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Summary VXX is benefiting from backwardation for now, we will discuss how long that might last. Historic contango and backwardation levels in relation to VIX futures. Your focus should remain on U.S. economics. First, thank you to everyone who shared or contributed to my 360 degree math classroom project . You guys are awesome! Let’s jump right in: Backwardation began on August 20th, 2015: (click to enlarge) As we discussed in the previous article , longer periods of backwardation will have positive effects on the ProShares Ultra VIX Short-term VIX Futures ETF (NYSEARCA: UVXY ) and the iPath S&P 500 VIX ST Futures ETN (NYSEARCA: VXX ). Popular inverse volatility products, such as the ProShares Short VIX Short-Term Futures (NYSEARCA: SVXY ) and the VelocityShares Daily Inverse VIX ST ETN (NASDAQ: XIV ) have been hammered during this period of backwardation and market head fakes: How long will this last? I believe this is the number one question at hand currently. Additionally, I believe there are two outcomes in the short-term. The Federal Reserve moves to raise rates providing a negative jolt to the market. The Federal Reserve moves to keep raise low, providing a short-term positive jolt to the market. I would personally view a delay in rate hikes as a negative on the U.S. economy. Eventually rates will rise and Wall Street has enjoyed easy money for a long time. The Fed has many things to take into account and I believe they are backed into several corners in regards to their inflation targets. To complicate this decision we have China and all of the talk about its slowing economy. I highly recommend this read by one of my favorite authors, Jeff Miller. I’ll be the first to admit that I really don’t know that much about China or its economy. I think Jeff does a good job of putting things into perspective. I also highly recommend his weekly Weighing the Week Ahead series. Economics If you have followed me for a significant amount of time, you know my feelings towards economics and the VIX. Short-term events are often not tied to economics, while longer-term VIX events are. This current event falls under the economic category and it is waiting on confirmation of a weakening economy. Whether the economy begins to weaken or not is now the question. This article isn’t to discuss the state of the U.S. economy but rather how potential changes could affect the VIX. For the most current economic data I like to us the investing.com economic calendar . Here is what you need to know: If negative economic conditions arise, even in light of a delayed rate hike, backwardation could persist for a much longer period of time. If positive economic conditions remain, than we will see a return to contango shortly, even in spite of short-term negative response to hike in rates. Current Advice Patience is needed now. If futures revert back to contango, I plan on initiating a short position in UVXY through options or purchasing XIV. This position will be small as futures could easily revert back to backwardation. For more on the contango and backwardation strategy, along with the backtesting results of this strategy, I recommend viewing my previous article here . Look below for the long-term back tested results of VXX: Chart created by Nathan Buehler using historical data from The Intelligent Investor Blog . The point of this graph is to demonstrate that the longest periods of time VXX has gone without losing value, is around one year. This is primarily due to the effects of backwardation just as contango has a long-term positive effect on XIV. For more information on what drives VXX, I recommend viewing this article . Chart created by Nathan Buehler using historical data from The Intelligent Investor Blog. To describe the above chart, the weighted future is the front and second month added together and divided by two. The best times to purchase inverse futures products or short long volatility products have come after prolonged periods of extreme backwardation. We are not going to see that type of event here unless U.S. economics begin to turn negative or show more negative signs than what is currently being reported. For now, I would continue to monitor the situation and keep a very close watch on the FOMC meeting coming up soon, economic reports out of China (and the rest of the world), and most importantly economic data here in the U.S. As a final thought, October is historically the most volatile month for volatility. Seasonality doesn’t always pan through so it is just something to ponder. Feel free to share your thoughts and comments below. The last article had over 160 comments and I really enjoy the conversations and learning that occurs when we can come together and discuss strategies, predictions, and outcomes in a professional setting. I hope you have a great week! Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in XIV over the next 72 hours. (More…) 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. Scalper1 News
Scalper1 News