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A Tale of Two Vols

Thus far, the S&P 500 seems to be holding onto its relative strength.  Despite some stable footing, we continue to watch the VIX and shorted dated implied volatility march higher.  With this trend we have seen a fairly strong divergence between historical volatility and implied volatility:

Which one can be trusted?

This same phenomenon occurred back in August/September 2009 after the rally off of the lows was a few months old.  It is often an artifact from investors’ disbelief in a rally and their subsequent purchase of crash protection as fear is still top of mind.  We will see if this pricing holds any truth, but right now I feel as if this rally can hold up through year’s end because despite the poor sentiment the market does seem to have legs.

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