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Courtesy of Daniel Sckolnik, ETF Periscope. Daniel asks, Is It Just Me, Or Is It Getting a Little Volatile In Here?
“It is by going down into the abyss that we recover the treasures of life. Where you stumble, there lies your treasure.” ~Joseph Campbell
Now is the time of the Dog Days of the markets.
Not the Bear Days, nor the Bull Days. The Dog Days. That string of market sessions that get played out from the holiday-shortened week of Thanksgiving through the Christmas holidays and right on through to New Year’s Day. When volume can be a bit thinner than usual, news is often inconsequential, and investors’ heads are filled with dreams of sugar plum fairies. Or, at least, their version of such things.
Last year, for example, during this same time period, the Dow Jones Industrial Average (DJIA) started and ended right at the 10,400 level. For those with short memories, that year, 2009, was a significantly more volatile year than this one has proven to be.
This year, though, things are starting to have a different sort of feel. During the course of the last five sessions, the Dow had two separate days where it opened and closed over a range of 170 points. You’d have to go all the way back to the first week in June of this year to find a pair of sessions in the same week with at least that same degree of movement.
So what’s making the markets move? Generally speaking, the usual suspects, of course. Fear and greed, the eternal yin and yang of the markets. Some of the fear has emerged in the form of concerns for the problem of the Irish debt, which began to permeate the markets early in the week, and had investors concerned that the weaker links in the European Union, primarily Portugal and Spain, could become infected with the contagion. The news on Sunday that the EU’s finance ministers agreed to a formal appeal by Ireland for a massive loan bail-out to help prop up the struggling Irish banks might serve as a reason to sigh in relief, or cringe in apprehension of a replay of last April’s mini-panic caused by similar events centered around Greece’s sovereign debt.
Some other undercurrents of uncertainty, which invariably impacted the markets to the downside, had to do with China. Shanghai’s Composite Index lost about 8% over a three-day period, driven down by concern that China’s central bank will tighten monetary policy. This spooks investors in the U.S. equity markets, at least to a certain degree.
So what stopped the fear from coursing through the markets, the fear that was pretty evident during Tuesday’s big drop-off? Well, greed, of course. Greed in the form of opportunity. Apparently, there were enough attractive price-points available in the equity markets to not only halt the down spiral, but, as evidenced by Thursday’s big gains, reverse it as well. In addition, there were other, more technical reasons that may have played a part in the reversal. First, the psychologically significant 11,000 level of the Dow seemed to serve as strong support. Second, the Dow’s 50-Day moving average, which was lightly brushed during Wednesday’s market action, added another level of support. Together, this confluence of technical factors, while hardly being the sole reason, was certainly a contributing factor to Thursday’s gains.
Something else worth looking at is last week’s swing in the VIX. The VIX, a widely used measure of market risk and often referred to as the “investor fear gauge,” hit 23 intraday on Tuesday, yet closed a hair over the 18 mark on Friday. That is a 20% swing, pretty substantial, and also revealing as a certain indicator of the sentiment in the markets.
If your virtual portfolio is tilting upwards towards the Bullish side, and you don’t want to make major adjustments in the composition of your virtual portfolio, you might consider purchasing some downside insurance via the VIX. It is worth noting that a rise in the VIX indicates “fear,” which accompanies drop-offs in stocks. A drop in the VIX means that uncertainty is replaced by a feeling of more stability, and generally, mirrors a rise in stock prices.
One way to play is in the form of the Exchange-Traded-Note VXX. VXX, the IPath S&P 500 VIX Short-Term Futures ETN, doesn’t track the VIX, precisely. It does, however, follow a daily rolling position in the two front months of the VIX futures contracts, and provides a pretty good correlation, close enough to serve the purpose of monitoring the market sentiment. You could buy the ETN itself, or purchase some Call options. Which options to use? There is not any single best answer. It is worth picking up one of the many books on the subject to get up to speed. That being said, a relatively simple play might be to go for a slightly out-of-the-money option, going two or three months out. That way, the volatility of the option on this “volatility” ETN is, to a certain degree at least, minimized.
Some investors balk at hedges as an unnecessary tool that limits potential profits. Consider, however, a good hedge being something akin to auto insurance. You hate to pay the premium, but if you have an accident, are you ever glad to have it. With the sensitivity of the VIX to the news, more reactive to the bad than the good, you can protect your virtual portfolio with a relatively simple play. Not a bad thing to have if you like to sleep soundly without worrying what might happen to the markets overnight. Of course, there’s a virtually limitless variety of ways to hedge, depending on both the makeup of your virtual portfolio and the types of investment tools you are used to working with. But the VIX is one of the purest of hedges, and, by using options on VXX, you can keep your “insurance premium” costs relatively low.
Granted, this kind of trade may be more work than you care to put in. But at the money you might be saving, it could be worth the effort. And, should the going get rough as the remainder of the year unfolds, a little bit of protection may be the smart way to go, just in case a Grinch happens along during the markets “Dog Days.”
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
“It is by going down into the abyss that we recover the treasures of life. Where you stumble, there lies your treasure.” ~Joseph Campbell
Now is the time of the Dog Days of the markets.
Not the Bear Days, nor the Bull Days. The Dog Days. That string of market sessions that get played out from the holiday-shortened week of Thanksgiving through the Christmas holidays and right on through to New Year’s Day. When volume can be a bit thinner than usual, news is often inconsequential, and investors’ heads are filled with dreams of sugar plum fairies. Or, at least, their version of such things.
Last year, for example, during this same time period, the Dow Jones Industrial Average (DJIA) started and ended right at the 10,400 level. For those with short memories, that year, 2009, was a significantly more volatile year than this one has proven to be.
This year, though, things are starting to have a different sort of feel. During the course of the last five sessions, the Dow had two separate days where it opened and closed over a range of 170 points. You’d have to go all the way back to the first week in June of this year to find a pair of sessions in the same week with at least that same degree of movement.
So what’s making the markets move? Generally speaking, the usual suspects, of course. Fear and greed, the eternal yin and yang of the markets. Some of the fear has emerged in the form of concerns for the problem of the Irish debt, which began to permeate the markets early in the week, and had investors concerned that the weaker links in the European Union, primarily Portugal and Spain, could become infected with the contagion. The news on Sunday that the EU’s finance ministers agreed to a formal appeal by Ireland for a massive loan bail-out to help prop up the struggling Irish banks might serve as a reason to sigh in relief, or cringe in apprehension of a replay of last April’s mini-panic caused by similar events centered around Greece’s sovereign debt.
Some other undercurrents of uncertainty, which invariably impacted the markets to the downside, had to do with China. Shanghai’s Composite Index lost about 8% over a three-day period, driven down by concern that China’s central bank will tighten monetary policy. This spooks investors in the U.S. equity markets, at least to a certain degree.
So what stopped the fear from coursing through the markets, the fear that was pretty evident during Tuesday’s big drop-off? Well, greed, of course. Greed in the form of opportunity. Apparently, there were enough attractive price-points available in the equity markets to not only halt the down spiral, but, as evidenced by Thursday’s big gains, reverse it as well. In addition, there were other, more technical reasons that may have played a part in the reversal. First, the psychologically significant 11,000 level of the Dow seemed to serve as strong support. Second, the Dow’s 50-Day moving average, which was lightly brushed during Wednesday’s market action, added another level of support. Together, this confluence of technical factors, while hardly being the sole reason, was certainly a contributing factor to Thursday’s gains.
Something else worth looking at is last week’s swing in the VIX.
The VIX, a widely used measure of market risk and often referred to as the “investor fear gauge,” hit 23 intraday on Tuesday, yet closed a hair over the 18 mark on Friday. That is a 20% swing, pretty substantial, and also revealing as a certain indicator of the sentiment in the markets.
If your virtual portfolio is tilting upwards towards the Bullish side, and you don’t want to make major adjustments in the composition of your virtual portfolio, you might consider purchasing some downside insurance via the VIX. It is worth noting that a rise in the VIX indicates “fear,” which accompanies drop-offs in stocks. A drop in the VIX means that uncertainty is replaced by a feeling of more stability, and generally, mirrors a rise in stock prices.
One way to play is in the form of the Exchange-Traded-Note VXX. VXX, the IPath S&P 500 VIX Short-Term Futures ETN, doesn’t track the VIX, precisely. It does, however, follow a daily rolling position in the two front months of the VIX futures contracts, and provides a pretty good correlation, close enough to serve the purpose of monitoring the market
sentiment. You could buy the ETN itself, or purchase some Call options. Which options to use? There is not any single best answer. It is worth picking up one of the many books on the subject to get up to speed. That being said, a relatively simple play might be to go for a slightly out-of-the-money option, going two or three months out. That way, the volatility of the option on this “volatility” ETN is, to a certain degree at least, minimized.
Some investors balk at hedges as an unnecessary tool that limits potential profits. Consider, however, a good hedge being something akin to auto insurance. You hate to pay the premium, but if you have an accident, are you ever glad to have it. With the sensitivity of the VIX to the news, more reactive to the bad than the good, you can protect your virtual portfolio with a relatively simple play. Not a bad thing to have if you like to sleep soundly without worrying what might happen to the markets overnight. Of course, there’s a virtually limitless variety of ways to hedge, depending on both the makeup of your virtual portfolio and the types of investment tools you are used to working with. But the VIX is one of the purest of hedges, and, by using options on VXX, you can keep your “insurance premium” costs relatively low.
Granted, this kind of trade may be more work than you care to put in. But at the money you might be saving, it could be worth the effort. And, should the going get rough as the remainder of the year unfolds, a little bit of protection may be the smart way to go, just in case a Grinch happens along during the markets “Dog Days.”
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
