Actual Volatility and Forward Implied Volatility Continue To Diverge

Actual historical volatility for the S&P 500 over the past 3 months (HV63) fell to 9.24 today, putting current 30-day forward volatility (VIX) at a 50% premium. From the VIX Futures Data page:

This is getting to be a pretty large gap and it looks like it could be a good time for new long positions in XIV in the next day or two. However the risk of a position in XIV right now is that the premium between VIX and front month futures (the yellow and blue lines above) is only 2%. This means that if we do see a VIX spike there is very little "buffer" in M1 to absorb the spike so it will be more likely to see gains as well, especially if VIX stays above M1 for a few days.

We can see this risk reflected in the VXX Daily Forecast gauges. A short VXX (or long XIV) position is still in favor (just barely), but the risk of a spike has been increasing over the past several days. In fact, if you look at the daily chart of VIX you'll see that it's been on a choppy rise over the past 2 weeks -- a pattern that sometimes leads to a large VIX spike. I still think that a smaller position or no position is justified until we see some real relief in the VIX..

Some other interesting action today can be observed by using the intraday SPY arbitrage model, which seemed to be all over the map.

Short term futures were up over 2% (as seen in the decline of XIV), pricing in a downward move in the SPY. The term structure for the first two months flattened to under 1 point until about mid-day when XIV decided to reverse to catch up to SPY and close up 1.5%. VIX futures closed lower and with a wider contango spread (-1.3).

Treasury yields decoupled from SPY, falling all day and closing substantially lower (see TBF). 

High Yield Credit (HYG) sold off pretty hard toward the end of the day and finished negative.

So a bit of disagreement between assets and reason for continued caution. 

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