FIX FUTURES SHOW DISSENT

By Surly Trader

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.

Surly Trader

Share Trading can be stressful, but playing a rigged game is worse. SurlyTrader will explore the hidden game of financial institutions and the government that supports them while providing useful tips on trading strategies, hedging and personal finance. SurlyTrader is a portfolio manager at a large financial institution who specializes in trading derivatives.

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