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VIX Futures Showing Dissent

I am currently on a short sabbatical, but there are some market artifacts that I have to elaborate on.  I already suggested that I am not participating in the current rally, and in actuality I am reducing any equity exposure with each move up in the equity markets.  Many investors have decided to use VIX futures/options/ETP’s to hedge their long exposure in equities.  In my own investing world, I am literally shorting the S&P 500 against my own stock holdings.  The VIX futures are trading at a significant premium which should make the carrying cost of a long position more expensive than an outright short in equity beta.

I could spend quite a bit of time on why the market doesn’t *feel right*, but I would prefer to focus on one market artifact.  Since the beginning of the year, VIX futures have not moved as predicted against the S&P 500’s realized volatility:

The chart does not show you what to do, but it does make you feel like the current run-up in equity prices with a run-up between realized volatility and 1 month vix futures is a bit strange.  Either the VIX futures market participants are stupid, or they are predicting a reversion to high equity volatility in the near future that no other market participants are predicting.

I am hedging my long equity exposure as we move up in prices, but it all depends on how optimistic your outlook is.

Posted in Markets, Media.

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