Monday, October 29, 2007

VWSI at Zero Pre-FOMC

As the markets settle in for what will likely be 2 ½ days of waiting and mostly sideways action in advance of the Fed decision, the futures are suggesting that a 0.25% rate cut is in the works.

The VWSI is not tipping its hand vis-à-vis volatility expectations, moving back to zero after registering a fairly extreme -6 last week. The -6 VWSI reading preceded a week in which the VIX fell 3.40 points (14.8%), bringing the volatility index back down to the levels of most of the short and medium-term moving averages.

Recall from previous VIX and More research that the VIX has a tendency to anticipate higher volatility than the post-FOMC frenzy actually delivers, drop on the day of the announcement and perhaps one additional day, then take two weeks or so to attain pre-FOMC levels. In the absence of any compelling reason to expect something different this time around, keep an eye on the typical scenario to see if it plays out once again.

(Note that in the above temperature gauge, the "bullish" and "bearish" labels apply to the VIX, not to the broader markets, which are usually negatively correlated with the VIX.)

Wine pairing: For a VWSI of zero, I continue to recommend an inexpensive Rhone blend. Some of my recent favorites include the following New World wines: Oakley Five Reds; Robert Hall’s Rhone de Robles and Tablas Creek’s Cote de Tablas Blanc; Wrongo Dongo, the contrarian favorite from Spain; as well as The Hermit Crab and The Stump Jump (I prefer the white over the red) from D’Arenberg in Australia. If you are looking for additional ideas, I encourage you check out the Rhone Rangers.

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