You're a Mean One, Mr. VIX

Stocks are fading well off their morning highs for on the back of a cool CPI print pre-market. To be sure, we have a ton of event risk yet to be negotiated this week, namely with the FOMC tomorrow afternoon. 

That said, in light of the VIX popping yesterday alongside the rally in stocks, and now dumping out today, it reminds us of the underwhelming year volatility has seen given the overall bear market in stocks. Sure, the VIX moved in the 30s this year a few times, but never saw monster spikes in the 50s or even 80s as we saw in 2008 and 2020 as well as other times last decade.  

As noted previously both here and with Members, the soft VIX (relative) performance given the weakness in equities this year likely is a function of too many market players being hedged and/or then having reduced their long exposure throughout the year without needing to buy very many puts.

With March 2020, if not 2008 still fresh in many market players' minds, especially institutional players, the VIX never super spiked this year as nothing caught the market too far off guard. Many knew things were getting tougher, that inflation was a problem and The Fed is somewhat trapped, but conditions never spiraled out of control, at least not yet.

Headed into 2023, if enough market players decide that being hedged is eating too much into their alpha then I suspect we may finally be getting to a moment where it can be correct to look for an actual super spike in the VIX. 

But unlike 2008, this bear is moving at a slower pace, more reminiscent of 2000-2002 if anything else, if not the 1966-1982 secular bear. 

Hence, even though the VIX was not the place to be in 2022, that ironically may be getting us closer to it actually being the play when we look out to 2023. 

That is for another time, though. 

For now, it seems rather easy to call for yet another rally fading in risk. But I am not so sure. Seasonality remains bullish and one has to wonder if Powell wants to actually play the Grinch himself tomorrow by scaring markets in December. I suspect he will talk tough (again) but only raise by 50 bps.