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Fridays Market Selloff - Armageddon Or Opportunity

|Includes: SPY, ProShares Short VIX Short-Term Futures ETF (SVXY), XIV


I have no idea which way we go from here. We just wait and see what the VIX signals tell us and take action from there. The farther we fall the more money we can make on the way back up using (NYSEARCA:SVXY).

So what do we know? Since QE3 started when the Vratio (VXV/Spot VIX) is less than 1.00 at the close this has indicated the bottom for (SVXY).

Vratio Accuracy QE3:

Date VIX Contango VRatio SPY SPY Drw% XIV XIV Drw%  
12/28/12 21.79 -1.79% 1.00 140.03 -4.9% 15.70 -21.5% Nailed Bottom
2/25/13 18.99 -0.85% 0.94 149.00 -2.8% 19.18 -20.5% Nailed Bottom
4/15/13 17.27 -0.30% 0.99 155.12 -2.6% 22.45 -12.0% Wrong (Terror Attack)
4/18/13 17.56 1.74% 1.00 154.14 -3.2% 19.93 -21.9% Nailed Bottom
6/20/13 20.49 -1.02% 0.99 159.40 -4.6% 18.48 -27.6% Nailed Bottom
10/7/13 19.41 -0.76% 0.98 167.43 -3.3% 23.96 -17.7% 4% from Bottom

So That Was the Bottom Right?

No, well..Maybe. The Vratio does get it wrong when there are big market selloffs like in April-August 2010 and July-October 2011 but those were outside of a QE round. We also have some macro events happening Monday-Thursday of next week that can throw a monkey wrench into the best historical analysis.

Monday - Caterpillar earnings = huge global growth and cap ex indicator

Tuesday - Consumer Confidence, State of the union = you never know what job killing plan our leaders will come up with

Wednesday - Fed meeting = will they taper more if we are +5% down?

Thursday - GDP 4th Quarter and Jobless claims


VIX closed at 18.14. Highest VIX close during QE3 is 20.49 June 20th 2013. Longest VIX stayed above 18 during QE3 is 5 days during that June 2013 6% stock market pullback. The VIX also spent 5 days lower than 18, teasing us and making us think the bottom was already hit.

(NASDAQ:XIV) drawdown 11.4% 1/24/14.

Max XIV drawdowns since Financial Crises = 2010 - 53%, 2011 - 73%.

Max XIV drawdowns during QE3 = June 2013 - 22% SPY - (6%)

Max SPY drawdown during QE = 8% November 2012 Presidential Election and 8% Feb 2010 Just Before QE1 ended.


Highest VIX - 29.4 on 3/16/11

Largest XIV drawdown - 30.1% on 3/16/11

Longest Vratio stayed below 1.00 - 4 days during the March 2011 pullback. SPY down 6.21% on that one.

We need to keep a close eye on this one to spot the real bottom as close as possible. There are many reasons to believe this selloff will be short lived - bonuses/new allocations happen around now, QE3 still massive, positive GDP growth, etc. The typical drawdown during QE3 has been about 22% on XIV. I just don't want to be all in SVXY and find out the 20% XIV drawdown ends up being a 60% XIV drawdown.


Don't forget about Debt ceiling Feb 7th with a default date set for late February. If GOP comes out looking for a fight on this one (i don't think they will) then we have yet another hurdle for the markets in February.

Unless we snap back strongly next week January will be a down month. Forget what you hear or read about what happens when January is a down month. I have run the data for the last two boom bust cycles and the January indicator doesn't work better than a coin flip. What does work (and I ran the numbers myself) is what the Traders Almanac says about down January's. Misquoting Stephen Aniston:

"If January ends up down, it precedes a Bear market, 10% correction or a flat year 100% of the time." Let that one sink in for a minute.

2014 is going to be a very exciting year indeed!

Disclosure: I am long SVXY.

Additional disclosure: 25% Trade Account Long SVXY @ $63.07 and100% Cash in 401k