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Market Update

Fed Flexibility or Uncertainty? Slumping Stock Market’s Not Sure

September 18, 2015

Volatility is back to stay and how that sits with traders just depends on who you ask. The no-action Federal Reserve has a lot to do with market gyrations but so does Friday’s “quadruple witching” expiration, which tends to jack up volatility and volume.

On Thursday, Fed members, by a 9-to-1 vote, refrained from the first interest rate hike in nearly 10 years. But they kept alive market speculation that a rate hike is on the table for either (or both) of the Fed’s remaining 2015 meetings, one in October and one in December.

That may be too wiggly for a Wall Street hungry for clarity. The Fed’s acknowledgement of global growth concerns—especially surrounding China—also likely keeps financial markets on high alert that conditions could get worse, not better. Stocks traded defensively in reaction to the Fed’s update, with financial shares especially hard hit as they need higher rates to improve loan margins.

Said Fed Chair Janet Yellen: “So as I’ve said before, every meeting is a live meeting where the committee can make a decision to move to change our target for the federal funds rate. That certainly includes October …”

Whether the Fed raises interest rates this year or next, there's little doubt that stock volatility could remain elevated the rest of the year. And what I mean by "elevated" is the CBOE Volatility Index—the VIX—would run closer to its historical norm near 20.

A 20 reading, which had been the long-running threshold that divided relatively calm markets from highly volatile markets, will feel elevated simply because VIX had been uncommonly low. Remember, VIX ran well below 15 for much of this year (figure 1), and flirted with a dip below 12, before the August pullback for stocks.

The Fed chief herself felt compelled to speak to market volatility and its impact in slowing the Fed’s rate-hiking campaign. From her press conference: “I think developments that we saw in financial markets in August in part reflected concerns that there was downside risk to Chinese economic performance and perhaps concerns about the gaps where policymakers were addressing those concerns, in addition we saw a very substantial downward pressure on oil prices in commodity markets. And those developments have had a significant impact on many emerging market economies that are important producers of commodities as well as more advanced countries including Canada which is an important trading partner of ours that’s been negatively affected by declining commodity prices, declining energy prices.”

This tells us that commodities prices, and their impact on global growth, will be a key area to watch as we all try to access the timing and pace with which the Fed hopes to finally remove the “emergency” monetary policy that pulled the U.S. out of recession.



The stock market’s “fear gauge,” the CBOE Volatility Index (VIX) has been trending lower over recent sessions but could continue to drift around the closely watched “20” line. Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Witch’s Brew. Witching Friday will stir the pot as well. Friday features the expiration of various stock-index futures, stock-index options, stock options, and single-stock futures. Big expiration-related moves by big players tend to touch the broader market, so be aware.

Buck Slumps. The U.S. dollar extended losses against other major currencies on Friday, weakening in the wake of the Fed’s decision to stand pat on interest rates. The ICE Dollar Index (DXY), which measures the dollar against a basket of currencies, was trading at 94.224, on track for its lowest close since August 25.

An Apple Win. For anyone paying attention to the micro picture, Apple (AAPL) won a patent ruling in a case against Samsung Electronics. A federal appeals court ruled on Thursday that the iPhone maker was entitled to an injunction barring its mobile-hardware rival from using specific phone features that the case alleged violated Apple’s patents. The news was not an immediate score for AAPL shares, however, which fell initially. Separately, iPhone unit shipments will be boosted in the December quarter by a calendar shift that should add 2 to 2.5 million units to the total, RBC Capital Markets said in a note.

Good trading,



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