VIX on the Rebound: Time to Look at Its ETNs?

Investor confidence seems to be rebounding, indicating that the worst of the U.S. recession may be over, indicated by the low levels of the VIX and the ETNs that track them.

The CBOE Volatility Index, or the VIX, which is calculated from Standard & Poor’s index options, tracks the market’s volatility over the next 30 days. It’s at the lowest level since right before the collapse of Lehman Brothers, states Rodrigo Campos of Reuters.

The probability of an economic recovery has been strengthened by stabilization of key economic indicators such as payrolls, home prices, bond yields, consumer confidence. Additionally, the Obama administration’s plan to revamp the economy is shedding extra light on the chances of an economic recovery.

Although the aforementioned is all fine and dandy, we are still far from being in the clear.

One of the kings of all economic indicators, consumer confidence, is still unstable. Confidence among U.S. consumers slipped in June to 49.3 from a revised 54.8 in May and a far cry from the 55.3 forecast by economists. Additionally, the job market is still not looking too pretty. Companies continue to lay off workers and unemployment rates continue to increase.

Some VIX ETNs to watch are the following:

• iPath S&P 500 VIX Short-Term Futures ETN (VXX)

• iPath S&P 500 VIX Mid-Term Futures ETN (VXZ)

Remember that if you do consider VIX ETNs, it is imperative to completely understand how they work. They don’t track the VIX, they track a basket of volatility futures and produce a negative return where the yield on the cash for the futures softens the blow.

Kevin Grewal contributed to this article.

Comments

[Mad Hedge F...:]

Also look at the long term chart of the volatility index (VIX), which shows that we hit major long term trend support at 25%, and is overdue for a rebound to a least the mid thirties. That means lower stocks. If I had time, I could go into a dozen additional indicators flashing red lights. If you can’t get the tea leaves to work, then slaughter a goat and examine the entrails.

Jul 08 02:20 PM