SPX and VIX Correlation

The VIX is flashing warning signs.  It did so last Wednesday, 2/15, and you had a pullback the following day.  Yesterday, on a slight up day in the SPX, the VIX futures were up firmly, especially April.  Today in the pre-market, you have VIX futures up again meaningfully.  As you can see below, the VXX, VIX short term ETN, has been trending higher along with the SPX.  In fact, volatility adjusted, the VXX has been up more than SPY during the uptrend over the past 2 weeks.  That is quite hard to do when you consider the steep contango embedded in the VIX futures curve, making VXX go down in a natural decay if VIX stays stable.

Past instances of VIX moving in the same direction as the SPX acted as a warning that the market is about to pullback.  With the French elections in April/May, Trump's tax plans seemingly taking longer than many thought, and continued hawkish rhetoric from Yellen, any one of those things could act as a convenient excuse for hedge funds to reduce their equity exposure.

The question is how far do we pullback.  Eventually, we should go back to the breakout area of SPX 2300, but it could take a few weeks to get there.  Before then, I don't think we can rally much from these levels.  We could chop around for a week or so and then drop in March.  Not a huge amount of conviction on the extent of the pullback, but the timing should be soon.  I would think that any Trump tax announcement in the coming weeks will be met with disappointment and a sell the news reaction.  There are still a lot of Republicans that oppose the border tax, and without it, you need a debt explosive tax plan, which seems like a possibility if the border tax doesn't get through.  Mid march would also coincide with a pre-French election risk off mood.  All signs point to a pullback.

I have yet to get a short position and I regret not shorting the intraday bounce near the close.  If we get another move towards yesterday's highs in the coming days, it is a good risk reward chance.  I am finally getting interested in shorts, but want to wait to short near all time highs to give myself a better chance to hang on through the chop.

Neutral on bonds here, it could go a bit higher into month end, but then you probably will get your typical selling early in the month ahead of nonfarm payrolls.