Wednesday, September 29, 2010

Zooming in on the St. Louis Fed’s Financial Stress Index

Yesterday’s post, St. Louis Fed’s Financial Stress Index, generated a great deal of interest in what I like to call the STLFSI.

Not surprisingly, many of the questions and comments had to do with the performance of the STLFSI and the VIX during the 2008 Financial Crisis and up through the present.

The chart below zooms in on the previous 1993-2010 timeline and highlights the STLFSI and VIX since the beginning of 2007. Keep in mind that the data is weekly (the STLFSI is only updated once per week) so some of the nuances are lost. Still, some conclusions are unavoidable. For instance, the STLFSI appears to have done a better job than the VIX of flagging the deteriorating economic situation from the end of 2007 to September 2008. Additionally, the STLFSI indicates that extreme stress in the system in late 2008 persisted longer than the VIX would have investors believe. Finally – and perhaps most relevant to the current situation – the VIX has almost completely discounted the May 2010 volatility spike some four months later, whereas the STLFSI suggests that the events of May, which were highlighted by the European sovereign debt crisis, still cast a large shadow on the current state of the markets.

As is often the case, here the holistic analytical approach trumps the solo indicator.

Related posts:

[source: Federal Reserve Bank of St. Louis]

Disclosure(s): none

Tuesday, September 28, 2010

St. Louis Fed’s Financial Stress Index

When I started this blog, I added what sounded like a whimsical tagline at the time, “Your one stop VIX-centric view of the universe.” In retrospect, perhaps the joke was on me, as the content here has consistently been VIX-centric, despite my occasional forays into that “and More” netherworld.
I will be the first to admit, however, that the VIX captures only a small slice of investor sentiment and represents only one type of threat to the markets.

Back in March 2007 I addressed a broader range of sentiment indicators when I wrote A Sentiment Primer (Long) and urged investors to take a broad-based view of threats to the market in The Credit Default Swap Canary. Along the way, I have been a strong proponent of using put to call ratios (Put to Call Everest), bond yields, the VIX divided by T- bill yields (VIX:IRX), the TED spread, counterparty risk measures, and other factors.

One excellent index which attempts to capture a broad range of components of financial stress is the St. Louis Fed’s Financial Stress Index, henceforth to be known here as the STLFSI. The index constituents are highlighted below and include an interest rate group, a yield spread group and an third uncategorized group of additional indicators in which the VIX is one of five components.

Interest Rates:
  • Effective federal funds rate
  • 2-year Treasury
  • 10-year Treasury
  • 30-year Treasury
  • Baa-rated corporate
  • Merrill Lynch High-Yield Corporate Master II Index
  • Merrill Lynch Asset-Backed Master BBB-rated
Yield Spreads:
  • Yield curve: 10-year Treasury minus 3-month Treasury
  • Corporate Baa-rated bond minus 10-year Treasury
  • Merrill Lynch High-Yield Corporate Master II Index minus 10-year Treasury
  • 3-month London Interbank Offering Rate–Overnight Index Swap (LIBOR-OIS) spread
  • 3-month Treasury-Eurodollar (TED) spread
  • 3-month commercial paper minus 3-month Treasury bill
Other Indicators:
  • J.P. Morgan Emerging Markets Bond Index Plus
  • Chicago Board Options Exchange Market Volatility Index (VIX)
  • Merrill Lynch Bond Market Volatility Index (1-month)
  • 10-year nominal Treasury yield minus 10-year Treasury Inflation Protected Security yield (breakeven inflation rate)
  • Vanguard Financials Exchange-Traded Fund (VFH)
The chart below shows the performance of the STLFSI and the VIX going back to 1993. Not surprisingly, there is a high degree of correlation. If one accepts the STLFSI as a more broad measurement of stress in the financial system, one can make a case that while the VIX is usually directionally correct, at certain times the VIX has underestimated the stress in the system (e.g., May 2008) while at other times the VIX has overestimated the stress in the system (e.g., May 2010). Going forward, I will make an effort to flag important divergences between the VIX and the STLFSI.

Note that the Kansas City Fed has a similar Financial Stress Index, aka the KCSFI, which is more concise and more focused on yield spreads.

The St. Louis Fed has more information on the STLFSI here, while the Kansas City Fed has more information on the KCSFI here.

Related posts:

[source: Federal Reserve Bank of St. Louis]

Disclosure(s): none

Sunday, September 26, 2010

Chart of the Week: Gold and the Miners

From a technical perspective, the big event in the markets in the last week is undoubtedly the breakout in the S&P 500 index, but since I devote so much time to the SPX and its derivatives, I thought the time is ripe to recognize gold for hitting a new all-time high and bumping up against $1300 per ounce.

To put a slightly different spin on gold, in the chart of the week below I have elected to include the gold futures continuous contract (red line) and also two popular ETFs for gold miners: GDX, the large cap version (top holdings of ABX, GG and NEM), shown below in a blue line; and GDXJ, the junior gold miners ETF (green line.)

As the chart of 2010 performance shows, gold futures have been the least volatile of the group and have had about the same performance as GDX. While GDX and GDXJ track each other fairly closely, note that GDXJ has distinguished itself with superior performance over the course of the last month or so.

Predicting the future of gold is a daunting task, but if the bullish trend continues, GDXJ clearly has the potential to continue to deliver outsized returns – with commensurate risk, of course.

Related posts:


Disclosure(s): long GDXJ at time of writing

Friday, September 24, 2010

More on the Multi-Asset Class ETF Portfolio

Yesterday’s post, Diversification, Momentum and Sidestepping the 2008 Panic, brought such a positive response that I thought a brief follow-up is in order.

In the chart below, courtesy of, I show how the Multi-Asset Class ETF Portfolio I referred to yesterday performed on a month to month basis, this time using the ETFreplay’s Portfolio Moving Average timeline tool. The chart is really a table which shows all of the ETFs and the results of the moving average rule which determined whether to be long or in cash for each month of the period covered. The far right portion of that graphic also shows where the each of the individual ETFs currently stands relative to their selected (in this case it was six months) moving average.  Finally, the column graph toward the bottom also shows what percentage of the total ETF portfolio was long in each month.

As an aside, someone asked for a recommendation on a site for backtesting stocks based on fundamental data. My suggestion was to check out, which is the site discussed in the bottom of the links below.

Related posts:


Disclosure(s): none

On Abnormal Returns TV with Tadas Viskanta

Just a quick note to let readers know that yesterday I spent a half hour talking with Tadas Viskanta of Abnormal Returns on Abnormal Returns TV.

We discuss a wide variety of topics, with an emphasis on the VIX, VIX futures, VXX, contango, futures-based ETFs, and related subjects. We also talk a little bit about the ideas behind my last three posts on the blog:
  1. Diversification, Momentum and Sidestepping the 2008 Panic
  2. VIX and Historical Volatility Settling Back in to Normal Range
  3. The Education of a Trader
Thanks to Tadas for the opportunity to experiment with a new media platform. Going forward, I expect to be showing up in other corners of the internet not just in print, but also in an audio and/or video format as well.

Related posts:
Disclosure(s): neutral position in VIX via options

Thursday, September 23, 2010

Diversification, Momentum and Sidestepping the 2008 Panic

While most trading systems I know – including my own – struggled to eke out a profit during the 2008 financial crisis, it is certainly worth investigating which sort of strategies and approaches might have allowed investors not just to sidestep the 2008 panic, but to profit from it.

Using some functionality recently released by, I assembled a portfolio of ten ETFs from multiple asset classes and tested that portfolio in ETFreplay’s Portfolio Moving Average backtesting tool, which evaluates each ETFs relative to a moving average and goes long if the ETF is above the specified moving average (MA) and is in cash when the ETF is below the MA. I experimented with a variety of moving averages up to 12 months and from time periods going back to 2003 (recall that most ETFs do not have an extensive history) and came up with some interesting results.

The chart below shows the Multi Asset Class ETF portfolio since the beginning of 2007, using a 6 month MA (results were better using a 7-10 month moving average) as the evaluation period. Note that even during these tumultuous times, the long/cash strategy over the ten ETFs suffered a maximum drawdown of only 7%, had volatility that was only about 1/3 as much as the S&P 500 index (SPY) and managed a cumulative return of over 42% while stocks in general were putting up double-digit losses.

Of course my point is not that the strategy described below is the holy grail when it comes to risk-adjusted returns, but that investors should take advantage of tools like the one mentioned above to tinker with ideas and tactics in order to refine existing strategies or perhaps devise new ones.

ETFs offer incredible diversification across all asset classes and in today’s markets, every little extra edge helps.

Related posts:


Disclosure(s): none

Wednesday, September 22, 2010

VIX and Historical Volatility Settling Back into Normal Range

So much has been made lately (here and elsewhere, e.g., Surly Trader) about the extremely steep term structure in the VIX futures that I thought it is important to point out that in terms of current data, the VIX and historical volatility are sitting right in the middle of historical norms.

The chart below captures the mean VIX (red line) and mean S&P 500 10-day historical volatility (HV) values (blue line) for each year going back to 1990. In addition, I have added a beige column to show the ratio of the annual means for each year. After an unusual pattern in which the VIX spiked higher than HV in 2008 and remained persistently high relative to HV in 2009 (think “disaster imprinting,”) it now looks as if the relationship between the two is back to the more standard correlation and differential. Note also that the VIX is typically about 35% higher than historical volatility in the SPX, about what has transpired so far in 2010.

So the future may indeed to turn out treacherous enough to warrant that steep VIX futures contango, but for now, but the present looks very much like business as usual.

Related posts (just a few of many):

Disclosure(s): neutral position in VIX via options

Tuesday, September 21, 2010

The Education of a Trader

[The following first appeared in the May 2010 edition of Expiring Monthly: The Option Traders Journal, on the back page of the magazine, where the authors are encouraged to be tangential and irreverent. I thought I would share it because of the positive feedback I received from a number of readers and because I think this piece dovetails nicely with the collection of links below.]

Do you remember from your school days those students who when confronted with a complex issue, would acquire a look on their faces somewhere between consternation and dread, immediately thrust a waving hand up into the air and blurt out in a worried voice, “Do we have to know this for the test?” I can be fairly sure that none of these people ended up as successful traders.

One only has to look at the history of hiring patterns at Wall Street firms to get a sense of the evolution of thinking about how to develop a successful trader. For many years, the model for aspiring traders was considered to be a genteel Ivy League education. Over time, Wall Street firms began to favor graduates with a more humble socioeconomic pedigree who were considered hungry, hard working and highly motivated to prove something to the world. In more recent years, we have seen Wall Street seek out physicists and those with exceptional quantitative skills. Lately, a desire for poker skills has also come into play.

As I see it, all traders are ultimately self-taught. There are no required classes, readings, homework assignments or even a syllabus with recommendations. Tests are administered on a daily basis, frequently with multiple tests on the same day. Worst of all, everyone is graded on an unfavorable curve in which there are more Fs than As.

Against this backdrop, education counts, but skill and experience count even more. An insatiable curiosity helps, as does a willingness to explore unfamiliar territory. Great trades, insights and strategies present themselves in somewhat random fashion and, as Louis Pasteur observed, “Chance favors the prepared mind.”

But what kind of preparation is ideal? Malcolm Gladwell asserts that 10,000 hours of experience is a prerequisite for greatness in almost any field. In a normal career, that level of commitment usually translates to five years, but on Wall Street, 10,000 hours of experience can be crammed into 3–4 years. Of course, all hours are not created equal. A trader’s capacity to distinguish between random events and meaningful patterns is important to establish a solid trajectory of growth and development.

For my personal education process, unlearning was more important than learning. My formal schooling consisted of an undergraduate degree in political science and a traditional MBA program. After two decades of business strategy consulting experience deeply rooted in fundamental analysis, I was ill-equipped to excel in a short-term trading time frame. In order to embrace technical analysis, I first had to jettison my fundamental perspective on investments and build a new foundation based on technical analysis and market sentiment.

In my opinion, the best way to approach trading is to consider the educational process to be a lifelong endeavor, crossing as many multi-disciplinary boundaries as can be digested. In a way, I like to think of the foundation of trading success as building a large idea stew and developing an eye for spotting high potential new ideas. The trick is to have the right breadth and depth of knowledge so that when one stumbles on the next great strategy, it can be easily identified, captured and developed. Call it opportunistic research and development, if you will.

As luck would have it, some of the most successful trading strategies I employ are based on areas in which I had limited knowledge when I first encountered them. No matter how well things are going, I take the approach that I never have the luxury of being satisfied with the status quo and need to embrace the idea of getting out of my comfort zone. In trading and in life, it pays to constantly refresh the pipeline of new ideas and continue to tinker with them, because you never know what will be on tomorrow’s test.

Related posts:

[source: Expiring Monthly, May 2010]

Disclosure(s): I am one of the founders and owners of Expiring Monthly

Monday, September 20, 2010

Expiring Monthly September 2010 Issue Recap

Just a quick reminder that a new options expiration cycle means a new issue of Expiring Monthly: The Option Traders Journal is available. In fact the September issue was published today and is available for subscribers to download.

The September edition features a handful of articles on the subject of directional trading with options, including a feature article from Mark Wolfinger and a guest article from Steven Place of Investing with Options.

In addition to my regular gig as authoring Editor’s Notes, this month I have also contributed the second in a three-part series on the VIX futures term structure. The current installment lays out a six-part framework for analyzing VIX futures which establishes a foundation for next month’s finale, in which I discuss some of the implications for various VIX term structure patterns as they apply to trading VIX options and VIX ETNs such as VXX.

I have reproduced a copy of the Table of Contents for the September issue to the right for those who may be interested in learning more about the magazine. Subscription information and additional details about the magazine are available at

Related posts:

[source: Expiring Monthly]

Disclosure(s): I am one of the founders and owners of Expiring Monthly

Sunday, September 19, 2010

Chart of the Week: Looking for Sector Leadership

Stocks have rallied impressively since the beginning of July, but during that period, that has not been a particular sector which has led the rally. The lack of strong sector leadership can be seen on the one hand as a potential impediment to further bullish moves, but also as a sign of broad-based support for stocks and a potential inhibitor to a correction.

In the chart of the week below, I show the performance of the nine AMEX sector SPDRs since the market’s July 2nd lows. Note that materials (XLB) and industrials (XLI) have been the top two performing sectors during the past 2 ½ months, reflecting the relative strength in manufacturing. The other two sectors that have outperformed the SPX during this period, consumer discretionary (XLY) and technology (XLK), both showed signs of coming to life last week.

Going forward, materials and industrials can conceivably continue to lead a bull leg, but the rally will benefit substantially if one or more of the others sectors rises to meet the challenge. For now at least, my money is on technology to step up. That being said, the consumer and financial sectors cannot afford to be a significant drag on stocks or the current rally will likely run out of steam.

Related posts:


Disclosure(s): none

Friday, September 17, 2010

Hope and Depression in the Investor Sentiment Cycle

Charles Kirk of The Kirk Report has an interesting post up, The Investor Sentiment Cycle, in which analyzes the results of a recent survey he conducted in which he asked a broad group of professional investors to indicate where they believe investors are in the sentiment cycle, a graphic of which is at the bottom of this post.

I am not sure of the exact origin of the Investor Sentiment Cycle, though it was attributed to a graphic from 1998 by Westcore Funds by several sources. My guess is that the chart evolved from a similar graphic from Justin Mamis, which appeared in The Nature of Risk, published in 1991.

Given my recent discussion of the record highs in my proprietary VIX Futures Contango Index, extreme readings in the AAII Investor Sentiment survey (in the newsletter), records highs in the price of gold, record low Treasury yields, surging prices for default insurance for European credit defaults swaps (CDS), etc. it is not surprising that the #2 response to the Kirk survey was that investors are going through a period of depression. On the other hand, the S&P 500 index is now 69% above its March 2009 low, which is part of the reason that the #1 response to the survey was that investor sentiment is currently characterized primarily by hope.

While depression and hope are adjacent in the sentiment cycle, the distinction in an investor’s psyche is an enormous one. With depression, there is a concern that current conditions will likely not improve and that investment opportunities carry more risk than reward. More importantly, the is such an anxiety about the future that investors worry that about the potential for markets to deteriorate to previous low levels and perhaps even get worse than they were in 2008.

Just around the corner from depression is hope, where the outlook is still mostly cloudy with a chance of sun, but there is a widespread belief (perhaps partly wishful thinking, but grounded in some tangible signs of progress) that the bottom is behind us and continued improvements are more likely than not.

Given much of the data I have seen and written about, I believe investors are still operating under the long shadow of 2008 (and beyond), with the result that their psyche is still under the influence of ‘disaster imprinting.’ In terms of the sentiment cycle, this puts them in the depression stage. My personal perspective closer to hope than depression at this point. I understand that hope is a concept that traders should avoid, but I do think that even with all the challenges to the global economy, hope is a more appropriate place to look for investment opportunities.

When the VIX is at 22 and I can sell VIX futures (or options based on those futures) at 32, at least I have the comfort of knowing that I have a large margin of error before I have to worry about some of my trading ideas becoming unprofitable.

Related posts:

Disclosure(s): neutral position in VIX via options at time of writing

Thursday, September 16, 2010

Opportunities Arising from Unusually Low Implied Volatility in Gold

Gold sure seems like it has been acting more than a little crazy lately, with the commodity recently hitting new highs and threatening the 1300 level and ETFs for physical gold (e.g., GLD) and gold miners (e.g., GDX, GDXJ) attracting a great deal of attention.

If you listen to the media, a number of extreme positions are being bandied about, ranging from gold going to 10,000 to being described yesterday as the “ultimate bubble” by billionaire hedge fund guru George Soros.

With such strong convictions and emotions riding on the gold trade, this is the type of environment in which one would expect to find extreme volatility. Instead, the exact opposite has been unfolding. As the chart below demonstrates, during the last month the 20-day historical volatility in gold (dotted green line) has dropped to its lowest level in several years. At the same time, the CBOE’s gold volatility index (GVZ), which measures 30-day implied volatility expectations for GLD, has been making all-time lows. GVZ, which has been calculated since June 2008, established a new all-time low on Monday when it closed at 16.69.

With two strong divergent opinions on gold and low implied volatility levels, this could be an excellent time to buy options in order to establish speculative long or short positions in the metal.

In addition to gold’s speculative potential, investors looking for a portfolio hedge or even just a little portfolio diversification might also find gold options to be an attractively priced addition to one’s portfolio at current prices.

Related posts:

[source: CBOE, Yahoo]

Disclosure(s): long GDXJ at time of writing

Wednesday, September 15, 2010

Sitting in for Steven Sears at Barron’s Today

Today I am the guest columnist of The Striking Price at Barron’s, sitting in for Steven Sears.

In Will Market Volatility Return to Crisis Levels? I took the opportunity to expand upon some recent themes, notably the record contango in the VIX futures term structure as indicated by the new all-time highs in the VIX Futures Contango Index, etc.

The Barron’s article talks about some of the mathematical implications of an elevated VIX, puts some important numbers in historical context, and offers some thoughts on the implications for trading approaches.

Related posts:

Previous Barron’s contributions:

Disclosure(s): none

Tuesday, September 14, 2010

VIX Futures: What Were/Are They Thinking?

Yesterday, my proprietary the VIX Futures Contango Index hit a new all-time high, indicating that investors believe very strongly that the current volatility environment is grossly underestimating what volatility will look like in the coming months, particularly in 2011. This, of course, is nothing new, as the links at the bottom of this post will attest to. It is important to note, however, that the disconnect between current volatility and the volatility levels indicated by the VIX futures suggest that investors have never had such a Panglossian outlook as they do now.

While the VIX futures may be the market’s best estimate of future volatility, these contracts are far from an ideal prediction mechanism. One only has to look back a couple of months to see how the VIX futures saw the balance of 2010 unfolding. As the chart below shows, investors were anticipating volatility on the order of a VIX of 33-36 for the second half of the year as recently as late May. The reality has turned out to be substantially different. Yesterday’s closing prices in the VIX futures reflect a downward revision to September VIX futures of 12.60 points.

I find it particularly interesting that the massive overestimation of September volatility has had so little impact on estimates of volatility for 2011. Back in May, the VIX futures were only quoted through December 2010, but if one mentally extends the red trend line formed by the September 2010 through December 2010 futures, the result is an almost identical to the current expectations of a VIX of 31 or so for February through April 2011. It is almost as if the 12.60 point miss is considered irrelevant.

If some large storm clouds do not begin to appear on the horizon in a hurry, I would expect those who are holding doom and gloom volatility positions will start to capitulate and put some downward pressure on volatility. I do not expect the record contango in the VIX futures term structure to hold up much longer. In order for the term structure to begin to flatten out and assume a more normal shape, either the back month volatility is going to collapse or the near month volatility will have to rise substantially to give credence to the expectations of doom and gloom. My thinking continues to favor the former scenario.

Related posts:

[source: CBOE Futures Exchange,]

Disclosure(s): none

Monday, September 13, 2010

Chart of the Week: Updated Economic Data Trends

First unveiled on July 2nd in Trends in Economic Data Relative to Expectations, I was pleasantly surprised by the positive reception to my chart of how various components of economic activity have been tracking against expectations for 2010. As a result, I expect to periodically update a version of this chart for the blog.

This week’s chart of the week is one such update, selected partly because the last several weeks suggest a possible reversal in the negative trend of economic data relative to expectations for employment and the consumer (Retail Sales, Consumer Confidence, Consumer Sentiment, Personal Income, Personal Spending, etc.)

While there is some evidence that the downtrend in economic data may have been broken, there is at best marginal evidence to support the idea of a bullish uptrend in the data. Starting tomorrow with the retail sales numbers, this week should go a long way toward answering some of the questions about what the data say about the state of economic activity in the United States.

Related posts:

Disclosure(s): none

Thursday, September 9, 2010

VIX Weekly Options Coming on September 28

The CBOE Futures Exchange (CFE) announced today that it will begin trading weekly options on VIX futures as of Tuesday, September 28. Please note that unlike standard monthly VIX options which expire on Wednesdays, the weekly VIX options will expire on Fridays, as is the case with other weekly options. Also, settlement for weekly options will feature physical settlement - one futures contract for each expiring options contract. [Thanks to Chris McKhann for highlighting this important clarification.]

With the addition of weeklys to the VIX options stable, the proliferation of tradable VIX products has the potential to overwhelm and confuse investors. For example, in just three weeks we will have VIX futures options and VXX options expiring on the same date. The former will trade off of the VIX futures; the latter is based on iPath S&P 500 VIX Short-Term Futures ETN (VXX), which is a weighted portfolio of front month and second month VIX futures.

Among other things, the new VIX weeklys set up some interesting volatility pairs trades, including a VXX-VIX options pair that has the potential to be able to isolate the contango and backwardation components of VXX using VIX options with an identical expiration date.

For volatility traders, 2010 is shaping up to be a banner year in terms of new products.

Related posts:

Disclosure(s): none

Wednesday, September 8, 2010

VIX Futures Contango Soars

Last week I started publishing something I call the VIX Futures Contango Index in my subscriber newsletter. The intent of this index is to enhance one’s sense of the shape of the of VIX futures term structure curve, by building on the simple math of the front month and second month roll yield calculations to come up with a mathematical representation of the degree of contango or backwardation across the entire VIX futures term structure.

Using the VIX Futures Contango Index methodology, today’s close has the index at 99.8, which is the third most extreme contango reading since VIX futures were launched in March 2004. [The index values range from 0-100, with 0 being extreme backwardation and 100 being extreme contango.]

Extreme contango readings are generally associated with turning points in stocks, which is why in the chart below, I have highlighted the two most extreme VIX futures contango readings. The highest VIX futures contango reading in the history of the VIX futures comes from April 21, 2010 and is indicated by the red arrow in the chart below. Note that this mark was achieved just two days before the SPX posted its closing high for 2010.

The second highest VIX futures reading was registered three months later, on July 21, 2010, just over one month ago. This extreme contango situation is flagged with a green arrow on the chart below, as it turns out stocks were about to move up to their highest close (SPX 1127) since the May selloff.

It is difficult to anticipate what the steep contango means for stocks this time around. Clearly the market thinks another selloff is in the cards that will drive the VIX up over 30 by the beginning of 2011. I have a less pessimistic outlook, but will be watching the VIX term structure closely to see if the level of contango is able to rise above the April high water mark.
Related posts:


Disclosure(s): none

Monday, September 6, 2010

Chart of the Week: The Monthly SPX

Most of my trades have a tendency to last from a couple of days to a couple of weeks, so as a result I tend to spend almost all of my time looking at charts with daily bars or intraday bars. As a consequence, I find that I run the risk of not focusing on long-term trends.

One of the ways I try to overcome trading with short-term blinders on is to force myself to study some weekly and monthly charts. I find that particularly when markets seem to be at potential inflection points it pays to take out that wide-angle lens and step back for some additional perspective.

This week’s chart of the week is an attempt to do just that with the SPX, using monthly bars going back to 1998 to put the last few months into historical context. What I see is a classic bullish bounce off of a cycle low that has now advanced just shy of the 50% retracement level. Stocks have been consolidating for the past 4-12 months, depending upon one’s perspective, and are likely going to soon be choosing whether to continue upward above the 1220 level and establish some new bullish momentum or fall back below 1010 and make a run in the direction of 666.

The longer time horizon does not necessarily make it any easier to discern the direction of the next big move, but it does a better job of laying out the battlefield and where both bulls and bears should be able to declare victory.

Keep in mind, of course, that it is the victors who get to write history…

Related posts:


Disclosure(s): none

Thursday, September 2, 2010

Barclays VEQTOR ETN (VQT) Begins Trading

Both volatility traders and long-term investors should be interested to know that Barclays launched the launched the ETN+ S&P VEQTOR ETN (VQT) yesterday. Flying mostly under the radar, this ETN traded only 300 shares in its first day. That being said, I think VQT is probably the most interesting volatility product launched to date, with dynamic hedging rules that make it the first actively managed off-the-shelf volatility product for the retail investor.

I promise a more detailed analysis of VQT in the near future, but for now suffice it to say that the ETN essentially consists of a long position in the S&P 500 index, hedged with a volatility position (VXX) that varies daily, based on how the ETN evaluates volatility risk, largely using realized volatility and implied volatility calculations. The table below shows that the two main inputs into determining the VXX allocation are the current level of realized volatility and the direction of the implied volatility trend. The equity component of VQT is set to vary in a range of 60-97.5%, with the volatility component comprising the balance of the VQT at anywhere from 2.5-40%.

The concept behind VQT is an extremely attractive one, as it includes some built-in disaster insurance in the form not just of a volatility hedge, but also a stop loss feature, which is triggered whenever the 5-day return of the VEQTOR index on which VQT is based is equal to or less than -2.0%.

The specific implementation of volatility rules deserves more detailed treatment, which I will take up in subsequent posts. In the meantime, readers are encouraged to study the pricing supplement for VQT.

Note that VQT bears an extremely strong resemblance to a forthcoming VEQTOR product from Direxion that I discussed a little over a month ago in Direxion and S&P Bring Dynamic Volatility Hedging to ETFs with VEQTOR.

Related posts:

[source: Barclays]

Disclosure(s): neutral position in VXX via options

Wednesday, September 1, 2010

Milestones Past, Present and Future

Several different milestones seem to be converging in time at the moment and I thought this would be a good opportunity to acknowledge them.

Last month the blog recorded hit number 2,000,000. While I wasn’t there to record the event as it happened, looking at Google Analytics, there is a pretty good chance it involved someone surfing in to get some information on VXX. Whoever it was, thanks for dropping by and I hope you found what you were looking for.

Some time earlier today I accumulated my 3000th follower on Twitter. My enthusiasm for Twitter has spiked up and down over the years, but I have settled comfortably into using Twitter to flag posts of interest around the blogosphere; highlight breaking news of particular interest; comment on the VIX and VXX, as well as related options, futures and ETFs; make occasional intraday market calls; and indicate whenever I have something new posted on the blog. I try to keep my comments to only a couple per day so as not to create visual gridlock. Readers can follow me at

Looking ahead, sometime in the next month or two I will have 500 posts up and 1000 followers on Seeking Alpha. I mention this because Seeking Alpha has recently expanded their functionality and I am now utilizing their private email to respond to reader questions and have also begun to respond to comments posted their on my articles. Looking ahead, Seeking Alpha in the process of adding some investing apps and I hope to review some of my favorite in the next few weeks. For those who are interested, my Seeking Alpha posts can be picked up at

Thanks for all who have contributed to the dialogue here, both in public and behind the scenes.

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Disclosure(s): none

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