The Fed decided that tapering was finally ok and the stock market agreed with the S&P 500 up well over 2% on the week. I did some digging and found something that seems kind of ironic. In mid-October the S&P 500 was up about 2.4% (the same gain from last week). That rally was due to missing a potential government induced disaster deadline. So we rally on everyone’s near term biggest fear coming true (tapering) and rally when everyone’s near term fear does not come true. I know there is much more to the current situation than that simple sentence, but from 40,000 feet it is a little peculiar.
With the S&P 500 higher all four of the S&P 500 related volatility indexes were under pressure. The positive interpretation of tapering combined with the final two weeks of 2013 having holidays stuck right in the middle of the week resulted in dramatic drops in VXST, VIX, VXV, and VXMT. The volatility of VIX did not miss the party and moved under 70.00 (a level I consider significantly low in the current market) closing the week at 68.00.
The long VIX related ETPs did what would be expected and dropped in conjunction with VIX. While the inverse ETPs had stellar weeks. It is worth noting that the VelocityShares Daily Inverse VIX Short Term ETN (XIV – 32.95) is up just over 98% in 2013 while the ProShares Short VIX Short-Term ETF is up 97.6% for 2013 as of Friday. Both of these exchange traded products have benefitted from the very low volatility environment this year. These funds will be at the top of various “best of 2013” lists. Just keep in mind that in order to match 2013 in 2014 VIX and VIX futures trading will need to mirror the low volatility environment for 2013 as well.