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David Moenning is a the proprietor of StateoftheMarkets.com. In addition to providing free and subscription-based portfolios on "State", Dave is a full-time money manager and the President and Chief Investment Strategist of a Chicago-based Registered Investment Advisory firm. Dave... More
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Daily State of the Markets
  • Using The VIX To Buy The Dip 2 comments
    Mar 19, 2014 8:03 AM

    Daily State of the Markets
    Wednesday, March 19, 2014

    Another day, another crisis averted. Phew!

    In case you were out and about or weren't glued to your Twitter feed at approximately 8:00 am eastern time Tuesday, comments made by Russian President Vladimir Putin were the source of a second straight up on Wall Street. Within minutes of Putin saying he does not have an interest in acquiring any more Ukrainian territory, stock futures went from red to green. And just like that, the latest crisis appears to have been put to bed.

    Okay, to be fair, that may be a bit of an oversimplification of the situation in Russia/Ukraine/Crimea. Remember, next week the G-7 is meeting to discuss what they are going to do about 96 percent of a region wishing to return to Mother Russia. And there is little doubt that there will be plenty of tersely worded statements, some sanctions, and maybe even an ultimatum or two. Remember, politicians hate to waste a good crisis!

    Getting back to the stock market, the S&P has spurted higher this week and is within a stone's throw of a new all-time high. But it is important to recognize that the venerable index may not home free just yet. You see, our furry friends in the bear camp are quick to point out that there is some resistance overhead on the charts, that this thing in Crimea probably isn't over, and oh yea, China is likely to become to be a problem - and soon.

    Insert Eye Roll Here

    If you wound up rolling your eyes at that last sentence, join the club. Yes, the current bull market is growing older by the minute. Sure, Crimea, China, the Fed, the economy, or anything else for that matter, could easily become the next real problem for the market. And it is true that "trees don't grow to the sky." However, something the perma-bears hate to admit is there is an awful lot of money to be made when the bulls get on a roll.

    Granted, risk is rising. And it is also true that the cycles are calling for a meaningful correction to begin sometime this year (somewhere in Q2 to be accurate). But staying out of the market because stocks have been going up for a while doesn't make a lot of sense.

    What's a Worrier To Do?

    Take a look at the chart below. This is a picture of the S&P 500 on a weekly basis since 2011. By definition, that's a pretty bullish chart, right? And since the August 15, 2011 low, the S&P is up 67%. Not bad, eh?

    S&P 500 Weekly

    The problem is that in August 2011, the sky was falling. The pain of 2008-09 was still fresh. Europe appeared to be imploding and the debt rating of the good 'ol USofA had just been downgraded. Yikes.

    But in hindsight, that "dip" - painful as it was at the time - turned out to be a pretty good buying opportunity. As did the two dips in 2012, the less obvious pullbacks in 2013, and the little dip seen in January 2014.

    BTFD, That's What

    So, if you find yourself underinvested in stocks and jealous of those who have made big money in the market of late, consider the B.T.F.D. strategy - just buy the freaking dips. (BTW, if you want a good laugh and aren't put off by a fair amount of foul language go ahead and Google "BTFD.")

    The only problem with this approach (well, besides the obvious need for the approach to be married to some kind of a risk management strategy) is that it is tough to tell when a dip is over. This is where the VIX comes in.

    An Easy VIX Indicator To Follow

    Anybody who follows the market closely knows that when the VIX spikes, stock prices go down. And vice versa; when the VIX falls, stocks go up.

    So, while this approach is more than a little rudimentary, buying stocks after the VIX has first spiked and then reverses can be a decent way to BTFD. See for yourself.

    S&P 500 Daily

    VIX Daily

    The two charts above illustrate this idea pretty nicely. The VIX spikes and stocks go down. Then the VIX recedes and stocks improve. Note how the spikes in the VIX correspond to the opportunities to BTFD. Pretty simple, right?

    However, before you let visions of buying every pullback on the low start to dance in your head, understand that the game isn't quite that simple. Sometimes the VIX is so low that the spike doesn't hit the magical 20-level. And then there are times that the spike only lasts a few days. Thus, the question becomes, is that a dip worth buying?

    So, tomorrow we will apply some fancy math to this idea and see if we can't come up with a good way to use the VIX to help you BTFD on a consistent basis.

    Teaser alert: The indicator has "nailed" the dips since 2011 and gave a buy signal at Monday's close.

    Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.

    Turning to This Morning...

    With the Crimean situation being moved to the back burner for now (G-7 officials are meeting next week to discuss further sanctions/threats), all eyes will turn to Janet Yellen and the Fed today. Ms. Yellen will hold her first-ever press conference at the conclusion of the two-day FOMC meeting this afternoon at 2:30 pm eastern. Things are fairly quiet in the early going with European bourses fractionally mixed and U.S. futures modestly higher at this point.

    Pre-Game Indicators

    Here are the Pre-Market indicators we review each morning before the opening bell...

    Major Foreign Markets:
    - Japan: +0.36%
    - Hong Kong: -0.07%
    - Shanghai: -0.16%
    - London: -0.13%
    - Germany: +0.37%
    - France: -0.03%
    - Italy: -0.11%
    - Spain: +0.32%

    Crude Oil Futures: -$0.20 to $99.50

    Gold: -$11.60 at $1347.40

    Dollar: lower against the yen and pound, higher vs. euro.

    10-Year Bond Yield: Currently trading at 2.673%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +1.65
    - Dow Jones Industrial Average: +15
    - NASDAQ Composite: +4.48

    Thought For The Day...

    Be as you wish to seem. -Socrates

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave


    The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

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    The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (NASDAQ:HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

    Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

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Comments (2)
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  • Galen Taylor
    , contributor
    Comments (15) | Send Message
     
    And go all in when it hits 89.53 like in 2008.
    19 Mar 2014, 05:15 PM Reply Like
  • David Moenning
    , contributor
    Comments (641) | Send Message
     
    Author’s reply » LOL - Indeed a good strategy!
    20 Mar 2014, 08:11 AM Reply Like
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