A mere 7 hours ago in "Just in case there is no deal" [4] as is now the case, we noted that there was a considerable divergence between the equity market's roiling exuberance (and the accompanying over-confidence of the naive watchers) and the occurrences in the implied volatility world. VIX had decoupled rather notably from stocks (and its term structure had flattened as short-term protection was heavily bid). Sure enough, at the first sign of things not quite going to Plan (A, B, or Z), equity futures have collapsed amid a total farce of a market liquidity to recouple with volatility. With quad-witching tomorrow, we can only imagine the efforts the algos will be going to tonight to keep this afloat.
S&P 500 futures recouple down to VIX
[5]
Meanwhile S&P 500 futures are anchored to VWAP (but unable to break above)...
[6]
Of course, the whole point of this superficial equity-to-reality divergence was to fool - very successfully judging by the flash crash - both relatively smart market participants, what little of them is left, as well as superficial sidelines' commentators with zero trading experience.
People are freaking out way too much about the "collapse" of the fiscal cliff talks. The market gets it, once again.
— Joseph Weisenthal (@TheStalwart) December 20, 2012 [7]
Chart: Bloomberg