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Thursday, March 28, 2024

ETF Periscope: Bears Biting the Bullet or Biding Their Time?

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Bears Biting the Bullet or Biding Their Time?

Courtesy of Daniel Sckolnik of ETF Periscope

“If you do not change direction, you may end up where you are heading.” ~Lao Tzu

Are the Bears beat up enough to head for their caves, curl up into hibernating mode and call it a winter?

Lately, it seems as if the markets are finding a positive slant to just about any news that crosses its path. That pretty much defines the nature of the recent uptrend of the last six weeks as both the Dow Jones Industrial Average (DJIA) and the benchmark S&P 500 Index (SPX) continue to soldier bravely on in the direction of new highs for the year.

The overview for the week seems to solidify this perspective, with a mixed bag of economic and financial news steadily nudging the markets higher on the whole, even with the dip in the Dow on Friday. The usual weekly financial reports were joined in by the sonorous tones emanating from Big Ben’s pronouncements, combining for an overall gain in many key areas. The Dow ended at 11,062, up 0.5% for the week, closing above the psychologically significant 11,000 mark for all five sessions. The benchmark S&P 500 Index was at 1176, up 1% on the week, and with no obvious technical hurdles to cross before it hits the year’s high of 1217. The Nasdaq (COMP) continued on its tear, adding 2.8% for the week. Not exactly bubble territory, but certainly indications of a healthy pulse.

Notice a pattern here? Yup. Uptrend.

So what was some of that noise that the market considered, swallowed and spit out without any significant signs of indigestion?

Well, Google, for one, certainly added a dimension of positivity. Analysts were obviously taken aback by the degree of Q3 success that Google (GOOG) had, with revenue coming in at a hefty $7.9 billion, well above the mark expected by those who claim to know such things.  The market responded by adding 10% to the search engine giant’s scorecard. In other news, while the Consumer Price index moved up in September an almost imperceptible 0.1%, the closely watched Reuters/University of Michigan Consumer Sentiment report revealed an unexpected dip, meaning the masses are not seeing things through rose-colored glasses at the moment.

But never mind that, as far as Wall Street is concerned. Investors were more focused on what the Fed had to say, and what they said was, “Let’s print some more money!” Well, what Bernanke actually said was “quantitative easing” is still an option that’s available and waiting in the wings, somewhat like an eager understudy ready, able and willing to make an appearance. He expressed concern that he’s a bit spooked at the possibility of deflation rearing its big, ugly head, and this revelation surprised absolutely no one. Oh, and don’t worry so much about higher interest rates. Won’t happen anytime soon.  So the markets nodded at this sage and retreaded bit of news, and pretty much continued on their merry way. Which is towards the upside.

One of the things worth noting in review of the past week was the action of the VIX, often referred to as “the fear index.” While the Dow was experiencing an unusually tight intraday trading range of 250 points total throughout the week, the VIX fell below 18 on Wednesday, its lowest level in over 6 months. At that level, a strong indication is given that a high degree of volatility has been, at least temporarily, removed from the markets. Though the level topped out above 20 later in the week, it ended at 19. While not at the year’s lowest levels just south of 16, it’s still a long way off of the mean average, which is closer to 30. So, if the Bears are looking for signs that it’s safe to emerge from the cave, this could be one of them.

The saying “the trend is your friend” has certainly earned the respect of investors, and adding some Bullish bets to your virtual portfolio might make sense in the current environment. However, if you want to hedge your bets, one way to protect yourself against sudden moves in the wrong direction is to buy some downside insurance, and the VIX serves as a good tool for that purpose, as it serves as a good hedge against the broad markets. If you trade futures, you can trade the VIX directly. However, for those who may seek an easier way to use this tool, you can use either of two ETNs that attempt to track the VIX. One is the iPath S&P 500 VIX Short-Term Futures ETN (VXX) and the second is the Mid-Term Futures ETN (VXZ).  Buying Calls on either of these is one way to accomplish the task of hedging your overall downside market risk.

Or, if you’re one of the beleaguered Bears, you can use these ETNs as a way to make your primary play to bet on the market’s next dip, dive or crash.

ETF Periscope

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