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Thursday, May 24, 2012

VIX & VIX Futures Still Overvalued

 - Last Friday, VIX front month futures closed 22.7% above FVEF Indicator, which was the most "overvalued" in 5 years.  I honestly thought either this is the most opportune time to short VIX futures or my model is "not working", which undoubtedly put me at great unease.

- Well, from last Friday's close to Tuesday's low, VIX front month futures plunged from 28.25 to 22.85 or 19.1%.  In fact, VIX front month futures fell to par of FVEF at its lows on Tuesday before jumping up again.

- As the red line shows on the top chart, FVE has actually been falling this entire week, which was an indication that the underlying market was becoming more stable.  As shown on chart of SPY, we broke out of the short-term falling channel today.

- With all the headlines and fears and Volatility instruments like VIX & VIX Futures spiking up, it is very surprising that the underlying market's fall has been and still is orderly, relatively speaking.  In fact, I'm surprised with all the doomsday scenarios out there, SPY has yet to test the 200-day moving average.  Something is likely to give.  Either SPY has much more to fall or VIX & VIX futures does.  And what VIX futures price action showed me this week is that I should not doubt my FVE model.

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