Why We Can't Just Ignore the 'Patience' Panic

The FOMC's vocabulary choices are set to be a key market catalyst today

Mar 18, 2015 at 7:58 AM
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Patience. I'm old enough to remember when "Patience" was just a middling Guns N' Roses song -- give me "Paradise City," "Welcome to the Jungle," and "November Rain" any Fed Wednesday of the week.

Now it's apparently the biggest deal in the world whether the Federal Open Market Committee (FOMC) leaves that word in the statement they release today. I suspect that this obsession over that word is more of a media creation than an obsession of people who actually manage money. If they have a guest on TV and ask him or her about "patience," he or she will answer the question.

But I pretty much guess that's a case of speaking with your mouth as opposed to your wallet. Because I doubt anyone's making a financial decision based on this. That's not to say we should ignore it, though.

What I do believe is that the masses are indeed watching the actual reaction to the statement. Many like to fade the initial post-Fed move in stocks, no matter what. Many also try to ride the momentum. Bottom line -- it's always a potential window for short-term traders to make a play.

And we do figure to have some opportunity here. Volatility has picked up in a big way lately, and that has nothing to do with the fact that the Dow Jones Industrial Average (DJIA) is flipping up and back around unchanged for 2015. Rather, the ranges have expanded. Ten-day realized volatility in S&P 500 Index (SPX) now checks in near 16, which translates into about a 1% range on a typical day. That's a four-fold increase in a few short weeks.

Implied volatility is actually in line with -- and/or cheap -- versus realized volatility now, depending on your specific time frame. Options sellers that un-aggressively hedge have actually done quite well, in that we've essentially churned for two and a half months around the same levels. But that's always easier said than done, especially with the relatively large day-over-day swings.

Is this unrest anticipation of the reaction to the Fed? Perhaps. The "market maker move" in SPDR S&P 500 ETF Trust (SPY) is about 2.6 now, meaning the volatility spread implies a 2.6-point (about 1.25%) SPY move is priced into SPY options today. That's modestly high over the course of time, but very much in line with how we look lately.

I find debate over whether the Fed replaces "patience" with "flexible" or a synonym thereof personally mind-numbing. I mean, seriously -- isn't the Fed always "flexible" and data-dependent, to some extent? But, it could set off a move, so we can't just ignore it and/or post sarcastic tweets about it.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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