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Shopping for Fire Insurance During a Hurricane

With the Volatility Index back at a lowly $12, I am getting deluged with emails from readers asking if it is time to start hedging portfolios one more time and buying the iPath S&P 500 VIX Short Term Futures ETN (VXX).

The answer is no yet, but soon, possibly very soon.

They are inquiring at absolutely the right time.

And here is the problem. When the (VIX) rises, it usually spikes straight up, and then right back down again. That means the stock market has one more sharp selloff left before we hit bottom for 2020 and bounce.

Markets can ignore trade wars, rising interest rates, zero interest rates, foreign assassinations, falling earnings, and international political instability (Britain and Hong Kong) for a while, but not forever. When the time DOES come to pay the piper, prices with volatility will rocket.

So I am more than usually interested in hedging the downside risk for my trading book. A good rule of thumb is to let the (VIX) sit at a bottom for weeks, and then go buy the (VXX). That way you can ignore expensive and unnecessary time decay.

Which all brings me to the subject at hand.

If you are new to the service and have no longs, you probably should skip this trade and just watch it as a learning experience.

This can also be a great hedge for any long positions we may want to add in the coming weeks, such as in “trade peace,” or technology plays.

As I never tire of telling people, no one ever complains when they buy fire insurance and their house doesn’t burn down.

If you are new to this service, don’t freak out. My daily research newsletters are not always about exploring the esoterica of options, or volatility trading.

I’ll let you know when I’m ready to pull the trigger with a Trade Alert.

I am always trying to get better prices.

If you are new to the (VIX) game, please read the educational piece below.

 

 

 

January 10, 2020

Global Market Comments
January 10, 2020
Fiat Lux

Featured Trade:

(FRIDAY, FEBRUARY 7 PERTH, AUSTRALIA STRATEGY LUNCHEON)
(JANUARY 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(VIX), (VXX), (TSLA), (SIL), (SLV),
 (WPM), (RTN), (NOC), (LMT), (BA), (EEM)

December 20, 2019

Global Market Comments
December 20, 2019
Fiat Lux

Featured Trade:

(DECEMBER 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(BA), (CRSP), (BABA), (GLD), (PANW), (VIX), (VXX)

December 16, 2019

Global Market Comments
December 16, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GOOD NEWS IS OUT)
(FXI), (AAPL), (FXB), (VIX), (USO), (BABA), (NSC), (MSFT), (GOOGL)

December 9, 2019

Global Market Comments
December 9, 2019
Fiat Lux
 

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE MELT-UP CONTINUES),
(SPY), (TLT), (VIX), (FXI)

December 6, 2019

Global Market Comments
December 6, 2019
Fiat Lux

Featured Trade:

 

(DECEMBER 4 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (TSLA), (TLT), (BABA), (CCI), (VIX)

November 25, 2019

Global Market Comments
November 25, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or CATCHING OUR BREATH),
(MSFT), (GOOGL), (TLT), (VIX), (TSLA)

October 31, 2019

Global Market Comments
October 31, 2019
Fiat Lux

Featured Trade:

(WELCOME TO THE LAND OF ZEROS),
(TLT), (VIX), (GLD), (SLV), (FXY),
(A NOTE ON OPTIONS CALLED AWAY), (BA)
(TESTIMONIAL)

Welcome to the Land of Zeros

Jay Powell really showed his hand today with the press conference following his 25-basis point interest rate cut.

The Fed’s medium-term target rate is now zero. Take a 1.75% inflation rate, subtract a 1.75% overnight rate and you end up with a real interest rate of zero. The fact that we have real economic growth also at zero (1.75% GDP – 1.75% inflation) makes this easier to understand.

That means there will be no more interest rate cuts by the Fed for at least six more months. All interest rate risks are to the downside. There is no chance whatsoever of the Fed raising rates in the foreseeable future with a growth rate of 1.75%. It will also take a substantial fall in the inflation rate to get rates any lower than here.

That may happen if the economy keeps sliding slowly into recession. Net net, this is a positive for all risk assets, but not by much.

I regard every Fed day as a free economics lesson from a renown professor. Over the decades, I have learned to read through the code words, hints, and winks of the eye. It appears that the thickness of the briefcase no longer matters as it did during Greenspan. No one carries around paper anymore during the digital age.

I then have to weed through the hours of commentary that follows by former Fed governors, analysts, and talking heads and figure out who is right or wrong.

In the meantime, the “Curse of the Fed” is not dead yet. The ferocious selloffs that followed the last two Fed rate cuts didn’t start until the day or two after. That’s what the bond market certainly thinks, which rallied hard, a full two points, after the announcement.

All of this provides a road map for traders for the coming months.

The Santa Claus rally will start after the next dip sometime in November. Buy the dip and ride it until yearend. The Mad Hedge Market Timing Index at 75, the bond market (TLT), the Volatility Index (VIX) and the prices of gold (GLD), silver (SLV), and the Japanese yen (FXY) are all shouting this should happen sometime soon.

I hope this helps.

John Thomas

 

 

 

 

October 29, 2019

Global Market Comments
October 29, 2018
Fiat Lux

Featured Trade:

(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
(WHY TECHNICAL ANALYSIS DOESN’T WORK)
(FB), (AAPL), (AMZN), (GOOG), (MSFT), (VIX)