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2 years ago
Suddenly, in the Autumn of 2018, disaster struck all U.S. markets with great force; as the Federal reserve sent the world’s investing public into a tailspin. The selling off of all U.S. stock markets was transparent; kicked to the floor thanks to compounding downgrades and negative earning’s reports. Investors scrambled for some assurance for their portfolios; as the result of the collapsing market was a +200% spike in the CBOE Volatility Index (VIX).
Since January 2019, there has been a steady decline in the VIX; with shares of the index dropping from as high as $36 to a recent base of $12 per share. With the overall stock markets hitting new highs almost each day, continually month-after-month; complacency has become the norm. Traders typically refer to this sentiment as Fear of Missing Out (FOMO), with the investing public continuing to shovel money into the markets. The masses are exhibiting euphoria about their 401k gains, however this ongoing uptrend will eventually end in a bloodbath. The stock price of many under-performing companies has double or more in 2019, with no real improvement in fundamentals. Therefore, we must think about the real question at hand: Is This Bubble About To Burst?
Black swan events are a constant threat to the world’s markets, and are completely unpredictable, until they begin. In recent weeks, the very disturbing outbreak of the deadly Coronavirus Flu in China has surfaced, and now spread throughout the world. This is, indeed, an unforeseeable factor; one that could have a major implication on humanity, and, could have dire effects on the world’s financial markets: which include industry, travel, and pretty much all commerce, in general.
We believe that certain stocks have reached parabolic status. With the aid of trading apps, like RobinHood; allowing ill-informed, first-time traders to add to the fuel to recent rallies in stocks, such as Tesla, Inc (NASDAQ: TSLA) and Virgin Galactic Holdings, Inc (NYSE: SPCE). Small investments by the 99%, can add to up to huge amounts of capital; and can result in very erratic moves in these stocks.
Panic is a natural reaction when certainties become scarce and fears dominate the headlines. The first port of call to measure the level of that panic is the VIX; which we believe is on the verge of a major breakout.
The mighty VIX has broken out, and above a well established and strong downtrend from 2018. The tightening of the trading range should have been an alert to everyone that a break upward was on the horizon. And, given the political, environmental and economic instability throughout the world; a move to the downside was highly unlikely. Historically, we can see what a great indicator the MACD has been to foresee such moves. The MACD has now reversed, and a cross is imminent once again. There is, no point looking for insurance once your house has burnt down; so protecting your portfolio is imperative with the U.S. markets at such elevated levels, and with such a deadly epidemic spreading throughout the world.
For a retail investor, one popular choice is through an ETF, such as the ProShares Ultra VIX Short-Term Futures ETF (NYSE: UVXY); which tracks the Volatility index, but does lag in percentage gains. We could also bet the UVXY via options trading, in apps such as Robinhood; if you choose to participate in this gambling scenario.
Although this upward move has been very rewarding for traders over the course of the past few sessions, when we consult the weekly chart; we see that this move is insignificant. It is our opinion that the U.S. stock markets will rebound; with investors seeking a hedge, still having plenty of time to average into the VIX.
Given the fact that the VIX could move by 1000%, or more from its current price; utilizing the index, as a hedge, could be an extremely wise decision. This is, while, still longing the super bullish U.S. markets. To sum it up, in life, we often think we don’t need God. That is, until we actually need him, and when investing in the U.S. stock markets, the VIX could be held, in the same regard.