Heading into today’s potentially momentous decision on interest rates from the Federal Open Market Committee, the Federal Reserve’s monetary policy-setting panel, speculative positions in index futures are the most net long on record.
To this crowd of hedge funds and other big speculators, it really doesn’t matter what the Fed does.
Raising rates for the first time since 2006 would almost certainly send waves through equity markets, and not moving will keep the guessing game, and accompanying market gyrations, alive for weeks to come.
“There is a general consensus in the market that the Fed meeting will continue the volatility, and if they don’t do anything it may sustain the volatility at least for six more weeks till their next meeting,” said JJ Kinahan, chief strategist at TD Ameritrade, Chicago.
The most recent weekly Commitments of Traders data from the Commodity Futures Trading Commission shows speculative net long positions in VIX futures stood a record high.
Moreover, positioning in VIX futures has flipped like never before over the last month as the Fed guessing game has been compounded by worries over the health of China’s economy and its wobbly stock market.
Volatility arrived in earnest for US stocks about four weeks ago as investors got rattled by a free fall in Chinese stocks and a series of unsuccessful measures by authorities there to stem the sell off.
Emerging markets are on tenterhooks over the US Fed's interest-rate decision http://t.co/7h1QtFxZzq— Quartz (@qz) September 16, 2015
That helped push the Standard & Poor’s 500 index into its first formal correction in four years, and the US benchmark remains more than 7% off its record-high close set back in May.
Unlike the many fleeting instances of volatility spikes seen in the last couple of years, the current run up has not been quick to recede.
Given the duration of the current bout of volatility and shocks of similar magnitude in 1998, 2010, and 2011, it is unlikely that calm will return to markets very quickly, MKM Partners derivatives strategist Jim Strugger said in a note.
Trading in the options market also points to caution as investors protect their positions and look to replace expiring hedges.
“Do I want to hedge for the next Fed meeting, or do I want to hedge for the end of year Fed meeting?” is a question some traders appear to be asking, Kinahan said.
Another factor is that tomorrow is a “quadruple-witching” day, when options on stocks and indexes, and index and single-stock futures all expire together.
The expiry of existing positions and the opening of new positions, called rolling, could make for heavy trading and add to market volatility.