Everyone was waiting on the Fed announcement and Bernanke surprised the market by announcing they are beginning to scale back the quantitative easing programs now. Not many analysts expected that. The initial market reaction was what one might have expected; the market traded down. But then it reversed and turned into a huge rally before the day was over with an increase of $30 on SPX, closing at $1811. RUT gained $15 to close at $1134. Volatility pulled back markedly with the VIX dropping almost two and a half points to 13.8%. As one might expect, trading volume shot upward with three billion shares of the S&P 500 stocks trading. Trading volume spiked upward 32% on the NYSE and increased 19% on NASDAQ.

Bernanke announced they would reduce the stimulus programs by ten billion dollars per month and will consider further decreases based on economic data. He speculated that the QE program may be completely phased out by the end of 2014. The Fed's assurance that interest rates will remain low may have reassured the markets, but that isn't new, so I am unsure why the market took off so strongly. Once again, the market has a way of giving us the unexpected.

Housing starts came in at 1091k for November, up over two hundred thousand, but building permits dropped thirty two thousand to 1007k.

Some are saying this is the expected Santa Claus rally. I suppose we will see. The size of this market increase seemed inexplicable on the basis of any of the economic data. Earlier this year, any discussion of the Fed reducing their stimulus was met with a market sell-off. Perhaps the interpretation this time is that the economic recovery must be much better if the Fed is taking this action. I will be interested to see if any follow through occurs tomorrow and Friday.