When the rumors started on New Year’s Eve that Congress was close to a budget deal, the market rallied. When Congress actually voted and approved the deal on New Year’s Day, the market was primed for a huge rally on Jan. 2.
The sharp two-day rally in stocks caused a huge drop on the CBOE Volatility Index (VIX). In fact, the decline from Dec. 28 through Jan. 2 (two trading days) was the biggest two-day decline in history for the VIX.
The VIX closed at 22.72 on Dec. 28, according to StockCharts.com, while the close on Jan. 2 was 14.68, making the percentage decline 35.4 percent.
The weekly decline on the VIX was 39.1 percent, which is the third biggest weekly decline ever.
The huge drop took the indicator below the 15 level for the first time since October and for the fourth time in the last three years.
Each time the VIX has dropped below 15 in the last few years, a correction has followed within the next few months.
With earnings season kicking off with Alcoa’s earnings report tonight, we could be looking at a replay of the earnings season in October.
If you recall, it was the first few weeks of earnings season that started the pullback in the fall.
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