“The only way to make sense out of change is to plunge into it, move with it, and join the dance.” – Alan Watts
It was another week of wild mood-swings on Wall Street, as Ben Bernanke seemed to be intent on roiling the markets.
Deliberate or not, the effect was the same, as investors seemed hesitant to jump in on the dips with the same enthusiasm that they have for the majority of the year to date.
The result is that the dips are going deeper, as if investors and traders are looking for greater assurance that the down moves aren’t the beginning of a solid correction before they jump back in and pick up their favorite equities at the latest discount prices.
And discounts on stocks were certainly available to be had, as the Dow Jones Industrial Average (DJIA) shed 1.8%, the benchmark S&P 500 Index (SPX) lost 2.1% and the Nasdaq (COMP) dropped 1.9% over the course of the week.
So will the volatility express continue to barrel through the summer vacation months? Don’t be surprised, as the trend now seems to lean in that direction.
The Dow’s dip last week was deep enough to rank it as the heftiest sell-off in a month. And, in a stat that should be even more of an attention-grabber, the DJIA mid-week, two-day drop of over 500 points came in as the steepest such decline in quite a while, dating all the way back to the beginning of November 2011.
In addition, the volatility beast has reentered the fray with a vengeance, as the Chicago Board Options Exchange Market Volatility Index (VIX), known as the “fear gauge,” moved within an intraday range of 17% on Thursday. As a reference point, this was the largest single-day swing seen since the Boston bombing tragedy, an indication of the level of investor uncertainty that is beginning to permeate the market.
With the VIX sitting at 18.90 as of the end of last Friday’s session, it ended significantly above the year’s low point of 11.30 back in mid-March. That level, by the way, was the VIX lowest point in over six years, but investor confidence seems to have made a definitive swing towards uncertainty since then.
The general frothy top in equities, coupled with the rude reminder that the uptrend has roots deep in the Fed’s largesse, seems to be combining for a reevaluation as to the wisdom of remaining in equities at this moment.
So, does the current level of the VIX make it less attractive as a tool for hedging your portfolio?
It is worth remembering that using the VIX as a hedging tool is more about relativity to current market price, rather than to any specific highs or lows of the year. It is the explosive moves of the index that make it most valuable as an extreme hedge, as Thursday’s 17% range movement should well indicate.
For many investors and traders, a VIX-based ETF remains one of the most popular ways to utilize a volatility hedge.
And, while all of the volatility index derivatives have limitations in terms of hedging capabilities, the VXX (S&P 500 VIX Short-Term Futures ETN), which tracks the S&P 500 VIX Short-Term Futures Index Total Return, remains one of the simplest ways for investors to utilize the VIX as a hedging tool.
It is always essential to recall that the VIX, along with all of its derivatives such as VXX, generally move in inverse correlation to the market.
In other words, if the market drops sharply, the VIX moves up strongly, and vice-versa.
And, if the last few weeks are any indication, it would be reasonable to expect a high chance of continued volatility for the remainder of the summer.
So don’t forget to hedge, and take along some sunscreen to the beach as well.
What the Periscope Sees
The Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis. For the third week running, the order of the top three sectors remains the same, as once again the Financial Sector heads up the rankings, Technology remains ensconced in second place and Health Care continues to hold the third spot in the lineup.
Here, then, is the current list of some of the top performing Financial Sector ETFs year-to-date, as of the third week of June:
KIE — SPDR KBW Insurance ETF, +19.75%
FXO — First Trust Financial AlphaDEX Fund, +17.17%
IYF — iShares Dow Jones US Financial Sector Index Fund, +16.10%
XLF — SPDR Financial Select Sector Fund, +16.66%
VFH — Vanguard Financials Index Fund, +15.28%
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter 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 or Sabrient. Neither Daniel Sckolnik nor Sabrient makes any 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.