Long post so if you just want the plan stop reading when you hit Theory.
Something is up with the term structure of the VIX the last few weeks. Maybe it is the fact we haven't had any sizable pullback in over a year so we have been sitting down in the 12's and 13's for so long. I don't think the big money can be made on the VIX ETPs until we get a sizable jump in the VIX over a decent amount of time - IE- a stock market 5%+ pullback over a month. The triple long Index fund ETFs will work just as well in my opinion.
For the last 3 trading days the EOD stats are weird (Dec 18th -20th). Roll yield is acting ok but smaller than normal. Its contango and price of the SVXY which is really weird. Contango has been going up on days the VIX goes up and down the days VIX goes down....not normal. And SVXY is really weird. Down since Wednesday Dec 18th even though Dec 20th VIX was down and most of the day VIX1 and VIX2 were both down.......At one point VIX was down almost 1 and VIX1 and 2 were both down about 25 cents and held steady....yet SVXY kept trending down down down all morning.....wtf?? I don't understand some of the intricate details of how the structure of these VIX ETPs work so I am at a loss. If I don't understand it then I stay away for now.
I should have switched to UPRO or TQQQ (3x Nasdaq) after Fed day (Dec 18th). So the new plan going forward (until a big stock market pullback comes along or the VIX futures curve term structure starts acting nice again) is to buy some combination of UPRO and TQQQ near the close on Dec 31st. Still looking for up to a 3% move in the S&P 500 to start the new year. Good stock price years tend to follow great stock price years. 2013 was definitely a great year to own stocks. The trend is your friend until the liquidity wave falters.
Dec 31st near the market close buy UPRO and TQQQ - 100% of your investment. I am likely to do 50% in each.
Sell when the S&P 500 is up approximately 3%. 3% jump has happened from Dec 31st until sometime in mid January for 4 years in a row. Sometimes almost exactly 3%. Weird but true.
I have a theory that this slow taper wind down will do wonders for the US stock market until the whole thing breaks. My theory is the slow taper will cause liquidity to flee the emerging markets over time and come rushing back to the "fastest" growing mature market (excluding China), the US stock market. Why is that?
Normally the liquidity wave just suddenly appears in the form of QE and then abruptly goes away in both the emerging markets and the mature markets at the same time thus destroying both types of economies at the same time. Examples are QE 1, QE 2 or any of our stock market/financial crashes of the last few decades. This time we are slowly winding down the liquidity wave in a very obvious and orchestrated manner. So the logical conclusion to the beginning of a taper is the market will price in the end of QE….But since we don't know when the QE will completely end (I think it will continue well into 2015 and possibly longer) the market will hedge their bets. The market will price in the US QE liquidity wave receding in the emerging markets first and at some point this year it will fully price in QE stopping in emerging markets. BUT since actual QE will continue (just at a slightly slower pace) the US will not only still enjoy the rising tide of the liquidity wave but also enjoy a big influx of money in to the US stock market from those emerging market accounts that were liquidated.
The money has to go somewhere and people are looking for a return on capital. Japan and Europe are growing slower than us, China is a bubble looking for a pin to prick it…where else will they park their money? Australia? India? I doubt it. Most of it is coming here. And it won't go into bond funds or cash because emerging market investors are used to higher risk and higher rewards. You won't find a guy who owned 50% of his portfolio in Singapore, Brazil and China now putting his cash into a 30 year US treasury yielding 4% with his principal likely to fall considerably over the next 2-3 years. Not going to happen. They will pile into US equities. And then when the QE stays longer or some of the rounds of taper are reversed much of the money will stay parked in the US because flooding back into emerging markets makes no sense when you know eventually….QE will go away and you will once again get flushed if you hold Emerging market stocks. Not worth it. Just stay in the US and take your 20% return per year - thank you very much! And none of this factors in the late to the game herd mentality that will also snowball in 2014. People in money market funds, Bonds and Emerging markets that watched the US stock market go up 30% in 2013 (over 100% since the bottom) while they made 5% or less are going to eventually capitulate and join in on the action in US equities. Even just a small adjustment by each Fund manager into US stocks and away from other assets will spike the market even higher. The herd tends to be a few years behind the curve. They will all pile in near the top just when they should be getting out. That is to our advantage.
This is just a theory and I could be way way off on this one. My prediction is we could have a higher stock market appreciation in 2014 then 2013 with lower earnings growth in the S&P 500 assuming that the liquidity wave does not peak and implode on itself which it is bound to do eventually. Very hard to predict timing on the next collapse.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TQQQ over the next 72 hours.
Additional disclosure: I might day trade TQQQ in my personal taxable account until Dec 31st.