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Robert first tasted a passion for studying the economy during his participation in the National Fed Challenge, where he studied macro economic analysis and the inner workings of FOMC policy. He attended Clemson University and graduated with a B.S. in Business and Economics. After beginning his... More
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  • VIX Ready to Pop 0 comments
    Mar 22, 2010 11:25 PM | about stocks: VXX, VXZ, SPY, SPY, DIA, UDOW, SDOW, SDS

    The VIX is the CBOE (Chicago Board Options Exchange) metric of volatility regarding S&P 500 futures (SPX). The VIX of mainstream media is the most common VIX metric, which tracks the 30 day volatility of the SPX. Currently, the VIX is trading near it's lowest levels since 2008, allowing bear traders and bull hedgers an attractive entry point for some risk or insurance in their portfolios. 

    Below is a graph of the VIX, March 2008 to March 2010:

    (Click on the chart to pop out into a new window)

    VIX 03-22-10 

    From a technical viewpoint, the VIX is oversold and should find it's way higher very soon. The divergence between the 20 day exponential moving average (EMA) and the 50 day simple moving average (SMA) hasn't been as wide as it is now, since Jan 1, 2009 where the index saw a strong bounce higher. The Moving Average Convergence Divergence (MACD) histogram shows momentum on the verge of shifting into positive territory, while the Relative Strength Index (RSI) index shows the VIX in deep oversold territory. 

    The VIX is forming a bottom above the 16 level at the beginning of an uncertain week where sweeping change to health care in the United States (17% of U.S. GDP) is expected to be signed into law. Simultaneously, Jean Claud Trichet, head of the European Central Bank, has publicly rejected pleas by Greek President Papandreou for "subsidized" lower financing rates to the country, days before a summit over the Greek debt crisis convenes (March 24-25).

    The S&P 500 has recovered zestfully from the most recent correction, as five of the last nineteen sessions have been gainers for the broad large cap U.S. equity index. However, the RSI and MACD are showing the index is heading for a pullback over the next week or two, which would directly affect the VIX.

    SPX 3-22-10 

    Attempting to bet on European bond spreads by calling the outcome of the Greek Crisis or implications from the new U.S. health bill would be far too risky, yet betting on increased uncertainty and volatility in the prices of SPX options can be achieved using ETNs which track the CBOE VIX metric. 

    Barclays owned iPath offers two products; the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX), or the iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ). Depending on the level of volatility and risk each trader wants to assume by adding such an ETN to their portfolio, they can choose between these two products. The VXX tracks closer to the traditional VIX thirty day volatility index, while the VXZ represents the constant weighted average futures maturity of five months, and both carry a maintenance fee of 0.89% over one year.

    We like the VXZ, since there's less volatility in the price and more potential for gains when S&P 500 pullbacks do occur. (See chart below...)

    VXZ 3-22-10 

    Notice, the RSI and MACD both warrant a reversal over the next few trading sessions as the VXZ ETN is priced near an ideal entry point for short minded traders and hedge conscious bulls alike. These vehicles aren't for the novice trader or investor, and should be carefully researched by clicking the link to the prospectus above. 

    Disclosure: Long SDS, Long VXZ
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