Tag Archives: events

VIX: A Hedge To Consider For Your Portfolio

It is not uncommon to see the markets follow irrational trends. Sometimes, the markets will climb up or drop down on information that may indicate contrary trends. This past month I’ve been watching the markets with immense caution; I was a little surprised that we have seen US stocks rise for a fifth straight week. For the long run, I have a handful of stocks I think will grow exceptionally, but for the most part I believe we are entering a bear market, and I have thus prepared myself with hedges. The headlines, and the data and statistics that are coming in from Central banks and governments across the world are not exactly signaling optimism for the markets, yet the markets are trending towards all-time highs. ^SPX data by YCharts I think it’s absurd that the S&P 500 is approaching all-time highs, especially at a time like this. I will not go in depth as to why I think we are due for a major correction (again), but I will simply write a basic summary about why we are likely going to continue falling into a bear market, and about why investing in the VIX index might be smart. The reasons for a bear market heavily outweigh the reasons for a bull market right now. Commodities have staged an odd recovery the past couple of weeks that hasn’t exactly made much sense. Most importantly right now is the prices of oil; oil has proved to be latched on to the movement of stocks and vice versa. Brent Crude Oil Spot Price data by YCharts Brent crude oil has spiked over $10 USD in less than a couple months, but why? The world oil supply has remained at roughly 98 mb/d the past couple of months and demand has also been idle. I firmly believe oil will stage a recovery, but this recovery seems fake and is happening way too fast, which is alarming. In addition to the suspicious rise in commodity prices, there is tons of debt everywhere. People are getting crushed by margin calls, people are still accumulating debt, and energy companies are on the brink of bankruptcies. Banks are also having a hard time. Many major banks are hitting 52-week lows, although they have recovered slightly; but that point aside, they are still going to have to deal with lower interest rates. Nations around the world are following a general trend of lowering interest rates, even into the negative and this will likely hurt major bank stocks. Banks have also proven to be central to market crashes in recent history. It was a little surprising to see the markets react so positively to the Fed’s latest press release. Yellen gave the people a lot of “ifs” and “buts” and “maybes”, and I feel it did not justify the market spike we have just seen. On top of all this, we are seeing a ton of political turmoil, which inevitably affects the markets. There are a lot of problems right now in the world: Brazil is on the brink of a political and economic collapse, Europe is dealing with the refugee crisis which in turn is giving right wing groups serious power and support, Brexit is a serious possibility and would have potential consequences on markets worldwide (and in my personal opinion the Brexit would negatively impact the world markets), and then there’s the Middle East tension. I don’t want this article to be a sensationalist piece, but there are a lot of similarities between what is going on right now and the 1930s. Basically, I believe we are in for a roller coaster ride, and if there are people out there who are long on the markets as a whole, maybe a hedge or two would greatly benefit your portfolio. The VIX index The VIX is an index that uses options to predict stock market volatility, and it is commonly referred to as the fear gauge. ^VIX data by YCharts As you can see from the chart we have had numerous spikes in a short span of time. The last time we’ve seen this type of market volatility was in 2011, and I believe this time there is potential for the volatility to be even greater. Depending what market one invests in, it is entirely possible to put some money in an index that tracks the movement of the VIX. When the time comes for the market to crash, one’s portfolio will be protected with a hedge in the VIX, but this is definitely a highly risky trade. For example, Canadians, or those who invest in the TSX can invest in HVU. As I write this article the VIX is approaching lows it hasn’t seen since early 2015, but I believe the market volatility has just begun. Catching the bottom of the VIX and riding it up during a major spike could be very profitable, but once again this is to be used as a swing trade, and the ETF should not be held for more than a couple of weeks at most. Generally, I want readers to tread with caution in this current market environment. Everything seems off, and the markets are being irrational at the moment, thus a crash or a longer bear market might be in store for us. Hedging your portfolio is important, and remember to do your own research. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Want To Become A Millionaire During The Market Crash? Buy This ETF

With gold regaining its status as a safe alternative to equities, it’s about time we look at the precious metal. Gold is becoming increasingly important in this market, and the potential for large gains relates to (1) the range gold can move and (2) the possibility of a reversal with extremely high momentum: Gold’s huge sell-off since 2011 makes a comeback one of potentially great heights – a 50% upside if your price target is the previous high. We are seeing the best quarterly performance in gold in the past 30 years, signaling a possible turnaround. In this article, we will focus on the SPDR Gold Trust ETF (NYSEARCA: GLD ) instead of the physical metal or futures. While futures perhaps constitute the most profitable of the bunch for speculative trades, it is also of higher risk and outside the risk tolerance of most investors. Physical gold is the best of these three options for holding gold but is illiquid and has delivery as well as storage costs. For most investors, GLD is the best option to play gold, even though it does not entitle you to physical gold. Thus, if you’re buying gold to prepare for an economic collapse or the like, look into physical gold. For the rest of us, we will discuss GLD as an investment. Speculative? Gold is less speculative than most other commodities and is typically safer, as the biggest governments’ central banks still hold gold as a reserve asset. Those who suspect a true economic collapse typically hold gold, banking on the idea that gold will become an actual currency if fiat currencies fail. Although I am bearish on the economy and hate the current financial system, I highly doubt that non-fiat currency will ever “become a thing.” Thus, we should look at gold as an investment somewhere between the speculative investments of stocks and the inflation-defensive investments of bonds. If we place GLD on this spectrum, it is closer to a bond ETF than a stock. Indeed, like bonds and unlike stocks, most hedge funds are not apt to take strong short positions on GLD: Click to enlarge (Source: Bloomberg) The demand for GLD from hedge funds is more attributable to true hedges (most hedge funds aren’t actually for the sake of hedging) than speculative positions meant to profit from a demand for gold. That is, GLD is seen as a protection against a market crash. If this were not true, we would not see so many GLD positions in hedge funds during the 2014 gold bear market. With GLD being at a near-year high for net-long positions in hedge funds, we can only ask if the hedge funds know something we don’t. The recent economic news has been mixed. The Philly Fed report, for instance, shows a huge spike in new orders; other reports, such as imports and exports show clear declines. Gold and the Market What we have noticed in the past few months is that GLD has seemingly lost its negative correlation to the stock market. That is, when stocks surge, GLD does not drop as expected. In fact, in the past few weeks we have seen both GLD and the general market rally. I sincerely doubt this is due to a real need for gold – i.e., gold used for jewelry. No, the recent gold rally is more likely due to banks and hedge funds increasing their holdings in gold, primarily as hedges but also as speculative investments. Remember that Goldman Sachs correctly predicted the gold crash in 2013; now they are predicting a rally for 2016. The Fed also has some blame. Without clear policies for interest rates, Fed pushes banks and hedge funds toward gold. The lack of the rate raise last Wednesday has caused concern for the dollar and for future rate raises, as explained in this video: www.youtube.com/watch?v=xDBJrdksAFs It’s Not All about the US Check out this line for the new iPhone in China: Actually, I lied. That’s a line to buy gold from back in June 2013, which coincided with a 12% correction in the Chinese stock market. (Source: Caixin) Demand in Asia is also driving up the price of gold, which drives up GLD as a proxy. According to Reuters, the majority of gold demand comes from Asia. India and China alone make up 50% of the gold demand. With North America only accounting for 8% of gold demand, it’s no wonder that the US stock market and gold prices are out of alignment. In fact, to predict gold demand, you might be better off watching the Chinese stock market. On that note, we see physical gold demand at pre-2008 levels. Miners Miners affect gold price by increasing the supply. Mine production has slowed in growth and is at a nearly sideways trend. Much of the recent gold production has been from China, which has been constantly increasing its gold mining efforts despite the low price of gold. China uses gold to hedge its currency. With the Yuan taking hits in the recent years, China’s growing gold reserves have served their purposes. The Chinese demand for gold should grow as the Yuan falls. If world gold mine production continues to fall to where gold production levels out, we have a status quo situation, in which demand exceeds supply. In this situation, gold prices will rise in tandem with the current stock market bubble and debt bubble. Currency War The currency war, which is currently underway, makes future currency prices unpredictable. Japan wants a weak Yen and therefore a strong greenback. China wants a strong Yuan and therefore a weak greenback. The US, with its recent interest rate hold, has given China what it wants. But the currency wars have just begun. Most of the major currencies will see devaluation against one another. Eventually, some currencies will come out on top. But throughout this chaos, we should see gold appreciate against all other currencies, simply because gold doesn’t have a country or a central bank trying to devalue it. Thus, the simultaneous devaluation of the greenback and Yen, for example, will provide a rising gold/dollar and gold/yen phenomenon. Stock Market Crash The stock market crash or correction that we will inevitably see ( I’m predicting 2016 ) should further bolster the strength of gold. A market crash will likely lead to the printing of money for the purpose of quantitative easing, which would further devalue currencies, amplifying the currency wars. Interest rate decreases would also help stimulate the economy but hurt the bond market. Hence the final node of the vicious cycle: investors and hedge funds selling bonds and avoiding cash in favor of appreciating gold. An ounce of gold could easily break the $3,000 per ounce price range in such a situation. Holding GLD during this time could easily be your best-performing asset. If this prediction comes true, you would only need have invested $419,000 in GLD to turn that sum into a nice million. Learn More about Earnings My Exploiting Earnings premium subscription is now live, here on Seeking Alpha. In this newsletter, we will be employing both fundamental and pattern analyses to predict price movements of specific companies after specific earnings. I will also be offering specific strategies for playing those earnings reports. Our last newsletter looked at the upcoming earnings for Lululemon (NASDAQ: LULU ). Request an Article Because my articles occasionally get 500+ comments, if you have a request for an analysis on a specific stock, ETF, or commodity, please use @damon in the comments section below to leave your request. Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Too Far, Too Fast? Market Professionals Reflect Evolving Smart-Money Opinion

How good have their forecasts been? Figure 1 is the record of five years of daily forecasts for ProShares UltraPro Dow30 ETF (NYSEARCA: UDOW ), an ETF that holds derivative securities which are intended to magnify the daily percentage price changes in the DJIA index by a factor of 3 times, either up or down. Figure 1 tells what the Market-makers daily hedging-implied forecasts for UDOW over the past 5 years have produced as net profits for a wide range of imbalances between upside and downside prospects. Those imbalances are measured by the Range Index [RI] which tells what percentage of the whole forecast range lies below the market quote at the time of the forecast. Figure 1 also indicates how often the forecasts were able to produce a profitable outcome, operating in a realistic, time-constrained portfolio management discipline. Click to enlarge So what did MMs see earlier, see now? Here is the current picture of probable coming UDOW prices, along with similar once-a-week forecasts over the past 2 years. Figure 2 (used with permission) The vertical lines of Figure 2 are the price range forecasts for UDOW implied by the MM community’s hedging actions to protect firm capital exposed during buyer~seller balancing to “fill” volume trades. The forecast of 5 weeks ago was from a then-price of $46.54 and a Range Index of -11. Now it has a quote of $64.72 and a Range Index of 57. A week ago the price of $59.49 carried a RI of 51. Figure 1 suggests that buys of UDOW at today’s RI level of 57 in the past might produce only a +2% payoff from here, instead of the upwards of +12% that had been experienced by -11 Range Index forecasts earlier. The +2% prospect is reinforced by the row of data in Figure 2 as the actual payoff experience achieved in 108 of the 1261 days for which UDOW forecasts were available. Forecasts that had RIs of around 57. The current forecast is more optimistic than past experience; it projects a potential gain of +5.6% Odds for reaching the current payoff prospect remain high, with priors producing a profit in 84 of every 100 among the 108 experiences. The fact that gains better than three times the earlier forecast’s average payoff already have been experienced makes one wonder if the “other shoe might drop” any time now and markets might start to back off. To ease such concerns, it is appropriate to know as UDOW prices were rising during this past week, its MM expectations rose faster. The outlook gains pulled back RIs which on a couple of days were at 68. Continued rising expectations, at a gain rate faster than prices, will put strength under a continued market price rise, albeit at a slower pace. Failure to do so may signal weakening market enthusiasm. We’ll have to see what happens. It can be monitored on blockdesk.com., along with expectations for the VIX index and VIX-based ETFs. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.