My recent article titled "UVXY: Adjusting My Portfolio After The S&P 500 Rallied Too Quickly" has given birth to the desired outcome explained within the article. In the comment section of this article were very thoughtful questions related to the article. While I had desired to achieve a 20% return on this hedge against the market and volatility index, I decided to accept a 10% return on capital with a more condensed timeframe. My main reason for adjusting my desired/modeled return was that with the VIX at very low levels, the ProShares Ultra Vix Short-Term Futures ETF (NYSEARCA:UVXY) did not break $21 as hoped upon and indicated within the article. As such, in the comment section I adjusted my price target objective to $25 or roughly a 10% return on capital.
Moreover, it is still possible that the UVXY can march higher in the near term. Having said that the goal for this trade was not to "make all the money." Understanding that the UVXY is actually more dangerous from long participation over the long-term than short participation, I generally look at what can be achieved and accepted from a return in quick order when participating from the long side. Additionally, as the UVXY always seeks new 52-week low trading prices, if volatility should spike higher and force the UVXY higher in price, this might be a good opportunity to rebuild a bigger short position. This is how I've managed my portfolio with UVXY since 2012 and in the most profitable manner.
For readers and investors, it may bring you comfort to recognize that my decision to hedge against a pending rise in market volatility has been shared by others. Please see below an excerpt from Barron's.
For traders with a short-term investment horizons, or long-term investors looking to add some protection, Wednesday's missive from Michael Purves is worth a look. Purves, chief global strategist and head of equity derivatives research at brokerage Weeden & Co., itemizes five reasons why now looks to be a prudent time for investors to buy downside protection or trim a bit of recent gains. He's not bearish long term; rather, it looks to him as if the market could be in for a 5% tumble. Here's my summation of his thoughts spiced up with direct quotes:
The SPDR S&P 500 (NYSEARCA:SPY) looks "overbought" after rising 13% in less than six weeks.This whole rebound feels a lot like October, when stocks rallied quickly after plunging in late August amid concerns about China's growth and currency devaluation. Both times, the VIX plunged and the stocks rally coincided with a sinking dollar. Now, a sharp drop in the VIX, an options-based measure of the cost of stock-portfolio insurance, seems to be finding a bottom. Here's Purves: "The VIX has contracted significantly and is currently below 15 and is at 6-month lows. However, the VIX appears to be establishing support at the same level that concurred with the topping of the October rally top." Meanwhile, the U.S. dollar, which has been beaten-up this year, is also finding support. More Purves: "the dollar is critical to the direction of the equity market (as the dollar weakens SPX strengthens, and vice versa). While we think the dollar top is in, we highlight that the dollar should find some near term support as it consolidates its recent weakening." Oil remains highly correlated with stocks and so if oil pulls back, so too will stocks: "The correlation of crude with equities has defined U.S. equities for several months. While we think the equity market should be increasingly capable of shrugging off a crude roll over, this de-coupling won't happen suddenly."
The CBOE Volatility Index (VIX) edged higher on Wednesday to 14.7, still at a level that is roughly half of its Feb. 11 closing high of 28. This blog has noted that some options strategists see a "volatility overshoot," while others see VIX "downside exhaustion." In plain English, these folks are similarly warning that stocks have rallied so fast and volatility has plunged so much that each trend seems due to reverse. This scenario would be a setup for exchange-traded products including the Barclays iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX), VelocityShares Daily 2x VIX Short Term ETN (NASDAQ:TVIX) and ProShares Ultra Vix Short-Term Futures ETF.
It appears that the disseminated thoughts of Michael Purves were shared by my thoughts and decision to hedge against near-term volatility and a potential downturn in the overall market. Additionally, it seems as though Mr. Purves believes the downturn in the market to be temporary, offering investors a trading and/or profit taking opportunity. I would have to agree with the timeline parameters set forth by Mr. Purves. So with that being said I will resign to the sidelines through the weekend and not put any capital to work until I see a more meaningful opportunity in the coming weeks.
One such opportunity may come from Fitbit (NYSE:FIT). While it is fair to say I'm bearish on the long-term prospects of the company, near term forecasted results from myself and the greater analyst community may provide traders with an opportunity to achieve strong returns in short order. Of course this assumes Fitbit achieves its forecast and that of the analyst community. My most recent trade on FIT was exercised with a purchase of shares at $12.12 and a sale of the total stake at $14.54. This occurred in less than two weeks…not a bad trade and return on capital. I tweeted out these trades through my Twitter (NYSE:TWTR) account in real time as the opportunity was at hand. My last trade represented three total, profitable trades on FIT from the long side, even as shares fell from my initial bearish publication on the company business model and products. It is important that readers and investors understand where Fitbit is in the business cycle presently in order to fully appreciate why I believe in the near term results and potential of trading the stock. If shares of FIT fall below $13.95 I will look to add shares to my portfolio. The plan would be to build a larger position if shares fall to $13 and, if necessary, hold shares until $16 can be achieved in the share price. To reiterate with regards to FIT trading, it would be advantageous to read my initial coverage publication linked and those which proceeded to understand my short-term and long-term analysis of FIT and Fitbit. I am always honest in my analytics and offer an objective approach to disseminating these analytics regardless of my position. I always disclose my positions as well. My goal is to disseminate fact based analytics and logical forecasts not attached to my personal positions with full disclosures. So back to UVXY for a moment and to conclude.
I do desire an opportunity to see UVXY rise to around $30 allowing me to short shares, but there has yet to be a clear trend in the market recently that would suggest this to occur. As such I will continue to monitor the macro environment and other asset class like currency and oil which may influence the market sentiment. Economic data is also always a part of my continual consideration for when and where to deploy capital. The most recent economic data show Durable Goods falling, albeit less than expected while Jobless claims rose slightly last week.
With the markets closed tomorrow and Q4 2015 GDP revision still to come tomorrow it will be interesting to see how the economy fared during the final quarter of 2015. Many economists have already called for a reduction in Q1 2016 GDP expectations based on several key economic indicators like retail sales and Durable Good orders. It's not the greatest economy in the last 20 years that we are muddling through for sure, which is just another reason why investing capital has demanded greater activity on the part of the average investor. If I was to offer a recommendation to investors, I would suggest actively managing your investment portfolio if the ability and time is there to do so. Good luck and best of profits to all in 2016!
Disclosure: I am/we are short UVXY.
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.