If the derivatives market sees the future better than the stock market (many claim this to be the case), those folks made it clear today that the rally in the equities market is not over.
When the VIX crossed 15 and appeared to be headed much higher, the futures barely budged, and this was a clear indication that the volatility in the market was not going higher today, and that the sell-off in equities was not driven by significant fear. The futures barely touched 16 when the VIX hit 15.30.
| Symbol | Contract | Month | Time | Last | Change | Open | High | Low |
|---|---|---|---|---|---|---|---|---|
| VX H3-CF | S&P 500 VOLATILITY | March2013 | 16:05:31 | 14.65 | 0.95 | 13.50 | 15.38 | 13.15 |
| VX J3-CF | S&P 500 VOLATILITY | April2013 | 16:05:44 | 15.32 | -0.08 | 15.10 | 16.15 | 14.85 |
| VX K3-CF | S&P 500 VOLATILITY | May2013 | 16:05:44 | 16.20 | -0.15 | 16.25 | 16.92 | 15.85 |
| VX M3-CF | S&P 500 VOLATILITY | June2013 | 16:05:44 | 16.90 | -0.05 | 16.90 | 17.55 | 16.55 |
At the end of the day, the April contract ended up falling on a day when the VIX rose 7%. Tomorrow the April contract is the front month, and will roll into May. May will probably hold its value for throughout the cycle, as the month is notorious for vicious market sell-offs. Therefore, the negative roll could get expensive for the VXX.
This roll could very easily be 10% for the next 20 trading days. Yet if you are short the VXX as a short-term trade, a sell-off in equities of the real kind will certainly drive futures far above today’s prices.
The way the market handled the Cyprus nonsense spoke volumes. There were a few sellers and few buyers. At the end of the day, shorts were left wanting again, and covered into the close. Once Ben states that he’s pumping primer until 2033, who would be surprised if the market rallied to new highs? People forget, dual mandate: interest rates and employment levels. He is in no danger of an issue with either, so the pump is on. He is a huge advocate of not cutting off  stimulus until he is sure the economy is moving strongly forward. He specifically studied the effects of pulling stimulus too early after the great depression and the stock market crash and recession of 1937.
Action/Trades:
Closed the short legs of the VIX calendars, holding only the VIX $14 calls. Still long VXX calendars, Mar4/Apr, and will roll the short legs forward Thursday provided they haven’t eroded. Still long Apr. $19 VXX puts.
Added VXX $18 April puts for .19 as tweeted this afternoon.
Outlook:
Still anticipating some quiet trade and the Cyprus situation to fade into the background. Tomorrow will be primarily Ben and a “stay the course” theme.
