Market Fear Gauge Signals More Volatility To Come…
Market Fear Gauge Is Going Nuts…
No doubt about it, investors were hit with another heavy dose of market volatility this week. The Dow Jones Industrial Average (DJIA) dropped a hefty 469 points on Tuesday before recovering a portion of the losses on Wednesday.
This week’s downturn is not what anyone bullish of stocks wanted to see.
Speaking of bullish…
There’s one market that’s seeing remarkable gains thanks to this ongoing bout of volatility.
Which is it?
… the market for fear.
Let me explain…
The CBOE Volatility Index $VIX is a closely watched market indicator of investor fear. It measures fear by tracking the implied volatility of S&P 500 Index put and call options.
When professional investors get spooked, they load up on S&P 500 put options to help protect their portfolios. The surge in investor interest in these put options sends the $VIX roaring higher.
Just look at what the market fear gauge has done the past few weeks…
As you can see, the $VIX spiked dramatically- just as stocks plunged. The recent close above the 40 level is the loftiest this index has traded since 2011. Account for the intraday spike above 50 and you’ll find the $VIX hasn’t traded that high since the financial crisis of 2008.
Clearly, there’s some intense fear engulfing the marketplace right now.
But here’s what we really want to know…
Where does the volatility index go from here?
Does it spike higher as stocks continue lower, or will it slowly bleed back below the 20 level as the S&P 500 recovers?
Of course, it would also be nice to know how to profit from this situation.
Here’s my take…
The current bout of remarkable volatility we’re seeing is likely due to just two factors.
First of all, investors are concerned about the US Federal Reserve raising interest rates. The US central bank has been talking about raising rates for quite some time. But now that the moment is finally arriving, investors are worried the markets may not handle higher interest rates so well.
But that’s just the start of it…
Much of the recent market downturn has come from worries about China. As we’ve discussed many times the past few weeks, Chinese economic data is coming in at the worst levels in years. Manufacturing is slowing quickly, as are exports.
Since China is the world’s second largest economy behind the US, a downturn would no doubt do damage to global economic growth.
Without question, these two factors are becoming a considerable force to be reckoned with.
Here’s the deal…
It’s unlikely the Fed raises interest rates in September or October. Growing concerns over the strength of the global economy will likely fend off a rate raise until late this year or early next.
Secondly, while there are legitimate concerns in China, I highly doubt the People Bank of China (PBOC) will let their economy crumble without a fight. Expect more stimulus measures from China’s central bank soon.
With that in mind, I have no doubt there’s still plenty more market volatility in store for us in coming weeks.
However, additional market downturns won’t likely be as severe as the ones we’ve witnessed the past two weeks.
As a result, the $VIX has likely already traded to the highest level it’s going to see during this downturn. In other words, investor fear should start subsiding even though stocks may not have bottomed out just yet.
Here’s how you profit…
Instead of diving into the futures markets to trade the $VIX firsthand, there are a number of exchange traded funds (ETFs) that mimic $VIX price action. The ones we’re interested today are those trading inversely to the $VIX. In other words, when the $VIX drops these specially designed ETFs rise.
The VelocityShares Daily Inverse VIX ETN $XIV and the ProShares Short VIX Short-Term Futures $SVXY are two products that will rise sharply once market fear subsides.
Let me be clear…
Going long $XIV and $SVXY aren’t without risk. If an unforeseen market fear factor pops up, the two inverse ETFs could drop even further as the $VIX achieves new highs.
So be sure to use stop loss orders if you trade them.
However…
If market fear subsides like I think it will, there’s a lot of money to be made going long $XIV and/or $SVXY.
Until Next Time,
Justin Bennett
BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.
Category: Commodity Trading
