Mixed Signals

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Today, the market bounced from its oversold levels. The way the futures traded yesterday afternoon and the sky-high jump in the price of Face Book seemed to nearly guarantee such a day. At the end of the day, however, the market sold off a little. Not much, but one could sense those who trade single day bounces were bailing out (its the opposite of a short covering rally at the end of a down day); for they are yet to be convinced that the next market phase is in focus. The behavior of the VIX today confirmed their trepidation.

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The VIX graph shows the two front-month future contracts selling at the same price and both under the VIX cash market. This is a weird pattern. During the bullish phases, all the futures contracts sell at a premium to the cash. Over the past year, when the cash is rich compared to the futures, it is time to short volatility without too much regard for the cost to carry long options.

The only right conclusion is that the future direction of the market hasn’t been set yet. We have mixed signals.

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