On Friday the market rallied 50 dollars, and the VIX sold off 2 bucks...into a weekend. Then yesterday the market sold of 1 point and the VIX gave away a little more. Today, the SPX sold of 35 bucks, basically the lows of Friday, and the VIX was up about 2.00 even. What gives? Well I think the answer lies in the futures. While the VIX cash has remained, save .02%, above 20, but managed to fall back into contango relative to the VIX futures and VXV. The VIX futrures have been trading in a backward state out to may the entire rally. Today's did not help.
The one thing that has been stunning about this sell off has been the total lack of volatility as seen in the VIX. The VIX barely touched over 30 on Friday despite the middle of a 60 point sell off and a new low below levels from August. By the end of the day the VIX closed around 27. Today we saw the same thing, the SPX rocketed higher on the open and VIX got killed. Then by days end the entire rally was gone, and in fact the SPX had been down as much at 15 at one point. But take a look at VIX with the market up 14 and the market flat...coming off a huge sell off.
As nice as today was, the VIX futures are not giving the all clear yet. Ignoring the January contract (it has a week to go) one can see that the VIX Feb future is trading at a nice premium to the March future still. Meanwhile, in the further back months, the throttle has come off and the market appears to be willing to bet that 'extreme' volatility is more short dated. Even so, this curve does not scream 'safe.'
Around noon today I was working with a client in a mentoring session discussing risk managment when something strange happened. The SPX rallied about 3 handles...not strange, but with that rally came an absolute woodshed style THWACK to VIX and VIX futures. In a matter of minutes VIX went from Flat on the day to down .80, ending down about 1.25. VIX futures for there part gave away almost as much in a short period of time falling from 20 back to 19.50 i minutes.