Courtesy of Daniel Sckolnik
In terms of Wall Street at the moment, one word says it all: Volatility.
The word “volatility” has its roots in the Latin word for flying, and the markets have been soaring along a trajectory of uncertainty for the last two months. During this period, daily moves by the Dow of 2-300 points have been as frequent as at any time since the months leading up to the Crash of 2008.
Fear currently trumps greed, and investor sentiment has turned towards the dark side. A perfect example of that is how investors reacted this week when the Fed Chairman tossed Wall Street a bone, increasing its share of longer-term Treasurys by $400 billion.
It probably didn’t help things when Bernanke mentioned that “significant downside risks to the economic outlook” remained.
The crowd reaction? A ruder version of the “Bronx cheer,” and it was not pretty. The Dow shed 600 points in just two sessions, over 700 points on the week. Will there be more 700-point down weeks coming anytime soon? With the global markets this volatile, it’s as likely as not.
Consider some of the reports that emerged out of Europe last week:
- The Managing Director of the International Monetary Fund said dark clouds are over Europe, and there’s huge uncertainty in the U.S.
- The Greek Finance Minister told fellow lawmakers that in one possible bad scenario, the current agreement collapses and is followed by a disorderly default.
- A member of the European Central Bank Governing Council said a default by Greece could no longer be ruled out.
These are comments that hardly inspire stability in the EU crisis. And it is precisely the fear of defaults by one or more of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) that has been a key source of recent investor concern. Coupled together with the growing U.S. recession and China’s apparent economic slow down, high volatility may be “flying” around for quite a while.
So, for smart investors, it seems prudent to figure out if there’s a way to get a clear read on volatility levels.
Most investors are familiar with the VIX, which is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index. It consists of a wide range of S&P 500 index options, and is often referred to as the “investor fear gauge.” When the VIX goes up, it indicates uncertainty and fear. A drop in the equity markets usually accompanies it. Conversely, when the VIX goes down, the Dow tends to trend up.
This past week, the VIX was up over 30%. If you held one of several ETFs that track the VIX, it would have served as a pretty potent hedge. VXX (iPath S&P 500 VIX Short-Term Futures ETN) is the most popular by volume, while TVIX (VelocityShares Daily 2x VIX Short-Term Futures ETN) is a 2X leveraged ETN. Though both of these ETNs (similar to ETFs) are derivatives based on the VIX, neither tracks the index precisely.
Volatility is the currency of the markets right now. It might not be a bad idea to get familiar with this particular brand of currency, and figure out how to use it to your advantage.
This FREE webinar is open to all investors and traders who want to learn how to use ETFs to profit in today’s high volatility market! In his webinar, Daniel is covering many important topics, including:
1) The #1 thing you have to do to keep your investments safe (knowing this will help you avoid getting ulcers and losing sleep at night!)
2) Three simple strategies you can use to not only survive, but to thrive in today’s wild and volatile markets
3) A little known secret for hedging your portfolio against extreme moves (Hint: It’s not just about buying Put options or short selling!)
4) The single most important tactic you MUST use as a trader or investor to make money and stop losing it!
5) What you can do right now to help level the playing field so you’re not at the mercy of the “Big Boys”
Check out Daniel’s Free Webinar.
Daniel works with Sabrient Systems as an ETF expert and analyst, and is partnering with them to create a series of virtual ETF portfolios based on their proprietary quantitative analysis systems. He also writes ETF commentary for a large financial website. His new book on ETFs is slated for publication in the spring of 2012.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s ETF Periscope”
Disclaimer: This article 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 Daniel Sckolnik/ETF Periscope. Daniel Sckolnik/ETF Periscope 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.
Pic source: THE ACCIDENTAL BUSINESSMUM
