How Vladimir Putin Helped Make My Bearish Case

| About: iPath S&P (VXX)
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For months now, I've been arguing that "the end is near", and not only is the bull market going to come to an end from one or all of a group of catalysts - but also that in conjunction with that and rising middle east tensions, it could be a time for a short term play on volatility. Like my fellow contributor, Michael Blair, I'd argue until I'm blue in the face that there has never been a better time in the last four years to realize the gains you've made in the midst of the current bull market.

In a past article, I argued that we are in especially volatile times right now - where the slightest bit of news that can be perceived as bad can move the markets significantly:

Can't you feel it? Calling it instinct is semi-stupid with all the technical indicators and data we have, but it feels like we're starting to tiptoe over a frozen lake and are just starting to hear the first cracks of the ice.

Folks, no bull market lasts forever, and to me the signs have never been clearer that the floor below us is about to give out. To think we can continue to move upwards the way that we have forever, especially in the wake of how we're diluting our currency, is simply foolish.

My point was that since we've seen this in theory and practice, the market could possibly be on the verge of panic. This would influence how I've allocated my portfolio - which now sits at about 80% conservative and about 20% aggressive.

From a recent article I wrote on Syria, the Fed, and trading volatility short-term:

Make no mistakes about it, the Fed is going to be an enormous catalyst for how stocks in general perform in the upcoming year. The market over the past month has looked like a bloated old man with gout and horrible gas from eating too much pastrami and drinking in excess the last three years. The market could be starting to spin its wheels in the midst of the Fed alluding to the fact that they're going to start tapering their bond buying this fall.

Friday we saw this volatility that's been bubbling under the surface firsthand. Let's take a look at Friday's trading chart:

- courtesy of

See that low of the day, around 10AM? The market opened positive on the August employment report and was promptly slaughtered on comments coming from Russia that Vladimir Putin had said that Russia could help Syria if the U.S. goes ahead with their plans to take military action there.

The market was mixed for a good portion of the day afterwards - but the main event was the volatility. The contention at the beginning of the day was that the employment report was at a rate where the Fed could potentially wait to taper its bond buying. Less than an hour later, it was potential full scale panic.

After Putin's comments, President Obama offered commentary and "softened" his position and remarks on Syria, calming the nerves of investors and popping the market right back up again.

USA Today commented on the day's trading after Putin's comments, and Obama's remarks afterwards:

The losses moderated after President Obama laid out his case again in a St. Petersburg press briefing why he thinks the U.S. and others should take action in Syria.

The Dow climbed as high as 15,010 before falling back in late afternoon trading.

The yield on the bellwether 10-year Treasury note fell to 2.93% after topping 3% Thursday for the first time in 26 months, reflecting the view that the report, while not a disaster, was weaker than expected and may give the Federal Reserve pause before it begins tapering its massive monthly bond-purchasing program.

On the economic front, the Labor Department said job growth for July was revised down and the drop in the jobless rate was mostly due to job seekers giving up on finding a job, not from job growth, the Labor Department's monthly report said.

Economists had expected the U.S. economy to add 180,000 jobs in August. The report is likely to play some role in influencing the discussion at the Fed's next policy-making session set for Sept. 17-18. The Fed has said throughout the summer that if job growth is strong enough the central bank might be able to start dialing back its $85 billion a month in purchases of mortgage-backed securities and Treasuries later this year.

In addition,'s front page headline on Friday evening was an article solely dedicated to how much Syria will "fan the flames" of the volatility we experienced in September. That report notes that President Obama will speak again on Tuesday of the coming week (expect more wild swings), and that the price of oil continues to rise on this news as well:

The focus on Syria in the coming week will be another factor fanning market volatility as investors debate the next step of the Fed.

President Barack Obama addresses the nation Tuesday to lay out his case for why the U.S. should launch a missile strike on Syria, after its government used chemical weapons on its citizens. A Senate vote on Syria could come midweek, and the House of Representatives should vote several days later.

In a month that was already expected to be eventful, Syria has moved to the front burner and has ramped up volatility across markets, not least of all the oil market.West Texas Intermediate jumped more than 2 percent Friday, to finish at $110.63 per barrel, its highest close since May 2011.

The point is that even though rarely do true bulls like when an article like this is published, it's time for us to pay attention. Change always is met with resistance and it's much easier to live in a dream world where the market is always your friend and always goes up than to embrace the reality of the country's current situation. Take the clues the markets have given us this year - the Nikkei craziness, this latest volatility, the Dow Jones Industrial Average topping out on it's chart:

So, on the verge of the panic that I feel is about to set in, I have to ask: Will you be ready to make money off of it when it happens, or will you be, yet again, telling the story of how you were wiped out by the government created market bubble?

Bulls make a lot of decent arguments for the market continuing the way that it has been, regardless of the whether or not the Fed stays involved. Some of the bullish case revolves around the fact that bears (like myself), haven't been 100% right in predicting the future of the markets - and that the market has withstood everything that's been throw at it over the past 6 months of mixed closes.

In addition, Barron's reports that analysts see the "fall forecast" as "sunny":

Barron's recently checked in with 10 Street seers, whose consensus view is that the S&P will reach 1700 by year-end, 4% above Friday's close. If these prognosticators are right, the market will log a 19% gain for the full year, compared with last year's 13.4% advance. Unperturbed by rumblings of rising interest rates or another budget brawl in Washington, some strategists see the S&P hitting 2000 or more in 18 to 24 months.

But, here's where the rules are thrown out the window and my projected thesis undercuts the bull argument. As we know from previous bear markets, the bears only have to be right once, and it'd be foolish to think the markets will stay bullish forever. Nobody expects a bear market when it happens - that's what makes it a bear market and not a "let's make money on the downswing" market, for the public at least. Expect the unexpected - expect a bearish correction.

At the very least, are you in a position to protect that gains that you've made in the last four years? I am. I'll leave you with a line from previous commentary on the market being on the verge of panic:

Are you tired of watching big banks and investors place massive bets with your 401k that you have no control over? Do something about it. Get yourself into the shark mindset on the forefront of the coming bear market, because the meek are eaten alive, and I wish that on no one.

Best of luck to all investors.

QTR's Ways to Trade a Bearish Upcoming Market

  • Small 5%-10% long position in staple stocks [American Capital Agency (NASDAQ:AGNC), NuStar Energy (NYSE:NS), ACCO Brands (NYSE:ACCO)]
  • Medium sized position in actual gold or silver bullion
  • Medium sized cash position in FDIC insured account or in person
  • Small position in volatility ETFs and ETNs to be traded in the very short term
  • Sector shorts in companies that you feel are fundamentally flawed
  • Small long positions in gold and silver trusts (GLD, SLV)
  • Medium sized long positions in inflation-adjusted Treasuries (AAA rated)

Ways to Trade Volatility

  • Buy ETPs that track the VIX, like CVOL or VXX
  • Buy VIX call options
  • Buy call options for VXV
  • Buy S&P VIX Mid-Term Futures VXZ
  • Buy S&P 500 VIX ETF listed as VIXS

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.