Markets adjusting to new world of less easy money
Markets are calibrating to the new world of a less easy Fed.
Traders will be watching for those types of Fed-related moves Friday, amid the activity generated by the quadruple expiration of futures and options, and re-balancing of the S&P 500 and Nasdaq. Facebook will join the S&P on Friday afternoon.
There is also third-quarter GDP on Friday at 8:30 a.m. ET. It is the third look at the number, which has risen to a surprising rate of 3.6 percent. Just several weeks ago it was expected to be 2 percent.
"If it's revised at all I think it would be marginal," said Ward McCarthy, chief financial economist at Jefferies. "What matters is we've seen progressively faster GDP growth this year—1.1 [first quarter] to 2.5 [second quarter] to 3.6, and right now I'm at 2.7 for the fourth quarter. I'd be very surprised if that' didn't figure into the Fed's thinking."
Traders have been eyeing the yield curve, which was getting flatter Thursday with 5-year notes trading as high as 1.7 percent. The 10-year yield also crept higher, to as high as 2.95 percent and was at 2.93 percent in late afternoon.
"They got whacked," McCarthy said. "One possible interpretation of that [move in the 5-year] is that the market's comfortable that the Fed's not going to raise rates out for two years but less comfortable beyond that. But then issues out the curve have been trading better because I think primarily the size of the taper was pretty moderate. The worst anxieties were not realized."
(Read more: Fed created 'gross distortions,' says Ron Paul)
Stocks meandered Thursday after surging to record highs Wednesday following the Fed's announcement that it would trim its $85 billion a month bond-buying program by $10 billion. The Fed also sought to reassure the market by stressing that it would keep short-term rates low for a long time.
But Adrian Miller at GMP Securities said the bond market senses that the Fed may move up the timing for raising short-term rates to mid-2015. That has created some of the action in the middle of the curve, he added.
"I think it might be a delayed reaction to the Fed's announcement yesterday with an understanding that in this forward guidance we heard yesterday, I think the Fed is going to try to unwind a little faster than we anticipate," said Miller, who is GMP's director of fixed-income strategy.
Miller said the market is also less liquid at this time of year, which would exaggerate moves.
(Read more: Wits beat out speed in S&P's post-taper surge)
Perhaps the most dramatic market response to the Fed's action was in the gold market. February gold futures plummeted over 3.3 percent, to a more than 3-year low of $1,193.60 per troy ounce.
Traders said the metal is testing a key support level in the $1,180 to $1,200 range and that the selloff was made worse by tax loss selling in the SPDR gold ETF GLD.
As for stocks, investors were actively pursuing protection against a downdraft in stocks when the Fed begins its taper early next year.
"We've been seeing a lot of put buying in near-dated options and even longer-dated options," said Patrick Kernan who trades S&P 500 options at the CBOE.
"There have been a lot of people buying volatility and buying puts pretty much across the board. A lot of January options, a lot of February options, a lot of weekly options," he added.
Kernan said it appears investors are making more bets on volatility in the stocks early next year, with puts that are 5 percent to 10 percent out of the money.
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.