Last Wednesday I discussed how a new VIX futures front month (March) which was priced much higher than forward implied volatility (VIX) and historical volatility would likely cause XIV to continue higher in the short term. After moving up from that time to over 7% into yesterday's close, XIV pulled back hard today to close down -8.9% as the market sold off a bit and traders started looking for protection with put options with spot VIX moving up 19.25% to close at 14.68 (highest close since 1/2/13).
The VIX futures curve flattened notably today, with front month futures closing just 0.65 below second month futures and the difference between 1st month and 7th month compressed to just 3.7 points. This flattening often indicates that there is imminent downside in the broader market and could move VXX higher and XIV lower (although I don't like long being VXX without backwardation in first two months).
Term structure as of close today:
Coinciding with these technical signals, the market expressed its displeasure of the FOMC when they suggested that they may need to reduce the $85Billion of QE that goes into the market each month, citing that continued QE may prompt excessive risk and that the economy is on a moderate growth path. But whether the level of QE can actually be reduced without causing an equity market sell off and a costly rise in interest rates remains to be seen.