by Rani Chopra, SmartStops.net contributor
The market has experienced unprecedented volatility and investors are getting more risk averse than ever before with equity fund outflows exceeding $61 billion since the start of May. The CBOE Market Volatility Index, (VIX) considered to be the markets fear indicator, continued to fall yesterday and is now down 12%.
Investors did not care whether they were invested in stocks, bonds, mutual funds or ETFs. Fear and uncertainty caused outflows across the board and gold became a safe haven, with gold prices rising over 24%.
In the midst of all the market turmoil, with the downgrade of the US debt and the continual downtrend of the US dollar, investors have turned to the Swiss Franc as a safe haven. The Swiss Franc is up more than 37% against the dollar compared to a year ago and has managed to rise against all major currencies amidst the fiscal problems of the Eurozone. The currency is also up 20% against the Euro from the start of the year.
Read the rest at: http://seekingalpha.com/article/287876-swiss-franc-remains-the-safest-currency-as-long-as-europe-s-debt-problems-continue
Are VIX ETFs Breaking Out? originally published at ETFTrends
Some traders have been keeping a close eye on the CBOE Volatility Index as a possible “tell” that the rally in risk assets since March 2009 may be due for a breather.
That’s why the VIX’s move above its 200-day moving average Wednesday drew the attention of investors with a technical bent.
The index, which measures the implied volatility of options contracts on the S&P 500, has been relatively subdued during the market’s recent rocky stretch. The benchmark is known as Wall Street’s favorite fear gauge.
However, the VIX was up 18% in the final hour of U.S. trading Wednesday to its highest level since March.
The largest exchange traded product following VIX futures, iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX), rose 8%.
In stock ETFs, a Nasdaq-100 fund was pushed below a key indicator in Wednesday’s sell-off. [Nasdaq ETF Lower]
CBOE Volatility Index
By Raghu Gullapalli, SmartStops.net contributor
If you are not aware of the all consuming political debate about the U.S debt ceiling that has consumed the country, then you’ve more than likely been living in a cave. Our distinguished representatives have debated the possibility of increasing the national debt and solving future deficit problems ad nauseum. Surprise, surprise we are no closer to a solution with four days to go to the deadline then we were four months ago. Unfortunately our bloviating leadership does not realize the tremendous real life consequences of this political drama.
Aside from the embarrassment of the possibility defaulting on our financial obligations as a country for the first time, there is the almost assured downgrade of our national credit rating. This downgrade may well cripple any chance of a recovery in our economy and will have cataclysmic affects in the worldwide equity markets. What does that mean for investors? Any fond memories of 2008?
For traders like me, that would involve shorting the financials, industrials, the dollar index or anything with interest rate exposure and hedging myself by buying gold, oil and going long the iPath S&P 500 VIX Short-Term Futures ETN (VXX). But for the average investor, Financial Armageddon: Part Deux.
By Raghu Gullapalli, contributing writer , as originally published on Minyanville
Value investors, such as Warren Buffet, William O’Neil and Jordan Kimmel are all big proponents of the idea of buying low and selling high. All these extremely experienced investors also look at historical patterns and are always on the hunt for bargains.
Or as traders refer to it, “buying into a pullback.”
Since its ballistic drive up in late April to create new historic highs, silver has plummeted down and the market saw the kind of volatility many traders thought gone in the post financial crisis era. But rather than continue its freefall to price levels that this writer thought were more in keeping with its historic norms, silver defied expectations and has consolidated in a $5 range over the past seven weeks.
iStockAnalyst thinks there is a probability of ”60% that sideways is the most likely outcome” of the NASDAQ. “Until the index breaks resistance at 2700 or falls through support at 2600, both levels are likely to act like bumper car rails”. In their view, “ the biggest July fireworks show will come from second quarter earnings and forward guidance, July’s GDP and Employment Situation reports. The trio will determine which way we go with great clarity”.
Thus they suggest a following potential plays on leveraged ETFs off the NASDAQ:
“With the market’s direction truly a flip of the coin to start the week, iStock thinks the prudent thing to do is buy a double or triple leveraged NASDAQ ETF when the index approaches support at 2610-2620ish. Sell it and buy an inverse double or triple leveraged NASDAQ ETF as it heads towards 2690. Of course, should the index start the week in the green, just turn the trading strategy upside-down and start with the short ETF first.
Leveraged ETFs that trade in the same direction as the NASDAQ:
2X NASDAQ ETF: ProShares Ultra QQQ (QLD)
3X NASDAQ ETF: ProShares UltraPro QQQ (TQQQ)
Leveraged inverse ETFs that trade in the opposite direction of the NASDAQ:
2X inverse NASDAQ ETF: ProShares UltraShort QQQ (QID)
3X inverse NASDAQ ETF: ProShares UltraPro Short QQQ (SQQQ)
SmartStops wants to remind you that when taking on a more risky play as leveraged ETFs, it is imperative that you maintain proper stop loss protection. Remember too that SmartStops does produce datapoints for ETFs that are short.
By Chuck LeBeau, SmartStops.net Director of Analytics (originally published Jan. 2009)
In less than a year six widely held financial stocks (Fannie Mae (FNM)’ Freddie Mac (FRE), Lehman Brothers (LEH),
American International Group (AIG), Washington Mutual (WM) and Bear Stearns (BSC) have cost Buy and Hold investors more than $840 billion dollars. That’s billions more than the controversial government bailout that has the entire country up in arms. If we add in the losses in the rest of the market we are talking about recent losses measured in trillions of dollars. (I’m certain that many of the Lehman and Bear Stearns account executives advised their clients that the best way to invest was to Buy and Hold.)
Think of all the retirement funds and college tuition money that has been needlessly lost in these few months. It’s a very sad scenario for average investors who are not Wall Street tycoons. However the saddest part is that the investors who lost all these billions and trillions of dollars could have avoided this disaster by simply using some logical form of trailing exit to protect their investments.
Buy and Hold is not only the riskiest possible strategy it doesn’t qualify to be called a strategy. Buy and Hold is actually the absence of any intelligent exit strategy and is mostly adopted by default. Read More…
SmartStops commentary: There are critics of his calls, but Roubini in July 2006 predicted a “catastrophic” global financial meltdown that central bankers would be unable to prevent. The collapse of Lehman Brothers Holdings Inc. in 2008 sparked turmoil that led to the worst financial crisis since the 1930s. Of course predicting the markets future is challenging to say the least, with so many factors at play. Its why investor’s methodology must evolve to have protection ready for themselves at all times. You can’t survive our markets any longer by deploying a buy and hold methodolgy.
‘Perfect Storm’ warning for stocks
A “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy, New York University professor Nouriel Roubini said.
There’s a one-in-three chance the factors will combine to stunt growth from 2013, Roubini said in a June 11 interview in Singapore. Other possible outcomes are “anemic but OK” global growth or an “optimistic” scenario in which the expansion improves.
“There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”
Elevated U.S. unemployment, a surge in oil and food prices, rising interest rates in Asia and trade disruption from Japan’s record earthquake threaten to sap the world economy. Stocks worldwide have lost more than $3.3 trillion since the beginning of May, and Roubini said financial markets by the middle of next year could start worrying about a convergence of risks in 2013.
By Raghu Gullapalli, contributing writer
Just this morning an absolutely abysmal jobs report was released. This latest news on top of the steady stream of poor economic reports over the past week will no doubt conspire to push the market down. The S&P 500 is down to 1,300 levels and may well seek out the long-term support at 1,250. And on top of all this domestic turbulence, lies the desperate situation in the Eurozone and their dealings with the PIIGS; Portugal, Ireland, Italy, Greece and Spain.
Economists of all stripes are talking about a double dip recession and under those circumstances you would think there would be a flight to the security of precious metals. While recent increases in margin requirements may reduced the fervor for such investments than in recent months, it will not completely dampen the enthusiasm of many for Exchange Traded Funds (ETF) that can be erstwhile proxies. After all in the midst of all this new terrible news, what is the dollar doing? Tanking!
Much of the speculation has been shaken out of the Silver trade, especially after the dramatic 30% pullback from its all time highs in the first two weeks of May. Despite these more reasonable prices, and its recent range bound state, there has been little or no appetite for Silver. iShares Silver Trust (SLV) is continuing to trade below its 55 day moving average but comfortably above the 210 day moving average. Smartstops has the short-term stop at $33.09 and the long-term stop at $32.58
In contrast to Silver, Gold has not altered the direction of its movement significantly on the long-term chart. If you look at the SPDR Gold Trust (GLD), five-year chart, the price of the ETF is in a strong upward channel and despite the volatility in early May looks to continue its longer-term trajectory. This supports the opinions of many analysts and Gold bulls that project $1,600 Gold by the end of 2011 and may even lend credibility to the idea of $2,000 gold. Smartstops has the stop price of GLD at $146.84
We couldn’t agree with some of the commentary from this article in Financial Advisor Magazine. Its why we created SmartStops.
The broader message is that indexing is moving past the standard beta carve-ups, such as small- vs. large-cap equities and value vs. growth stocks. A new era of factor-based indexing is dawning… Among the catalysts for the new indices is the growing use of factor models, says Rolf Agather, director of index research at Russell. “As investors become more sophisticated, they’re using risk factor models to have a better understanding of their risk exposures.” Elevating risk management to a high priority, in other words, is the new new thing. “Many investors are realizing that using a traditional framework built around countries, sectors or styles doesn’t always provide the insights for appropriately managing risk,” he explained in an e-mail. “Investors are looking for new ways to manage their risks more directly.”
Beyond One Beta
A key motivation for targeting multiple risk factors in portfolio design is recognizing the limits of using just one.
The broad market beta does the heavy lifting for explaining the link between risk and return, according to the capital asset pricing model (CAPM). (CAPM is Robert Merton’s invention) . But if CAPM worked as promised, one beta would suffice for explaining risk and return. More exposure to market beta would bring higher return; less exposure would mean lower return.
CAPM’s embedded message: Don’t waste your time with factors other than market beta. It’s an elegant story, and it simplifies portfolio design and management—if it works. But it doesn’t, at least not completely
Even if you have the stomach for sitting tight over ten or 20 years, the risk and return story isn’t as simple as CAPM suggests. Decades of empirical research show that there are other risk factors beyond market beta driving performance. In fact, the risk-return story is teeming with factor narratives. The concept of one dominant beta isn’t dead, but it’s no longer alone.
By Michael C. Thomsett , contributing writer
(For those familiar with options trading and authorized to transact the following level of transactions)
Research in Motion (RIMM) alert: On June 1, 2011, a SmartStop Was Triggered.
The price of this stock in your SmartStops portfolio has fallen to the point where it’s triggered today’s SmartStop.
Note the last two sessions have developed one of two bearish alerts, confirming the SmartStop trigger. The full session was black followed by a downside gap. This may develop into one of two strongly bearish indicators. First is the side-by-side black lines, which will develop if a third session is also black and does not rise to fill the gap. Second is a downside tasuki gap, which develops if the third day is white and moves up and into the gap, but does not close it.
In either event, the confirmation of the SmartStops alert in the form of bearish signals may cause traders to take appropriate action. This may consist of one of three recommended options-based trades:
1. Buy a protective put at 40. This decision makes sense if a trader’s original basis is lower than $40 per share. If the price declines into the money, the put can be closed to offset losses in the stock with increased intrinsic value; or it can be exercise to sell shares at a profit. The profit will be equal to the difference between the strike and original basis, minus the cost of the put. With the stock at $41.16 as of this writing, the June 40 put is valued at 1.41. If traders consider the downside risk short-term, buying this put makes sense. If considered longer term, one of the two following strategies makes more sense.
2. Open a collar using the 42.50 call and the 40 put. The June collar based on these values involves the long 40 put at 1.41 and the short 42.50 call at 1.36. Net cost of the collar is 0.05 plus trading expenses; but it protects against downside protection just like a protective put but for less cost.
3. Open a synthetic short stock position using the 42.50 positions. This involves a long put and a short call. The 42.50 put is at 2.70 and the call is at 1.36. The net cost for the synthetic short stock using June contracts is 1.34. The same strategy using September 42.50 contracts combines the long put at 4.50 and the short call at 3.45, for a net cost of 1.05 but a much longer period of downside protection.
Keep the probabilities on your side.