With the Volatility Index back down to a bargain $16, I am getting deluged with emails from readers asking if it is time to start hedging portfolios one more time and buying the iPath S&P 500 VIX Short Term Futures ETN (VXX).
The answer is not yet, but soon, possibly very soon. And here is the anomaly in the market today. Volatility does not reflect actual short-term movements in the S&P 500.
While we have seen several 200-point moves in the market in the past three weeks, the volatility Index (VIX) has spent only hours over the $20 level. That is because the ($VIX) measures anticipated 30-day volatility, and for the past 30 days, the overall net move in the market has been zero.
They are inquiring at absolutely the wrong time.
And here is the problem. When the (VIX) rises, it usually spikes straight up and then right back down again. This time, it spiked but has since hung around the $20 level rather than collapse back down. That suggests that there is another leg up to go in volatility until it hits $50 or more before it takes a much-deserved break. That means the stock market has one more sharp selloff left before we hit bottom and bounce.
Markets can ignore trade wars, rising interest rates, rocketing interest rates, and international political instability (Gaza, Ukraine) for a while, but not forever. When the time DOES come to pay the piper, prices will fall, and volatility will rocket.
So, I am more than usually interested in hedging the downside risk for my trading book. A good rule of thumb is to let the (VIX) sit at a bottom for a week, and then go buy the (VXX). Two weeks is even better. That way, you can ignore expensive and unnecessary time decay.
Which all brings me to the subject at hand.
If you are new to the service and have no longs, you probably should skip this trade and just watch it as a learning experience.
This can also be a great hedge for any long positions we may want to add in the coming weeks, such as in “trade peace” or technology plays.
As I never tire of telling people, no one ever complains when they buy fire insurance and their house doesn’t burn down.
If you are new to this service, don’t freak out. My daily research newsletters are not always about exploring the esoterica of options or volatility trading.
I’ll let you know when I’m ready to pull the trigger with a Trade Alert.
I am always trying to get better prices.
