U.S. stock markets staged a dramatic rally yesterday beginning shortly after 1:00PM EST:
The rally appears to have coincided with mid-day news that the New York Insurance Department was attempting to coordinate a bail out of bond insurers by major banks, in order to minimize risks to the municipal debt markets (many bond insurers insure state and local debt in addition to consumer debt–if they go belly up, interest rates for municipal issuers are likely to rise). If correct, that would be another tip of the hat to Jim Cramer’s thesis.
However, the CBOE Volatility Index (VIX), a widely used gauge of fear levels among equity investors, went above 34 about 30 minutes prior to the market turnaround, something that some pundits felt had been the ‘missing piece’ in the current correction:
The two prior stock market rallies since the current financial panic began both started after the VIX reached similar levels, so the current rally may be based on a perceived "technical" relationship between VIX and stocks that has been apparent for the past 6 months:
As of last night, there were reports of some resistance to a bailout of bond insurers, but this hasn’t hurt stock market futures. On that basis, we suspect the VIX blow off might indeed have played a bigger role in yesterday’s rally.