The S&P 500 is up 13% year-to-date and the VIX is reading calm. With a record-high market and identifiable risks floating close to the surface, it’s worth asking what portfolio insurance is currently worth.
Cyprus is the reminder. The Eurozone is forecast to shrink 0.3% this year. Apple has just cleared its 50-day moving average and found support at $425 — a pairs trade with structural logic.
Bernanke isn’t going to upset a working applecart this week. But the dissenting voices on the FOMC are getting louder, and that’s reason enough to think about volatility insurance before it gets expensive.
The bulls just went five-for-five on the week. For investors who missed the early innings of the U.S. rally, China may be the lagging horse worth riding — and FXI is the cleanest way to ride it.
January is starting strong, the VIX sits at a five-year low, and Italian and Spanish bond yields have settled. The risks are real — Algeria, Senkaku — but the macro setup favors the bulls into Q1.
The election will end the uncertainty, and uncertainty is what’s been holding the market sideways. A pairs trade matching VXX against IYF positions for both the volatility drop and the upside that may follow.
The Dow is up 4% over six weeks on volume 40% below last summer. Volatility is cheap, the rally is thin, and September brings a calendar of macro risks. Time to buy the insurance.
Friday’s 120-point Dow drop returned the index to where July began. Apple and Facebook earnings could break the sideways pattern. The European exposure trade — short EWP, EWI, FEZ — remains structurally intact.
Twenty percent of U.S. exports head to Europe, fourteen percent to the Eurozone alone. The LTROs solved the banks; the elections are about everything else. The dysfunction trade is back on the table.
The Dow’s 8.1% Q1 ranks among its best in 128 years. But the LTROs only delayed the structural problem, and Spain may yet vote against austerity. VGK, IEV, and EWP all merit a look on the short side.