The world markets are all moving based on what the headlines have been saying. For the last month, headlines have been pretty silent in regards to the European debt crisis. This has caused the U.S. stock market to rally quite a decent amount, especially financials, which have seen a strong upside in just the past two weeks. While the headlines have slowed, it does not mean Europe is back on track. All they have done is push back the situation ... again. Investors have been jumping back into the market as they believe stability is back.
I believe the VXX is oversold and volatility will come back to U.S. markets for the following reasons:
1. Italy will need to refinance their existing debt and raise cash this year.
2. Election year could be volatile for certain sectors.
3. Iranian oil conflict could mean increased volatility in oil prices.
Italy's cost of borrowing is on the rise. The 10 year bonds yield nearly 7%, which is very unsustainable in the long-run for a country with so much debt. Italy has over 161 billion euros due between February and April.
Once Italy's debt maturity deadline begins to approach, the country will start making headlines again. This would cause panic once again in the financial markets and create an increase in volatility.
2012 will be a very important year in politics. With the presidential election around the corner, both parties will try to compete for votes. Two industries that will be heavily mentioned during the campaigns will the financial sector.
The financial sector continues be under scrutiny from regulators. Both parties have plans to change the industry.
Democrats have been for heavy regulation of the financial industry. They have been big on supporting Dodd-Frank.
Republicans, on the other hand, want to repeal many of the laws. Newt Gingrich, Ron Paul, and Mitt Romney are all for repealing Dodd-Frank and Sarbanes-Oxley. Many of the candidates are also against TARP and bailouts.
It's important that investors keep an eye on the election this year as it could change the face of the financial industry. Expect financial stocks to become very volatile over the months leading up to the election.
Politics have also began to play an important role on the oil conflict in Iran. There was talks that Iran was going to close the Strait of Hormuz. The strait is responsible for supplying 19 percent of the world's oil consumption.
Iranian senior officials stated that if oil exports from Iran were blocked, then it could close down the strait completely.
Europe is already planning a ban, while the U.S. is not too far behind. If the ban is placed, oil prices will more than likely spike. Since energy stocks have a strong correlation to the price of oil, the sector will be very volatile on any news coming from the Middle East. Saudi Arabia is observing the situation and still trying to figure out if they should increase production if the strait is closed.
This year will be volatile with so much going on in the market. The VXX is going to be a great buy at this price. The markets are stable for now, but expect them to be volatile in the coming months, when the debt maturities of Italy come into question.
The election year will move the financials based on what regulatory changes will need to be made. If Dodd-Frank is even more heavily enforced, profits of banks could fall. If Republicans win the White House, the liberalization of the industry would mean higher profits. Many investors need to consider politics as it can make a big difference in their investing decision. For example, last week Bank of America jumped 8% on rumors that the Obama administration was putting in place a plan to handle the millions of bad mortgages out there.
Then with the Iran oil crisis looming, energy stocks will be very volatile as the situation begins to unfold. If oil prices rise, then consumer spending will also decline.
The bottom line is that the market has become too comfortable lately and there is just way too much about to happen in the coming months to justify an increase uncertainty. This is why I believe the VXX has at least a 40% upside from this point, which puts in a price target in the mid 40's. This is a fairly conservative estimate too. One last thing investors should consider when purchasing the VXX is that timing is everything with this ETF. It holds short-term futures contracts that eventually expire, so investors need to make sure they get in at the right time.