Sunday, February 27, 2011

Chart of the Week: Flight to Safety ETPs

It has already been an interesting year for students of market sentiment, volatility and geopolitical influences on financial markets. We have seen revolutions of various sizes and shapes in the likes of Tunisia, Egypt and Libya, with smaller uprisings in Bahrain, Algeria and elsewhere in North Africa and Middle East. For the most part, volatility in the equity markets has been rather muted prior to the Libyan revolution and its influence on crude oil prices.

In this week’s chart of the week, I examine the year-to-date performance of five exchange-traded products (ETPs) that are central to the flight-to-safety trade. They include volatility (VXX), gold (GLD), oil (USO), the dollar (UUP) and U.S. Treasuries (TLT).

Note that with the exception of crude oil, the political unrest in North Africa and the Middle East has not been disruptive enough to make these trades profitable ones in 2011, though there has been an uptick across the board since violence heated up in Egypt on January 25th and in Libya starting on February 15th. The VXX chart does an excellent job of capturing the nature of the VXX gambit. Even with the geopolitical turmoil and spike in crude oil prices, this ETN is still down 16.2% on the year. The volatility spikes have provided VXX longs with very short-lived opportunities to capitalize on heightened market anxiety, with the chart reflecting the continued downward trend and high volatility in this ETN. [As an aside, a similar chart swapping VXZ for VXX would show very little difference in terms of performance.]

So the next time you think about a long volatility position in the context of a geopolitical crisis, give some strong consideration to some alternative flight-to-safety plays.

Related posts:


[source: ETFreplay.com]

Disclosure(s): long VXZ, short VXX, USO and TLT at time of writing

Saturday, February 26, 2011

Blog Posting to Resume this Weekend

Thanks to all who have inquired about my absence and health.  It turns out that I have been under the weather, then taking some time off.  Originally I had intended to post more intermittently rather than coming to a complete stop, but now I am back to a normal posting schedule.

The recent volatility spike has generated dozens of questions and I will try to address as many of those as possible as posting begins to return to normal this weekend.  I have also managed to fall far behind on emails and blog comments and will do my best to get caught up in this department as soon as I can.

In the interim, for those who are new to VIX and More or may be looking to cherry pick some of the best posts from the past in order to help shed light on the current situation, the following will certainly be of interest:

Note also that for certain posts which have a comprehensive retrospective view of content in the blog (such as this one) or critical market events, I have labeled these with an 'archival' label.  Just click on the link to pull up all posts with a similar label.  For more basic educational content, try the 'educational' label.  Finally,  for those who are interested in posts on specific subjects, use the hyperlinks for subjects such as VXX, contango, VIX futures, VIX options, VIX spikes, etc.

Of course there is also the custom Google search bar in the right hand column just below the CBOE:RMC ad for specific keyword searches on this site.  Which reminds me, I will be attending the aforementioned CBOE Risk Management Conference.  If you are a reader and wish to say hello, this is an excellent time to do it.

Monday, February 7, 2011

Chart of the Week: EGPT and Collateral Damage

Unrest in Egypt is barely three weeks old and already the ripple effect has crossed the globe in several waves.
I find it interesting how regional and country ETFs can be of some assistance in evaluating how investors are thinking in terms of contagion risk, be it political or economic – or at the very least in terms of the breadth and depth of the economic impact of specific events.

In this week’s chart of the week, I endeavor to track some elements of the relative geographical spread of concern with a handful of ETFs. The baseline ETF, EGPT, shows how the situation deteriorated over the long weekend in the U.S. from January 14th to January 18th, then began to accelerate downward during the January 26th trading session.

In terms of impact, the additional four ETFs include one broad-based frontier ETF, FRN, and three single-country ETFs: Turkey (TUR); Israel (EIS); and South Africa (EZA). Of this group, the Turkey ETF has proven to be the most volatile during the crisis and also suffered the largest drawdown. Interestingly, the Israel ETF has been the least volatile of the group, but the only one which appeared not to find a bottom on January 28th and continued to trend lower. The top performer of the group is EZA, the South African ETF. EZA has fallen slightly more than half as far as EGPT since the beginning of the crisis and has steadily gained strength during the past week. Among country ETFs, EGPT and TUR were the top two performers during the past week.

Note that there are several regional ETFs which cover northern Africa and the Middle East. I discussed these during the Dubai crisis at some length in Frontier ETFs and Chart of the Week: Market Vectors Gulf States ETF (MES).

Related posts:


[source: ETFreplay.com]

Disclosure(s): long TUR at time of writing

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