been a trend of reduced volatility in the days leading up to a market holiday and in the days afterwards.  Traditional logic would argue that less liquidity during the surrounding holidays would lead to larger price swings, but the dataset observed on CBOE Volatility Index Futures (/VX) suggest otherwise.  Known as the “market holiday effect,” asymmetrical returns have been recorded on market indices on days leading up to Thanksgiving and other market holidays.  For example, since 2000 the S&P 500 has traded higher for the week just over 60% of the time with the highest weekly return of 4.12% in 2008 and the lowest weekly return of 2.55% in 2021. 

With the return of scheduled publishing of economic data, investors and traders alike are also now able to gauge market sentiment with confidence again.  Black Friday and the broader Thanksgiving weekend sales are now emphasized in terms of consumer strength or weakness for the final part of the year. Data suggests that higher retail sales leads towards decreased volatility as investor confidence rises. 

This week from open until current the S&P 500 has risen roughly 3% while /VX futures have fallen roughly 13%. With the release of softer-than-expected initial jobless claims on Wednesday, there is speculation that the labor market is healthier than previously anticipated. This drastically shifted the probability percentages that the Federal Reserve and its Chairman Jerome Powell would have the data they need to confidently make a rate cut in 12 days. The CME FedWatch tool now sits at an 86.9% chance of a rate cut (target range of 350-375, or 25 basis points lower) at the next meeting when it was previously a coin flip. 

It is important to remember that /VX futures do not operate fully on a technical basis and are priced based on the CBOE Volatility Index Formula which can be best described as the expected volatility of the S&P 500 going out roughly 30 days.  From a technical standpoint, we notice a double top with the second peak being a lower high from the first.  There has been a return to the mean as the 100-day SMA (simple moving average) is providing crucial support going back to October.  More importantly, both volume and open interest are on the decline which falls in line with season expectations around  trading holidays from a liquidity perspective.

9:45 am Chicago Business Barometer (PMI)

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