An ETF Of The VIX Index Forecasts Market Moves?

Nov.12.13 | About: ProShares Short (SVXY)

The ProShares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY) provides a peculiarly advantageous look at market prospects, and a huge, low-risk operating leverage on profit potential.

This article is an analysis of the SVXY, not just a forecast for the S&P 500, which has to be involved.

Here is a technical description of the ETF, as carried by Yahoo:

The investment seeks to replicate, net of expenses, the inverse (opposite) of the return of the S&P 500 VIX Short-Term Futures index for a single day. The index measures the movements of a combination of VIX futures and is designed to track changes in the expectation for one month in the future. The VIX is a commonly followed measure of the expected volatility of the S&P 500 over the next 30 days. However, since VIX is not directly investable, exposure to equity volatility is often obtained though VIX futures. The VIX Fund intends to meet its investment objective by taking long or short positions in VIX futures contracts.

The practical description, as we see it, is that since the VIX index tends to move inversely with price changes in the S&P 500, SVXY's short structure provides a double-negative instrument that moves in the same direction of the S&P 500. The nature of the VIX index is to expand and contract vigorously mainly at times of surprise and have fairly modest changes the bulk of the rest of the time. That makes use of the SVXY as a profit-gathering vehicle an intermittent short-term investment device, not a long-term investment vehicle.

If the observer's categorization of speculation has to do solely with the length of time that a position is held, then investments in SVXY are speculations. If the observer's categorization of speculation has to do with lack of reasoned basis and lack of evidences of probable outcomes of involvements, then investments in SVXY are short-term investments, not speculations.

In either case, the use of Intelligent Behavioral Analysis currently provides guidance toward near-certain profit of +15% or more, likely in one month or less, for annual rates of gain in excess of four (4) digits of percentage gain. Caveat: Buyer beware, in investing rarely is any proposition fully certain.

The evidences

What leads us to such a proposal? Here is what the IB Analysis currently pictures for SVXY:

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(used with permission)

For those new to this analysis, the price range forecasts shown by the vertical lines of the picture are the product of analyzing the self-protective actions of market-maker hedges to prevent losses to firm capital that must be put at risk in order to fill big-money-fund clients' trade orders.

The sell target in the data table beneath the graph is the percent move to the top of the range forecast. Worst-case drawdowns are an average experience of implied forecasts during the last five years' having a balance of upside to downside like today's. That balance is expressed in the Range Index, which tells what percentage of the low to high forecast range lies below the Price Now. The win odds are the proportion of those similar prior forecasts that produced profitable experiences in the 3 months subsequent to the forecast, usually by reaching sell targets.

SVXY has had 22 days during its full existence of 416 market days (about 1 ½ years of 252 days) when prior instances of Range Indexes were like their present market-maker evaluation of 27. We advocate active investing, which constantly re-employs capital in the then most promising candidates, whenever a previous commitment has reached its sell target or met its holding patience time limit of 3 months after forecast date. The annual rates of gain in the above table indicate the pace of capital growth that would be accomplished if prior experiences are repeated in the future.

What could lead to a certainty?

Are the odds of SVXY reaching a price of $139.91, a gain of +15.8%, in the next 63 market days (3 months) really 100 out of 100? When we only have 22 real-life examples? Even if they represent 5% of the 416 days possible? What has happened at other Range Index levels? Here is the answer to that latter question:

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This table tracks all instances of SVXY price from its 3/19/12 inception to the most recent date of 11/11/2013. The columns measure percentage price change from the forecast dates moving forward daily through that time span to the number of days later, noted in yellow at the bottom.

The rows of the table are striated, according to their day's Range Index value, rising from an extreme of <29 and declining from >49, cumulatively, to meet at the blue line total and average. That line shows, just for reference, that all measurable instances of the 413 days at 13 weeks later (65 days, or 3 months) were above their forecast day by +19%.

Chasing up that column to the top row of RI instances, <29 produces a typical gain for only those experiences (including others at today's level of 27) of +44%, far above the current sell target of +15.8%.

But that was then, what about now? Why did the smart-guy market-makers think they only needed protection against being short when prices were up +16%? Is there some problem here in looking at average results, like the guy who drowned while wading across that pond which was only 3 feet deep on average?

Let's see what proportion of these later prices were actually at a profit out at their columnar end points:

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Well, that ought to put some doubts to rest, unless we're convinced that the market environment of the past 1-2 years (that allowed ANY 3-month bet on SVXY to turn a profit in 7 out of 8 times - the 87 at column 65, row TOTL) is likely to turn pretty sour in the next 3 months. That 65-day, <29 intersection looks pretty solid.


But, is this "death?" Is it "taxes?" Nah!, it's investing (or speculation) and anything can still happen. But the past makes it look pretty good.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.