The following is analysis from The Decline and Fall of Western Civilization:
S&P 500 options to protect against declines in stocks over the next year cost 22 percent more than one-month contracts, the highest since 1999, data compiled by London-based Barclays Plc and Bloomberg show. … The last time the average gap between one-year insurance and 30-day contracts was higher was five months before the S&P 500 began a 49 percent plunge in March 2000 during the collapse of the Internet bubble.
Those last five months were a doozy, though. further, as noted by Adam Warner on twitter:
Options has called 30 of the last 2 $VIX explosions, will post later on it.
A yet better indication might be the commitments of traders data. Jason Goepfert:
Speculators continue to like the Nasdaq 100. Really, really like it.
The chart below shows commercial hedger positions in Nasdaq 100 futures, but by definition, large and small speculators are taking the other side of the trade. The bottom like is that “smart money” hedgers are net short to one of the most extreme degrees in the history of this data (going back to 2000).
The other three weeks highlighted on the chart are 12/01/04, 12/05/05 and 10/15/07.
Daily NYSE reported short interest also shows a massive spike in specialist short sales on friday (december 4). these often mark short-term tops.
I think the VIX contango really only gains a lot of meaning with context like this.
The third aspect to watch closely will be the dollar, which is probably funding a significant global carry trade.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.