Do "Increasing Volume" in Short ETFs Really Justify Lower VIX?

Recently there have been several articles that are trying to justify the relatively lower values in VIX with respect to calling market bottoms. One of the biggest reason thrown out there has been the "surging volume" in index ETF shorts. Examples - short ETFs from the Proshares Funds' ETFs - SDS, QID, SH, etc. aka ultrashort S&P, ultrashort QQQ, short S&P, etc. The argument is because these short ETFs are gaining popularity and volume, they are acting as a more known and well embraced hedge against the broader based portfolio. So far so good. But then it goes on to reason that this phenomenon has resulted in panic mitigation in equity stocks, which is what sentiment indicator like VIX tries to measure in a broader manner. Ergo, VIX is not flying at high values that you typically see at Market bottoms especially in the last one year.

I disagree. Why? The facts don't support the popular hypothesis. I went back to the last two intermediate bottoms (Jan 22 and March 17) and compared the volume of several short and ultra short ETFs with the volume in recent days including today when we saw something of a mini spike in VIX earlier in the morning. Let alone being significantly higher, the volume in these ETFs recently has been generally less than the previous two bottoms! I also looked at the average volume to ensure I was not focusing on too short a window and still it wouldn't confirm the fact that the average volume traded has been consistently increasing as compared to Jan and March bottoms.

Well a picture speaks a thousand words. So lets take the example of Ultrashort and Short ETFs for S&P and DOW offered by Proshares



The first figure above compares the total volume traded for Ultrashorts within three days of January 22 and March 17 with the Mid July timeframe. The blue bars represent SDS (Ultrashort S&P). The red bars represent DXD (Ultrashort Dow 30)

As I said, pictures speak volumes. Example a total of about 145 million SDS shares traded on Jan 18, 22 and 23, with Jan 22 being the midpoint of January bottom in Markets. A total of about 138 million SDS shares traded on March 14, 17, and 18, with March 18 being the midpoint of March bottom in Markets. And get this, a total of only about 127 million SDS shares have traded on July 11,14 and 15 when we saw the biggest spikes in VIX since the March bottom. Shouldn't the volume on July 11, 14 and 15 have traded higher not only because of the first big spike in VIX since March but also because of the claims that the volume in these ETFs is more than the time period around previous bottoms??

Here is another example with the simple (as opposed to ultra) shorts in S&P and DOW (SH and DOG respectively)



Again the figure compares the total volume traded within three days of Market bottoms in January and March with Mid July. The blue bars represent SH (Short S&P). The red bars represent DOG (Short DOW 30)

Again we see a similar picture. Example a total of about 2.68 million SH shares traded on Jan 18, 22 and 23. A total of about 1.96 million SH shares traded on March 14, 17, and 18. A total of 1.90 million SH shares have traded on July 11,14 and 15.

Conclusion: The panic spike is yet to come unless the obscenely ginormous manipulative power of Feds was successful in the last three days. Which wouldn't make sense because the Fed had more tools back in Jan and March and they still could not prevent the VIX spikes.

Keep in mind we may see a spike as early as tomorrow or as late as August. But based on the above analysis, I am inclined to conclude we have yet to see it.

good luck
Krish

Still No Time To Be A Hero

Our strategy to remain on sidelines and short the cheaper index puts or buying index ETF shorts keeps on giving! If it wasn't for the enormous amount of government intervention in the last few days, what transpired with the banks, Freddie and Fannie came very close to getting stripped and receiving a kazillion lashes. And there are people who say we are in a free market country. What a joke! I don't know how many times I have uttered those three words in the last one week. Its not even funny anymore.

Only hindsight will tell if the intervention was a brilliant move or a kick in the face of the already fragile economy. I am one of those who believes we may benefit short term but the inevitable financial massacre has just been pushed to a later date and may contribute to an overall Black Swan incident. I hope I am wrong. But for now I am waiting for a bottom, not anticipating ..just waiting. I will start anticipating when I get my sentiment indicators high enough. With all due respects, am not stupid or stupidly rich enough to be a hero.

As I have said in the previous posts, I have taken half off my index puts or index shorts for profits and am letting the other half ride. I am STILL NOT opening any new long positions. But I will start studying and researching companies for some nice new long positions this week. The source energy aka God aka the Force aka the High aka the Feeling-You-Get-When-You-Put-A-Swab-In-Your-Itchy-Ear orchestrates such boring, mundane, drawling, slow-motion-train-wrecking and gut wrenching times for a reason - So that we can sit back on a lazy Tuesday evening and ask ourselves - while chickens are running with their heads cut off, what sweet stock/option is going to deserve my well deserved mint for the next couple of months?

Good luck
Krish

The Week of Reckoning

I had some market index shorts in the form of S&P puts open since the last few weeks as mentioned before in this blog. I had anticipated the market fall and the strategy worked out well. While my long portfolio was water tortured by Mother Market, thankfully due to the shorts, I didn't fall off the cliff. I will be covering my shorts this week. So that you know. My theory is - although the bloodbath has continued, the final reckoning I am awaiting for should happen this week. Expect major spikes in VIX and/or a panic sell-off this week. There is no other way except for this grand climax. Just in case it doesn't happen due to some stupid reason like interventions, I want to book my profits while I am still very sure about my shorts. Besides, the level of speculation would increase to a degree that would be too uncomfortable for me to continue betting on the short side until the indicators become slightly less oversold or we continue on the next leg down. For now though, I am going in for the kill and I will be ready on the other side.

The google trends indicator mentioned couple of posts ago in combination with the VIX study and other indicators reflecting institutional participation or lack thereof, worked out really well allowing me to not to sway with the talking heads who have been calling a bottom since the last twenty sessions. Yeah..same sessions marking the market's continued obscene decline.

A great post from Dr Bret Steenbarger published today resonated with me. Dr Steenbarger surmises that by tracking certain sectors' ETFs you can get a good idea of whether the market is in a recessionary/risk-averse mode or recovery mode. The former would pursuade the participants to move to defensive stocks like consumer staples. The latter would encourage the participants to move to stocks that have been battered off late such as financial stocks. If my theory about the week of reckoning is correct, then in addition to watching for a panic sell off, I like Doc's idea to study the sectors to understand if we have truly come on the other side. If so, I may be interested in getting long some of the financial stocks later this week or early next week.

Good luck
Krish Rathi

Lack of Fear (you read it here first!)

About a week and a half ago, I surmised how lack of fear is indicating the markets have still ways to go down using Google Trends indicator. While we saw that prediction unfold, many writers in financial publications and blogosphere also started talking about VIX and its inherent complacency off late.

Moving on, the markets remain in extreme oversold condition, and yet VIX remains stubbornly complacent. Even the google trends indicator discussed last week has remained flat to down. However lets not forget the seasonality. With the summer going on and lot of people taking off on vacations, the following of the markets and participation in them tend to thin down a bit. So a skeptic of VIX indicator might argue if there are not enough people, who is going to panic? On the other hand, a record outflow of money from Funds have been reported last week. So there is certain amount of wariness to keep money invested in the Equities.

I remain on sidelines. Anticipating the recent sell off, I had scooped up a few S&P puts in my personal portfolio that kept me from falling off the cliff in the recent bad days. You may want to buy some puts too as a hedge protection should the markets try to make another go at the trajectory down. These usually can be slightly pricier in this kind of a market as opposed to buying slightly out-of-money VIX options one or two months away. If you are not an options trader and more of a stocks investor/trader, then there are several ultra short ETFs to pick from as a good hedge.

Market's Schizophrenia

Sorry for the gap recently. I am back!
The markets continue their Schizophrenia. In the last post I had surmised that March had put in some sort of tradeable bottom. That strategy worked great all the way till Mid May. In my prior posts late last year and earlier this year, I had warned that if there is a second shoe, then there has to be a third and a fourth and more. Well the sound of the falling knife is really the sound of those remaining shoes dropping, with most of the bad news coming from financials. As a result, the worst performing sector this year has been financials followed by housing. As a trader it is my job to identify opportunities where we can still make money with an in and out strategy, but as a long term investor I continue to remain on the sidelines as I had surmised back in January.

Right now my trading bets are small with extreme precision. I am not casting a big wide net because the market fluctuations and less capital don't allow that kind of luxury at least for now. But hey..when did that stop us?

Here is something interesting that I discovered while perusing Google trends. Google trends is a tool publicly available to see how hot is a given search word or a phrase. I put in the words "Stock Markets" in this tool and I got the below chart.


Notice the spikes closely related to the big plunges in the market. For example C is right around the Jan 22 bottom and D is right around the March 17 bottom. I wouldn't call it a 100% reliable indicator but it sure gives an idea of investor sentiment. The bigger the spike, the bigger the fear/concern and hence more chances the market may put some kind of a bottom. Lets see when the next spike comes in.

Speaking of plunges, this coming week is interesting. Expect a blood bath this week possibly earlier than later, but also expect some big swings on the upside as well. You are smiling if you are a day trader. You are cursing if you are an investor or a position trader. Either way, we will keep treading the markets carefully. So caution is still the name of the game. Will send out picks if I pick any interesting scan. But this is it for now. I am glad to be back.

Krish Rathi

(Update to the above post: I got a comment from an "anonymous" reader that my use of the term "Schizophrenia" that seem to imply I was disregarding the real definition of the term and may have been indifferent to the real plight. He also said "two identities" is not a symptom of Schizophrenia, which is what he thinks I was implying in the post above. First off, I apologize if my usage of the term has upset anyone. I have used it pretty much as a metaphor as English speaking journalists the world over use it to describe fairly different situations. I could have done a better job to describe the context. Let me take another shot. My context here refers to that particular symptom of schizophrenia which deals with perceptions of reality that are strikingly different from the reality seen and shared by others around them. Living in a world distorted by hallucinations and delusions, schizophrenia induces fright, anxiety and confusion. In that regards, I feel the markets has come close to demonstrating these features. First off, the credit crisis was completely underplayed, underestimated and as the shoes kept dropping, the markets have panicked when reality collided with the perceived view back in October and even in January, times when the prevailing notion was that all the skeletons are out of the closet, only to be met by surprises. Not only that, every day the economic data gets even superficially better, the market is very eager to forget the underlying bad news and rally on things like a revered talking head thinking we have reached the bottom of a particular sector, the government officials talking up the dollar, so on and so forth. Next day, reality kicks in with some bitter news about a bank restating their write downs, and the market dives down making you wonder why did it even went up in the first place. This to me does sound like a case of living in hallucination with all due respects. I certainly recognize the seriousness of the disease and don't wish to belittle its gravity. Its a metaphor in this context pretty much like "bastardization". I thank the anonymous reader for giving me this opportunity to research more on this disease, clarify and I hope he understands my intention.)

Taking some profits off the table

The Markets did catch a great tradeable bottom! And they are still feeling pretty good. The monthly charts on S&P did a remarkable bullish hammer formation for March. In plain english it means there is a good chance the Market put an intermediate term bottom in March. This could be confirmed if April candles paint a bullish formation as a confirmation to March action.

The VIX trade published here and the ISRG trade published here did par excellence! I am closing my VIX trade for a profit of 94.67% and selling half off on ISRG for a profit of 170.56% today!

Is ISRG still a buy?
I think yes. And that is the reason why I sold only half of ISRG. The charts are quite bullish. What makes it extremely interesting is the earnings events on April 18th. I am betting on the upside.

Trade details

(1) Closed VIX (+VIXPF Option) at $7.30 (Purchase price $3.75)
(2) Closed Half off ISRG (+AXVDA Option) at $48.70 (Purchase price $18)

Good luck
Krish Rathi

Trade Update: Accenture

I am buying Accenture Options. (If you are not an options trader, you could consider buying the stock i.e. ACN). The purchase was May 35 Calls for a price of $2.15. Accenture is reporting earnings tomorrow close of Market. It is not only a play upon Accenture's impressive quarter over quarter positive performance with positive expectations in the last call but also the weak dollar. Its a quick trade. We might get out of it depending on whether we get a lift off the earnings and how big it is.

Good luck
Krish

Quick Update: Market Notes and Couple of Trades

As I had mentioned in my last post, we did get a tradeable bottom. Today's action has been significant in the sense that there was institutional participation and the indices are making a higher low on the charts. It is still early to say whether the rally will go unimpeded because of major resistance in the soon to be higher planes, but as surmised before we had a tradeable bottom and we are continuing to exploit it. The VIX options trade is turning out to be profitable so far. I am keeping my VIX trade open for intermediate term. I have opened two new trades today:



(1) ISRG Call Options (If you are not an options trader, the trade would be ISRG stock): I bought April calls with a strike price of 310 for $18 per contract. I think ISRG has hit some good support area and looks at least until $325 as its next target within a month or two. This is assuming the market volatility won't shake this stock down. Remember when the indices suffer a lot, ISRG suffers simply because it is a member of NASDAQ 100, unless it is close to its earnings period, which is nowhere near. So I am also going to put a tight stop to take into account any unexpected volatile move down by the indices.



(2) POT Put Options (If you are not an options trader, the trade would be sell short POT stock): I bought April puts with a strike price of 145 for $10.40 per contract. Potash has had a very good run and in my opinion is nearing exhaustion. Couple that with the hit on commodities. I think commodities still have some way to go down. Many offer the argument that because India and China is still strong, commodities and ag stocks in general would do very well. Whether I agree with that argument or not, one thing is clear: nothing goes up in straight line. Besides the rich valuation of the stock worries me. Also take a look at the weekly charts. We have reached a double top on MACD with bearish downtrend initiating and Williams %R, one of my favorite momentum indicators has a downtrending slope that has still some room to go. Once again I will putting a tight stop to counter any major moves in unexpected direction.



Just like last year, I will soon be entering all my 2008 trades into a table and provide that hyper link for performance tracking.



Good luck

Krish

(ps would love to hear from readers on the comments section provided here)

Quick Update on a Quick Trade

As I speculated in my last post, we saw lot of volatility but VIX is settling down to lower levels after spiking up to 36. Given that this was the last time VIX spiked up to and the FOMC meeting happening tomorrow sure to deliver some more positive news to market (they really don't have any other option), I am dipping slightly into some VIX trades as the market is forming a short term bottom here. Please remember this is not yet a complete confidence in Market hitting the long term bottom. But I think we have a tradeable bottom here. I might close this trade as soon as I realize profits of 30% or better which is quite likely as early as tomorrow or by end of this week. I will also put a close stop on this trade so that I don't take a negative hit by more than 20 %.

Here is the trade (please enter this only if you are an options trader. If you are not an options trader, you could bet on index ETFs such as IWW or IWM to play the Russell 2000 index on the long side)

$VIX.X April 30 Put options - Purchase price 3.75 or better (My purchase price as of now is 3.65)

Good luck
Krish

Truly Unprecedented

Folks, its been a while since I last posted. But believe it or not all you missed was a roller coaster ride that would have left you nauseated had you participated in the market actively. In keeping with my message in January to remain on the sidelines, I truly benefitted by not losing more money..phew!

Today I am writing or rather I am inspired to write because of a significant event that has unfolded over the business wires this afternoon. Unless you were living in Mars or had your tv switched off thinking nothing important happens on Sunday afternoon, you probably know that JP Morgan is buying Bear Stearns. That is not the shocking part. It is buying for $2 a share! No that was not a typo. That is not the shocking part either. The shocking part is Bear Stearns seems to be going ahead with it and the transaction would go through. In my books that doesn't sound like a rescue unless Bear Stearns knows where all the yogurt is going to spread after hitting the fan and we don't. This is truly unprecedented! Back in October, it was surmised that if credit problems were truly as bad as some had thought, we would see at least one major investment bank and one mortgage company go belly up or sell themselves at a flea market. With the Countrywide and the Bear Stearns transactions, we finally have a confirmation on those ominous predictions.

By any means or by any measures, the Bear Stearns collapse is not only stunning but also too rapid. It happened before I could blink my eyes and say "buy 10,000 BSC puts!"

Big daddy Ben shares the emotion of the significance of this event. Fed just announced a discount cut and made borrowing available to primary dealers. And they are doing this just two days before the regularly scheduled FOMC meeting. If this doesn't spell the sense of urgency I don't know what does. This is most likely going to cause a havoc in the markets on Monday instead of actually helping it to bounce. Do not be surprise with more emergency actions and even a concerted action globally by central banks of other countries on Monday and Tuesday. (The dollar has already plunged to a 12 year low against yen.)

I just checked out the monthly charts of XLF, an ETF that tracks the major financial institutions. It is obviously no secret that XLF has been in a downtrend and its been a while since it already broke its 200 day moving average and even 200 week moving average. It has also recently broken down its 200 month moving average on the monthly chart, which stands currently at 25.6.

You would either have balls of steel, or you are a genius long term investor with no worries for margin calls because you are loaded, or you are plain stupid to actually put some money in financial stocks on Monday.

That said, if you still have an itch to put money in financial stocks, the safer bet is asian banks who have ADRs listed here. The reason is simply that the asian banks, especially Indian banks have different liability structure compared to US and European banks. Unless the contagion spreads into other areas and generally sags the global economy, these banks will most likely not face the lack of confidence or stress tests that the US banks are facing left and right. One such star is IBN (ICICI Bank Ltd). My strategy would be to allow it to fall a little more as it will in sympathy with what would happen in US markets and especially financial stocks in the next 48 hours. There will come a point then when IBN could become a great bargain once again.

So what should be the general strategy in terms of handling your portfolio you ask? I think what I said back in January still holds unfortunately. Lets watch the blood bath from the sidelines. Do not be surprised if there is a hard rally within 48 hours of market eventually finding a bottom. But you should participate in it only if you are a day trader or an active trader. Otherwise given the general downtrend, the market could still fall down until we see a convincing confirmation and those rallies could be used as an excuse to sell some of your profitable positions.

Fundamentally though, it would be senseless to predict anything for intermediate term after what transpired today. What we know is there are uncertainties and based on the purchase price of BSC, we don't even know the depth of uncertainties. The positive side is that such kind of events usually indicate a market bottom over a longer term horizon.

Hang in there, folks and yes, no new trades for now.

Good Luck
Krish