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Rock228
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I trade volatility ETPs, occasionally S&P 500 through SPY or UPRO and invest long term in Dividend Growth stocks with high dividend CAGR values. Individual stock picking is a waste of time to me unless the company pays out large and high growth dividends.
  • UVXY & VIX 17 25 comments
    Apr 12, 2014 8:40 PM | about stocks: UVXY, SPXU, XIV

    Where do we go from here?

    There are many reasons to believe this drawdown has not finished. From a rational perspective you can reason that more tax selling can happen Monday, that people who weren't watching their accounts during the week and then saw the headlines this weekend of the stock market "tanking" or "Nasdaq falls 7%" will panic sell on Monday. It is plausible because of this recent pullback the usual April bubble up of markets from new money coming from bonuses, stock options and tax refunds will sit on the sidelines for now leaving us less likely for bounce from these levels.

    From a technical standpoint Japan broke through 14,000 (a big resistance line) on Friday and that can further unwind the yen carry trade, we broke the 100 DMA in the S&P 500, broke 4,000 on the Nasdaq, this https://twitter.com/etfguide/status/454712130902556672/photo/1 and the Traders Almanac stat that in the last 100 years a down January has meant a flat market (+-5%), start of a Bear market or a 10%+ correction EVERY single time. So one of those things is likely to happen…very likely to happen.

    From a déjà vu all over again standpoint this year looks exactly like 2010. 6-8% pullback late January (almost to the day), rebound until April and now a pullback. 2010 pullback started in late April and was the big 16% correction that lasted over 2 months until July 2nd 2010. I can go in to great detail about how scary similar we are but let's just leave it at I believe Friday April 11th 2014 is equivalent to May 5th 2010.

    From a "this could be the really big one" department remember that after QE1 ended we pulled back 16% in 2010 (starting in April just like this year as stated above), QE2 ended and we had a ~19% pull back in the summer of 2011. QE3/QEinfinity is winding down now and although it isn't finished with yet (unlike the others that had certain and sudden end dates of say $40B to zero) it is possible the market is already pricing in its conclusion now especially after the rate hike confusion/slip of the tongue from Yellen where she indicated rates may be going up sooner rather than later. Add on top of that we are coming off of a 30%+ gain year where P/E ratios expanded from QE and the belief that this one time after being wrong for 100+ years straight the Fed was correct and growth would accelerate to 3%+ GDP in 2014. My synopsis is the market is starting to realize either #1 - The Fed was wrong about growth so P/Es must come down thus the rotation from high beta to low beta, #2 - The Fed has no idea what they are doing (possibly pulling back right as we are either slipping into recession or recessionary forces are pulling at the market) and will likely overshoot inflation, raise rates too quickly and squash the economy or both. Heck it could be both #1 and #2 - that's my camp. History shows the Fed has a nearly perfect record of getting interest rates wrong.

    But let's forget all of that and just look at what recent history tells us the likelihood of this selloff continuing. This shows the maximum gains to be had in (NYSEARCA:UVXY) after we hit VIX 17 since start of 2012 and the total gain to be had if you timed it perfect in UVXY (Max UVXY Gain).

    DATE

    UVXY GAIN FROM VIX 17

    MAX UVXY GAIN

    1/24/2014

    35.2%

    54.0%

    10/3/2013

    22.7%

    42.1%

    8/30/2013

    -12.1%

    25.4%

    6/5/2013

    26.2%

    41.8%

    4/15/2013

    22.4%

    43.7%

    12/19/2012

    33.6%

    39.9%

    12/4/2012

    -8.3%

    3.4%

    10/23/2012

    3.5%

    28.4%

    8/29/2012

    4.2%

    10.0%

    7/30/2012

    6.2%

    21.2%

    7/5/2012

    7.7%

    11.2%

    4/30/2012

    38.2%

    43.5%

    4/9/2012

    16.1%

    38.2%

    So the trade would have failed 8/30/13 and 12/4/12. It worked 11 of 13 times straight up, good odds. Many of those times in 2012 where you wouldn't have made much were because we were in huge contango and did not go in to backwardation. The play was (NASDAQ:XIV) all year and only sell XIV during those drawdowns, never to own UVXY. Just too much contango all year long.

    Now I would like to show you that we were really 11 of 12 in UVXY buys at VIX 17 and could have been 11 of 11 knowing the information we now know. The 12/4/12 one was coming off of the elections pullback that we never recovered from (nowhere near back to new highs) and people trying to get in early before the Fiscal Cliff scare took off. That was a wait for the next train moment. 8/30/13 is one I probably would have played UVXY and failed. Problem #1 - We had high contango at the start of the run Problem #2 - a very slow drawdown that took 20 days to get us to VIX 17 meanwhile the contango that was left over and the big roll yield was eating away at our futures curve taking away any big potential UVXY move for us. This time we have low contango and roll yield from the start and we are only in day 7 of this pullback. Our typical pullback over the last 2 years has also included ~20% XIV drawdown, we are at 10% so far.

    I think it is a "safe bet" (nothing is safe with UVXY, be careful!) you can wager a small amount of money on UVXY sometime on Monday especially if we bounce higher. The recent past has shown that once you hit VIX 17 the VIX ends up higher in the next few days even if it sinks lower along the way. Also, this year is shaping up to be a skip XIV and (NYSEARCA:SVXY) and go with (NYSEARCA:VXX) and UVXY. UVXY is up 6% and XIV is down 14% so far this year. Average contango is 3.4% and average VIX is 14.8 all pointing to a long Volatility bias for the year just like in 2007.

    Just remember that those mid to late 2012 gains are during HUGE contango and/or roll yield (12-20%) which means had those drawdowns happened with our current contango you would have much higher gains.

    Do not buy UVXY until you know exactly when you plan to sell it. My recommendation is sell half at VIX 18 or a set % gain and continue to sell as VIX rises. At VIX 19/20 I would be mostly out and only keep in house money that you can let ride just in case this is the "big one" pullback.

    Finally I leave you with this gem from a brilliant fellow named Rick Santelli. A trader who has seen his fair share of market pullbacks. video.cnbc.com/gallery/?video=3000266460...

    Disclosure: I am long UVXY, SPXU, TLT, AGG.

    Themes: Volatility Stocks: UVXY, SPXU, XIV
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Comments (25)
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  • William Andrew
    , contributor
    Comments (66) | Send Message
     
    Good stuff Rock. Thanks!
    12 Apr 2014, 11:51 PM Reply Like
  • Learner16
    , contributor
    Comments (117) | Send Message
     
    According to Marc Faber, there will be a market crash in October. It seems unlikely we will have to crashes in May and October unless this is the beginning of a bear market.
    13 Apr 2014, 12:17 PM Reply Like
  • Jay Wolberg
    , contributor
    Comments (43) | Send Message
     
    Nice One. VXX and UVXY actually looking good this year.
    I wouldn't rule out another SPX run up to 1840 or 1880, but if we do, I see those as opportunities to buy vxx and uvxy at lower prices.
    13 Apr 2014, 12:25 PM Reply Like
  • Rock228
    , contributor
    Comments (876) | Send Message
     
    Author’s reply » Marc Faber has been calling for a huge correction for awhile now. I am on his side philosophically, I like listening to him but he is trying to sell news letters and get on TV. But a timing of March or October (not necessarily this year) is a good bet on when a top or bottom comes because that is when the recent ones were. I am not calling an overall market top or the end of the bull market just a possible healthy correction.

     

    William and Jay - Thanks. Yup I agree Jay. There are sometimes nice pops during drawdowns, the last two that looked similar to this one there was a 1% pop and an over 2% pop before continuing down. In fact I still think either Tuesday or Wednesday we will get an ~ 1% up day and I will short it by the close. The market rarely turns on a dime - the old trend is your friend. Just look at this cycle, Ukraine pulled us down March 7th until April 2nd and then April 9th gave anyone who missed the markets first few signals to sell another opportunity to get out. Now that the trend is lower it will take a bump higher more than once or a washout lower to turn this big ship around.
    13 Apr 2014, 01:55 PM Reply Like
  • Rock228
    , contributor
    Comments (876) | Send Message
     
    Author’s reply » Counter point - So the bull case is (I think) retail numbers may be strong on Monday, earnings may start to beat to the upside, QEinfinity still lives on and some technical signal about gapping lower, piercing bollinger bands and finishing lower marks a bottom, etc. The TINA (There Is No Alternative) argument falls down because emerging markets are so beaten down cheap that they are worth a look and bonds are rallying hard and about to pierce through huge resistance. Not to mention inflation showing up with material prices beaten down so there are alternatives now.

     

    Even if retail Revs look good it doesn't mean earnings will go up. Margins are shrinking, stores filing for bankruptcy, stores lowering guidance, etc. The earnings estimates are so low for Q1 that the beats would have to be significant to even say current P/E's are sustainable because there is no data showing an acceleration in GDP and there is some data showing that our momentum may not even take us as high as the low 2% GDP we had last year.

     

    After all that said, the market can be irrational and hard to predict so ultimately this is just my musings trying to make sense of it all and I could be completely wrong and we could pierce through 1900 by the end of the week. LOL!

     

    I see new stories about Ukraine popping up, I wonder if possible Russia invasion still has any legs against the market. I would guess big yes for Europe but little to none for US markets.
    13 Apr 2014, 02:05 PM Reply Like
  • Rock228
    , contributor
    Comments (876) | Send Message
     
    Author’s reply » This Chris Puplava is a good read, I recommend reading his articles to get some TA info on market sentiment. I read it because lots of people follow TA so it can help with your trades and I don't have the time or patience to learn how all of TA works so I rely on smart guys who do.

     

    He called the 1st pullback in 2014 and the bottom of it very accurately. Although he wrote this article a little bit different than his bottom call last time which tells me he has little confidence we are at the bottom. http://seekingalpha.co...
    13 Apr 2014, 02:25 PM Reply Like
  • aeovian
    , contributor
    Comments (25) | Send Message
     
    Thanks Rock! Glad to have a new article by you to use as a message board for us here in the peanut gallery ;-)

     

    I am still long May and June VIX call spreads and am looking for a VIX in the 18-20 range to take profits. I plan to fade any bounce this week with up to 20% UVXY, which is a position I will scale into.
    13 Apr 2014, 02:46 PM Reply Like
  • windwine
    , contributor
    Comments (74) | Send Message
     
    Nice article Rock!

     

    One more comment is that when you find UVXY hard to buy or you do not like the bid-ask spread you can always turn to VXX as it has better liquidity. Technically the effect of owning 20% of VXX is the same as 10% of UVXY in your account if you are doing a quick entry and exit. And if you are concerned about the weird behaviors happened to TVIX long time ago VXX is a "safer" choice. The big percentage gain of UVXY looks more attractive on paper but it is the same as long VXX with twice the asset allocation.
    14 Apr 2014, 02:42 PM Reply Like
  • Rock228
    , contributor
    Comments (876) | Send Message
     
    Author’s reply » All - I shorted more earlier in the day, missed the quick exit before 3PM but didn't add in to the close because I wanted to see where the VIX curve ended up.

     

    We got our bounce! Take a look at the VIX futures curve. Remember April (VIX1) rolls forward at tomorrows close so the ones to focus on are May (VIX2) and June (VIX3). Barely budged -5cents and unchanged on my screen. On a typical strong ~1% up day those should have fallen 30-60 cents. XIV should have been up 2-4% but was only up .85%. I will add to my shorts on any bounce tomorrow, the trend is still lower in my view.
    14 Apr 2014, 04:32 PM Reply Like
  • aeovian
    , contributor
    Comments (25) | Send Message
     
    I'm in $UVXY 20% with average cost 65.00.
    14 Apr 2014, 06:32 PM Reply Like
  • Rock228
    , contributor
    Comments (876) | Send Message
     
    Author’s reply » I'm 15% in @ 63.60 avg. But also have SPXU, TLT and UGLD.
    14 Apr 2014, 06:58 PM Reply Like
  • Piso Mojado
    , contributor
    Comments (25) | Send Message
     
    Thanks Rock et al. for the camaraderie! Took profits on my SPXU and bought some NUGT early in the day, then added another 5% to my UVXY (total of 15%) at the close. What dangerous fun!
    14 Apr 2014, 11:39 PM Reply Like
  • Piso Mojado
    , contributor
    Comments (25) | Send Message
     
    Well, the NUGT buy turned out to be a bad idea but I turned around that 5% UVXY for a tidy profit @ 71.00 today. Interesting times! Good luck to all.
    15 Apr 2014, 10:47 PM Reply Like
  • Piso Mojado
    , contributor
    Comments (25) | Send Message
     
    Hope y'all are still in the game. Tomorrow, Thursday, might be profitable - perhaps a nosedive for the Nasdaq? Bought back my 5% UVXY today @ 62.00. Then there's the long weekend - enjoy!
    16 Apr 2014, 10:13 PM Reply Like
  • Darrylb
    , contributor
    Comments (29) | Send Message
     
    Rock, just wanted to thank you for sharing your thoughts and starting a new thread.
    16 Apr 2014, 03:38 PM Reply Like
  • jeezuz30
    , contributor
    Comments (417) | Send Message
     
    Thanks Rock and all for the continued discussion on the topic.

     

    Missed the chance for profits at 71, lets see if the long weekend brings us a pleasant surprise on Monday, if not it might be time to switch to the short side!
    17 Apr 2014, 01:13 PM Reply Like
  • aeovian
    , contributor
    Comments (25) | Send Message
     
    I'm in the same situation as you, jeezuz30. Thought about getting out at 70 but I guess I got greedy thinking surely VIX would go higher. I picked up a handful of weekly UVXY 70 calls for about the price of a lotto ticket near the end today on the chance that something happens over the weekend.

     

    Holding UVXY right now is a real gut check. And I know that the market can stay irrational longer than I can stay solvent. But there is a lot going on in the world right now that isn't all puppy dogs and ice cream.
    17 Apr 2014, 07:34 PM Reply Like
  • jeezuz30
    , contributor
    Comments (417) | Send Message
     
    Yep will be watching for a reversal today since the prehours show the market opening higher.
    21 Apr 2014, 09:22 AM Reply Like
  • Piso Mojado
    , contributor
    Comments (25) | Send Message
     
    UVXY @ 58 tempted me again and again today. But with the Geneva agreement appearing to ease the tension in Ukraine, I was hesitant to raise my bet on volatility. However, at a news conference, just before the close, President Obama was quoted as saying, “I don’t think we can be sure of anything." Well, that was a good enough sign for me and now I'm "all in" at 20%. With any luck this will more than offset my losses in PMs (UGL, GLTR, NUGT) and the Russia Bear (RUSS). :p

     

    Cheers!
    17 Apr 2014, 08:58 PM Reply Like
  • Piso Mojado
    , contributor
    Comments (25) | Send Message
     
    FYI:
    Are Leading Stock Indices the "Canary in the Coal Mine" for S&P 500?
    http://bit.ly/1mk4A6D
    18 Apr 2014, 02:03 PM Reply Like
  • jeezuz30
    , contributor
    Comments (417) | Send Message
     
    Good luck to you Piso i'm still long with an average price of around 61 so I won't be adding any more and will be selling on any up days.
    21 Apr 2014, 09:24 AM Reply Like
  • Piso Mojado
    , contributor
    Comments (25) | Send Message
     
    Thanks, Jeez! More than all in now - added another 2.5% UVXY @ 55.10 today. Payday tomorrow? Good luck to us all!
    22 Apr 2014, 10:34 PM Reply Like
  • ParisJOM
    , contributor
    Comments (191) | Send Message
     
    Long UVXY ? ... that is a lot of head wind ! ... I much prefer having wing behind my back that give my position an edge.

     

    I far prefer to be on the short side of UVXY on spikes, or long SXVY or short XIV on a regular basis.
    23 Apr 2014, 06:03 AM Reply Like
  • jeezuz30
    , contributor
    Comments (417) | Send Message
     
    Yep you're spot on Paris. Though it's still worth chasing those short lived spikes, they can be very lucrative on occasion, but most off the time were heading down!
    2 May 2014, 05:32 PM Reply Like
  • Rock228
    , contributor
    Comments (876) | Send Message
     
    Author’s reply » Busy with projects. Crazy low VIX considering bond market, negative Q1 GDP. Sitting on lots of bonds, some UPRO and lots of cash. Waiting for the next drawdown to play bigger.

     

    Market up 3.5% on year (yawn!). The next drawdown I will post more. Until then, wake me up when something real happens!
    28 May 2014, 10:03 PM Reply Like
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