The Dip's Been Bought, Now Prepare Or Despair

by: Logan Corbin

Monday, the market saw its biggest dip in many months and yesterday that dip was bought up as the S&P 500 (NYSEARCA:SPY) and Dow Industrial Average (NYSEARCA:DIA) ETFs recouped much of what was lost Monday. The SPY and DIA were down 2.33% and 1.76% Monday, respectively, and up 1.48% and 1.06% Tuesday. The dip was significant because it followed disappointing domestic economic data, China growth concerns and the gold bust; the SPDR Gold ETF (NYSEARCA:GLD) is down 13.4% over the last 5 days despite a 1.13% gain yesterday. What is the best way to be long in this market without losing your shirt?

One must remember that a falling knife must not be grabbed, risks to the global economy remain although corporate earnings like Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Goldman Sachs (NYSE:GS) surprised to the upside earlier this week, companies like Yahoo! (YHOO) and Bank of America (NYSE:BAC) disappoint today. The bulls should heed the message that gold provided over last week: market risk is swift and as many already know, attempting to react to some events is futile (much of the sell-off occurred Sunday night). Whether the sell-off was coordinated or not, the message to individual investors is clear: prepare now or despair later.

The economic climate in the U.S. remains strongly supported by Bernanke and the Federal Reserve, yet corporate earnings expectations have been curbed because of various global economic concerns, the opportunity for upside surprises still exists throughout U.S. Markets. The dip, among other concerns, may have been the impetus for big bull Jim Cramer to announce he was scaling back on his holdings of Home Depot (NYSE:HD), even though the company is undefeated in its last 9 earnings announcements (against estimates). The long-term bull is intact but global concerns might push tepid money out of equities on a short-term basis. Though the dip was nearly bought back Tuesday, it may not be finished stirring up investors.

Gold investors' reaction to the negative price action was as volatile as the precious metal itself, it consisted of praise to the short sellers for their prescient calls, and cries of foul play from the +100% long investors and everything between. The shorts did come out on top after years of failed bearish calls, but the shorts may not have made the most money on that price action. View the below chart of the VIX equivalent in Gold, the CBOE Gold Volatility Index (GVZ) and see the real winners. The GVZ is up 121.71% in the last five days even including a 12.94% drop Tuesday. Volatility occurs with price change, not necessarily negative action which makes it better than a short or even a put which are more targeted means of protection. Bottom line: going long volatility could have protected the long positions in the metal:

(Click to enlarge)

The futures are red this morning, if bulls are adeptly buying this dip, caution should be backed with preparedness. Buying the iPath S&P VIX Short Term Futures (NYSEARCA:VXX) is an excellent way to buy protection from global or macroeconomic concerns and uncertainty. The fund is currently up 3.76% in pre-market trading reflecting the early weakness in the market today. A wise investor knows he or she cannot react correctly all the time, so he or she prepares appropriately. Given the underlying support from the Fed, it is appropriate to enjoy the low volatility and buy equities, but one should learn from gold investors and consider backing up an equity portfolio by going long volatility.

Disclosure: I am long VXX. 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. I am not a professional advisor; my interpretations of the market are independent and should not be construed as investment advice