Even as the S&P 500 pushed further into overbought territory last week  and the VIX Premium Ratio moderated back toward its normal range,  we saw an interesting development in the ratio of current realized to lagged implied volatility.  To review, that ratio plots the current 21-day realized S&P 500 volatility over the VIX reading from 30 calendar days ago. Essentially the ratio asks how well implied volatility estimates from one month ago predicted the volatility that was realized over the subsequent month. Much of the time, this ratio isn't of particular interest, but moves into extreme territory have coincided with major shifts in the market. I regard the area of 0.9 -1.2 as a neutral area, with readings below and above indicating that price behavior has been respectively more or less volatile than expected.
The ratio touched the 2.0 area last week, a level not seen before since the inception of this letter. One way to interpret that reading is as a sign that index options have actually been overpriced over the past month, as unlikely as that may seem. I would caution against regarding this ratio as a predictive indicator in itself. Given the mean-reverting nature of volatility it is reasonable to expect extreme readings to moderate fairly quickly, and to some extent this has already happened: the VIX at 30 figured into  is 20% higher than the current VIX price, and that decline will be reflected as the ratio rolls forward. Even so, realized volatility continues to decline as well, and I do not expect it to remain below 20 for very long, so equity longs in particular should consider tightening stops or taking some profits in unhedged positions.
1. Comment. Highlights items of note in the data below along with our short-term volatility bias and any trading theses. The Expected Daily Move table displays the de-annualized price and percentage change in each underlying asset as implied by its volatility index, within one standard deviation. The Forward Bias table displays my bias for the movement of the price and implied volatility of several assets for the coming week.
2. Weekly Change. Tracks the weekly percentage change in the assets listed and in their implied volatility indexes.
3. Implied Volatility Indexes. A one year chart of the implied volatility indexes for the S&P 500, gold, oil, and USD/EUR. Indexes for the Nasdaq 100 and Russell 2000 are omitted because of their tight correlation with VIX.
4. S&P 500 Price and Bollinger Bands. Tracks daily closing prices in SPX with an overlay of one and two standard deviation 50-day bands.
5. S&P 500 Implied and Realized Volatility. Tracks the 21-, 60-, and 90-day realized (or “historical”) volatility of the index and the21-day lagged CBOE Implied Volatility Index ("VIX"). Realized volatility is displayed as the annualized standard deviation of lognormal returns over the period specified, and may be thought of as a backward-looking measurement of price behavior. Implied volatility is the annualized standard deviation of returns implied by option prices, and may be thought of as a forward-looking measurement of expected price behavior.
6. S&P 500 Implied/Realized Volatility Ratio. Tracks the ratio of 21-day lagged implied volatility (IV) to 21-day realized volatility (RV). This ratio asks how well IV from one month ago predicted the RV over the next 21 trading days (roughly, 30 calendar days). When IV correctly anticipates RV over the period, the ratio will hover near 1; we regard the area near 0.9 –1.2 as normal, given the persistence of a volatility risk premium in equity market derivatives. A ratio less (greater) than 1 indicates that the price behavior of the underlying asset was more (less) volatile than anticipated.
7. Volatility Futures Term Structure. Tracks the Friday closing prices of the Volatility Futures complex (VIX, VXD, RVX) for the two weeks prior, along with the spot levels for reference.
8. VIX Premium Ratio. Tracks the ratio of rolling three-month (VXV) to one-month (VIX) implied volatility. Periods in which one-month readings persist at an extreme premium or discount to three-month levels have tended to coincide with major market moves.
9.S&P 500 Daily Return Distribution (3 month). Histogram plotting the frequency of daily percentage returns over the prior 63 trading days.
10. Implied Correlation Index. Reflects the market-capitalization weighted average correlation of the 50 largest components of the S&P 500.
11. Gold Price and Bollinger Bands. Tracks daily closing prices in GLD with an overlay of one and two standard deviation 50-day bands.
12. Gold Implied and Realized Volatility. Tracks the 21-, 60-, and 90-day realized (or “historical”) volatility of the ETF and the 21-day lagged CBOE Gold Volatility Index ("GVZ").
13. Gold Implied/Realized Volatility Ratio. See #6 above; given the novelty of the VIX-style gold volatility index (GVZ) and the characteristics of the underlying, we do not yet have a range we regard as normal.
14.Gold Daily Return Distribution (3 month). See #9 above.
15-18. Oil charts correspond to 11-14 above.
Disclosure: No positions