The End of an Era for the Market

Before I get to today's post I'd like to mention that we recently released an e-book titled, Fundamental Concepts and Strategies for Trading Volatility ETPswhich is available for free download. If you are curious about how our Bias forecasts work and why they have been successful in identifying long-term trends under a variety of market conditions, be sure to give this a read. It explains the basic concepts of VIX and VIX futures as well as the main price drivers of various volatility ETPs, including the popular funds VXX, XIV, SVXY, UVXY, ZIV, and VXZ. I believe that the concepts outlined in the ebook are critical to understand if you're going to trade these products.

Now for today's post:

In today's market we saw VIX make a big +17.8% move up to 15.64. Its VIX futures ETF counterpart, VXX, gained +7.2% while the inverse VIX futures fund, XIV, lost 7.5%. Fortunately for us, our VXX Bias indicator moved to positive on September 18thsignalling the start of a rising trend in VXX and a falling trend in XIV. Since the signal was received VXX has gained 11.4%. The chart showing the past six months of our VXX Bias forecasts can be seen below, and is automatically updated daily on our Daily Forecast page.

The persistent substantially negative VXX Bias of 2012 and 2013 has given way to a choppy pattern in 2014 that is no longer friendly to shorting volatility. The +142% (2012) and 85% (2013) gains in XIV are behind us and now XIV is just +14% year-to-date with three months to go. This lagging performance was largely expected, as we outlined nearly six months ago

So far, this market pullback has been pretty ordinary since the S&P 500 peaked on September 19th. During the past couple years, any pullback that reached 4-5% off the all-time highs in the S&P 500 was bought and resulted in new highs a few weeks later. Traders have been conditioned to "buy the dip," with many thanks to the Federal Reserve's Quantitative Easing policy of putting $85-Billion per month into the market. 

However, as September draws to a close we start looking forward to October and the rest of this year for growth prospects in the equities markets. With October scheduled to be the last month of the era of QE3, the big question for me is whether the "buy the dip" model holds up in the absence of QE. Adding to that concern are warnings from major banking institutions which are publicly highlighting the idea that investors are taking excessive risks (IMF, BIS, BoE, FOMC). 

Did September 19th mark the top of this market run? Will volatility spike into the 20s, 30s, 40s, and higher values that we saw between 2007 and 2010? No one knows for sure (anyone who tells you otherwise is either delusional or lying), but it is important to note the possibility of a change here. We will continue to examine the data from our daily Bias indicators to guide our next decisions in determining whether the next move of the market is up or down. If you are interested in following along with us or learning more about our services please visit our Subscribe page.  

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