We all know that when the S&P 500 goes up in value, we generally expect the VIX to go down in value. If we perform a linear regression between the S&P 500 and the VIX, we can come up with a linear formula to rougly predict that relationship. Using weekly returns going back to September 2009, that regression has an R-squared of about .65:
This regression says that the Weekly VIX Return = -5.736* Weekly S&P 500 Return + 2.582. With the last weekly S&P 500 observation at +4.741%, that would predict a decline of (-5.736*4.741+2.582)= -24.61%. In reality the VIX only declined 17.33% last week.
This mismatch is even more pronounced with longer term VIX futures. If we pick the 7th monthly contract, the March 2012 issue, we see a massive out-performance by the S&P 500:
In this example, the March VIX futures actually had a positive 3.54% return when the S&P 500 had a 4.741% return. Quite a bit off from the predicted -6.5% return for that particular VIX futures contract.
This analysis can be repeated with treasury yields and corporate credit spreads. All three risk factors have become slightly misaligned from the broader equity market returns. Either equities are leading the way up, or the lack of trading volume shows that the current rally has little true support.