The last few months have seen US equity markets swinging from confidence to grave concerns (briefly) and back to exuberance even as the looming 'debt ceiling' and sequester remains dead ahead. The pattern is eerily similar in price (and volatility) terms to the movements ahead of the Summer 2011 'debt ceiling' debacle. What is just as concerning is, as Bloomberg's Chart of the Day shows, is the mass psychology aspect, as mentions of the words 'debt ceiling' are once again gathering pace, just as they did in 2011. Markets may not repeat, but they do echo; and as UBS' Art Cashin noted, this month marks the 40-year anniversary of a significant top in the market as stocks broke to all-time highs and "all appeared right with the world." Perhaps, it is our inexorably optimistic belief that the politicians will fix it all (or kick the can) at the last minute - so there is nothing to fear but fear itself; or perhaps this time, there is a line in the sand that both sides need to defend.
The S&P 500 has followed a very similar trajectory heading into this uncertainty - but moreover, the mentions of 'debt ceiling'; are picking up dramatically and will increasingly weigh on mass psychology...
and perhaps that is why the VIX term structure is also showing a very similar path of over-confidence (and longer-dated hedging)... an initial flare of risk (with spot VIX inverting to the curve) followed by a push out almng the curve (where we are now) which is followed by the front-end catching back up as the risk deadline becomes much more imminent