Showing posts with label Portugal. Show all posts
Showing posts with label Portugal. Show all posts

Sunday, November 21, 2010

Chart of the Week: European Stocks Holding Up Well

Six months ago the European sovereign debt crisis was flaring up and my chart of the week was the Flight-to-Safety Trade.

With the joint EU-IMF bailout of Ireland unfolding over the weekend and the future of Greece and Portugal in the euro zone also being called into question over the course of the past two weeks, this seems like a good time to compare the performance of Europe against some of the other continents.

While relative performance is almost always dependent upon the date one picks as a starting point, I still think many will be surprised to see in this week’s chart of the week below that at least over the course of the past six month,s Europe (VGK) has performed on par with Latin America (ILF) and has significantly outperformed Asia (VPL) and the United States. Should Europe be able to finish the year without giving up any ground to its counterpart regional ETFs, I think the continent should be allowed to exhale and declare victory, at least for 2010.

For more on related subjects, readers are encouraged to check out:

Disclosure(s): none


Tuesday, November 16, 2010

VIX Punches Through Upper Bollinger Band

The VIX has no idea what is going on in Ireland and has no way of knowing whether the markets are underestimating or overestimating the full extent of the European sovereign debt crisis, not only in the Emerald Isle, but also in Greece and Portugal.

While it is always important to be well-informed when it comes global political and economic flash points, most VIX traders prefer to take a technically-based approach to trading volatility. In this vein, the simplest and most effective approach is to fade any VIX extremes. I have covered many ways to measure VIX extremes in this blog. One of the simplest is to use Bollinger bands to identify VIX values which are extreme enough to invite high probability mean reversion trades.

The chart below is a daily bar snapshot of the VIX, with standard Bollinger band settings (20 days, 2.0 standard deviations), showing that the recent VIX high of 23.06 is well above the 22.45 upper band level of the current Bollinger band settings. For most VIX traders, this means a short VIX play is in order, irrespective of events on the ground in Europe.

For those who are new to volatility trading, keep in mind that VIX spikes have a habit of clustering and creating a vicious cycle. One only has to scroll back six months to see what happened the last time concern about European sovereign debt soared, sending the VIX from 15 to 48 in the space of a month.

Related posts:


Disclosure(s): short VIX at time of writing

Thursday, May 6, 2010

S&P 500 Index Correction at Post-March ’09 Average of 5.6%

A few minutes ago the S&P 500 index made an intraday low of 1151.49. While it remains to be seen whether this line in the sand will hold, it is important to note that the SPX is now 68.35 points below the high water mark of 1219.80 from April 26th. This means the index has corrected 5.6%, which is exactly the average (mean) pullback over the course of the past 14 months

The table below summarizes the 12 most significant pullbacks since stocks bottomed in March 2009. In percentage terms, the current pullback ranks 5th out of 12. Note that the pullbacks ranked fifth through eighth are all clustered around the 5.6% average.

Ultimately, the significance of a 5.6% pullback pales in comparison to fundamental issues surrounding Greece, Portugal and Spain (where the investors should pay the most attention), but given that 1150 also happens to be the high that preceded the January-February 9.2% pullback, the largest pullback since the bull market began, support in the area of 1150 to 1151 should be taken very seriously.


Thursday, April 29, 2010

VIX Unspikes as Stocks Rebound

How many days does it take to undo a 30% spike in the VIX? This time around, the VIX retraced 82% of Tuesday’s 30.6% VIX spike in just two days, a bigger reversal than I had anticipated. By comparison, the S&P 500 index reclaimed slightly less ground, recovering 73% of the 38.18 point loss.

The chart below details the most significant pullbacks since stocks bottomed in March 2009, with this week’s 3.1% drop being the 10th largest in 13 months and considerably below the average drop of 5.4% during the period. Note that a 5.4% pullback from a high of SPX 1219 would put that index back at 1153, which is very close to January’s high of 1150.

I have fielded quite a few questions on VIX options, VIX futures and VXX this week, many by readers who wish to know why these securities have been relatively placid compared to the seemingly more dynamic cash/spot VIX. The reason these securities have not retraced as much of Tuesday’s spike as the VIX is because while VIX May futures rose 2.3 points on Tuesday, they have only fallen 1.4 points or 61% in the past two days, largely due to the fact that mean reversion expectations are built into the pricing of VIX futures.

Ultimately the numbers will take back seat to the fundamentals of the European debt crisis, where there has been more evidence of contagion in Portugal, Spain and even Italy where yields on sovereign debt have increased dramatically in the past few days.

The SPX fell 6.5% during the relatively short-lived Dubai debt crisis of October-November 2009. The likelihood that the current European debt crisis will be resolved as quickly and smoothly as the Dubai situation strikes me as remote, which is why I will be looking to take profits on short volatility positions quickly.

For more on related subjects, readers are encouraged to check out:

Disclosure(s): Short VIX and VXX at time of writing

Tuesday, April 27, 2010

Short-Term and Long-Term Implications of the 30% VIX Spike

Today the VIX spiked 30.6% and closed over 22.00 (22.81) for the first time since the middle of February. While 22.81 is not the kind of number that suggests panic is in the air, it should be noted that since the VIX was officially launched in 1993, the VIX has spiked 30% in one day on only seven prior occasions. Those prior spikes were in the throes of some volatility events that posed serious systemic threats – or what I call structural volatility. Prior 30% spikes occurred at the height of the 2008 financial crisis (twice), during the 1997 Asian financial crisis and in the wake of the 9/11 World Trade Center attacks in 2001. In this context, the current threat to Europe in the form of deficit problems in Greece, Portugal and the rest of the PIIGS strikes me as a less significant structural risk, at least for now.

Readers who have followed this blog for a long time will know that I am a proponent of fading most volatility spikes with short volatility positions such as short VIX options (e.g., calls and call spreads), short VIX futures, short VXX, short various index/ETF strangles and straddles, etc. In the 38 times the VIX has spiked at least 20% in a single session since 1990, the volatility index has been, on average, down 7% three days later and down 9% five days later. Approximately 75% of the time the VIX is down three and five days following a 20% one day spike. Even during the last three months of 2008, when the risk to the financial system was the highest it has ever been and stocks were on a steep downward trajectory, going long SPX/SPY on a 30% VIX spike was profitable for the 3-5 day holding period.

Fading VIX spikes over a longer holding period is a little more problematic. Set aside the 2008 data and the long-term results of fading a VIX spike are extremely promising. Include the 2008 data, however, and the fat tails make a longer-term holding period into the teeth of a crisis an unprofitable venture. The bottom line is that whether this is a quick storm or the beginning of a major crisis, a 3-5 day holding period should provide a statistical edge. Of course, if you can be certain that a major crisis will not develop, then a longer-term holding period will generate larger profits.

For those trying to put the fundamentals of the European debt situation and volatility risk into perspective, some time with A Conceptual Framework for Volatility Events and Forces Acting on the VIX may be helpful. Readers who are more interested in the numerical context of history may wish to study Elast-o-VIX and VIX Spike of 35% in Four Days Is Short-Term Buy Signal from the list below.

For more on related subjects, readers are encouraged to check out:

Disclosure(s): Short VIX and VXX at time of writing

Sunday, March 28, 2010

Chart of the Week: Impact of Falling Euro on Stocks and Commodities

Given all the general economic problems facing Europe and the sovereign debt issues related to Greece and the PIIGS (Portugal, Italy, Ireland, Greece and Spain), it is not surprising that the euro has come under so much selling pressure as of late.

Considering that the dollar index is comprised of a weighted basket of foreign currencies of which the euro comprises 57.6%, it is not too much of a stretch to think of the dollar as an inverse euro – as their almost mirror image in the chart below suggests. So given that recent weakness in the euro is accounting for most of the dollar’s resurgence and the dollar has a strong influence on the prices of commodities and stocks, it is meaningful to consider how the fluctuations in the euro have translated into changes in stocks and commodities.

This week’s chart of the week looks at ETFs for the euro (FXE), dollar (UUP), stocks (SPY) and commodities (RJI) for the last 15 months. Following the bottom of the stock market in March 2009, the euro (red line) rallied in concert with the S&P 500 index (blue line) and commodities (green line) through December 2009. As the euro began to weaken, however, both stocks and commodities initially continued their bullish climb, before selling off in January and the beginning of February. Since the early February lows, stocks (SPY) have managed to rally in spite of a weakening euro and firming dollar (purple line). Commodities, which tend to react more strongly to currency fluctuations, have struggled much more with euro weakness and dollar strength. Should the euro continue to fall, it is reasonable to expect stocks to continue to outperform commodities and of course euro weakness to directly lift the dollar to new heights.

For more on related subjects, readers are encouraged to check out:


Disclosure(s): none

Thursday, February 4, 2010

Greece, Spain and the Pulse of European Anxiety

Investors who are attempting to get a sense of the magnitude of anxiety about the economic problems in Greece have a multitude of ways in which to measure how markets are evaluating the situation. Perhaps the most direct approach is with Greece credit default swaps, but the sovereign credit information available to retail investors through firms such as Markit is neither timely or comprehensive.

The euro is another excellent proxy for sentiment about Greece and the rest of the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain), though once again many U.S. retail investors do not have much in the way of background and experience when it comes to foreign currency.

My recommendation is to watch the iShares MSCI Spain Index ETF, EWP. This is a reasonably liquid ETF that is appropriate as a market barometer and/or trading vehicle. The chart below shows the performance of EWP going back to June 2009. After breaking recent technical support at 47.50, this ETF has been subject to intense selling pressure and after a large gap down this morning is currently trading down about 7% on the day.

Watch the euro, watch Spain, watch the large European banks, and if you can get your hands on some good credit default swap data, use a healthy dose of that to take the temperature of the European markets. The situation in Greece is very different than that in Dubai. Whether that is a good or a bad thing remains to be seen.

For related posts on these subjects, readers are encouraged to check out:


short EWP at time of writing

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