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VIX futures contango and backwardation - VIX/VXV ratio chart

If you trade VIX             futures (and if you ever bought/sold UVXY             you do) then contango and backwardation periods are important to monitor.

Several analysts over the years have suggested a .90 ratio of the VIX             to VXV             for detecting contango (under .90) and backwardation (over .90). That ratio chart is presented here with the UVXY/VIX in the background. Why UVXY/VIX? Because UVXY             loses value relative to the VIX             consistently due to contango. Pull up a 5 year chart of UVXY             to see why contango makes it the worst hold there is.

On the whole the .90 rule works - you can see where the UVXY             is rising in value relative to the VIX             (backwardation) when above .90. This all makes sense - think of VXV             as "the 93 day version of the VIX" (http://vixandmore.blogspot.com/2012/07/crazy-vixvxv-ratio-chart.html) and realize that backwardation happens when the distant future seems more certain than the immediate future. So when the VXV             (as a denominator) shrinks relative to the VIX             (the numerator) we have traders much less certain about the next 30 days than the next 90. Such periods are when UVXY             builds value. The UVXY/VIX chart shows such periods to be brief.

EDIT: Just noticed that spikes below 0.80 also result in backwardation of UVXY             . Now to figure out why.
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