Vexing Over the VIX

I am a short-term bear on the US market. Given the performance thus far, there is more downside than upside. Case in point, the S&P500 is up 9% YTD. At this clip, the S&P500 will be up over 36% for the year. This will occur on the back of 13.41% gain in 2012. Inconceivable as the Sicilian from Princess Bride would say. If the US and the global economy were roaring like in the pre-2008 era, it would be conceivable but they are not. The US economy will barely grow at 2% (vs 4%+ pre-2008). Global GDP will be lucky to pull in 3.3% (vs 5%+ in the heydays) growth rate given the obvious slowdown in BRIC countries.

One of the measures of investor sentiment is VIX. Using range of out of the money call and put options, the CBOE estimates the likely movement in the S&P500 index over 1 month period. Today VIX is at 13.36, meaning that the options market forecasts the S&P500 to move 3.86% in the next 30 days (13.36%/√12). That is not a lot considering that the S&P500 can move that amount in couple of sessions. There are VIX future contracts (Bloomberg: UXJ3) where investors bet on the future path of VIX. The VIX future for the end of November is 19.40 suggesting that the investors expect volatility to increase as we head into the dog days of summer.

My hunch is that the S&P500 will test 1,500 in the next month or so. That's not an outlandish prediction because it is just 3.35% from current level and entirely within the range implied by current VIX.