Thursday, January 19, 2012

Volatility Index: Why This VIX ETF Should Be On Your Radar (VXX, VIXY, TVIX, XIV, VXZ)

In the world of market volatility, what goes down, must come up. And the most likely time for that to happen is when the bulls and bears are sleepily resting on their laurels. Or, as it’s called on the Volatility Index (.VIX), “Complacency”. In the past, the average investor had no way to get exposure to the Volatility Index—which was reserved for the pit bulls in Chicago. Now with a plethora of ETFs and ETNs available, average investors have the ability to trade volatility, commodities and other market elements.

iPath S&P500 Short Term Futures (NYSEARCA:VXX) is an ETN for average investors to capitalize on the Volatility Index.

WOW! Why would anybody want to buy an ETF with all those negative performance numbers? The answer to that question is the price range. From its low to high, it nearly tripled. But this ETF (actually an ETN) moves fast. For anybody who’s ever been blindsided by a sell-off, you know that the price goes down much faster than it goes up. Because the Volatility Index is a close inverse correlation to the equities market (S&P500), VXX goes up much faster than it goes down. For this reason, you have to make your move before the market makes its move. The market is currently overbought and prime for a pullback.

To better understand volatility, let’s look at the S&P500 Volatility Index (.VIX) before we get to the chart of (NYSEARCA:VXX).

There are two generally recognized significant levels of the VIX: 30, which above that is considered “Fear” in the market, and 20, which below that is considered “Complacency” in the market. Much of the 2nd half of 2011 was in extreme levels of fear of the European Debt Crisis, our own (Congress) inability to adjust the debt ceiling in a reasonable fashion and possibilities of sinking back into a global recession. Much of that market anxiety has calmed, for now.

We see that the VIX has bounced off the 20 level twice, but this 2nd bounce was weaker than the first—almost too calm. If we look back to when the VIX was sub-20, we’ll remember that QE2 was still in effect and basically flooding the market with “free” money. That is not the case now and volume has been very light. More like a melt-up than a true rally in December and January.

I’m not going to go all Chicken Little and scream “The sky is falling”. I’m just saying we are due for a pull back—a healthy function of the market.

A prudent move for hedging your portfolio in anticipation of a pullback is buying VXX. (Or buying options on VXX if that’s your methodology)

Two of our indicators (RSI and Stochastic) are showing this position skipping along the bottom. The important indicator is the Money Flow Index (MFI) at the top of the chart. Smart money has already begun flowing into this position. Additionally, the MACD at the bottom of the chart is just about to have a bullish crossover. Although still low, we are seeing a slight increase in volume.

Unfortunately, VXX doesn’t have an exact correlation to the VIX. But we can establish some close correlation of the important price levels.

VIX 20 = VXX 30 (approx)
VIX 30 = VXX 50 (approx)

VXX below 30 would be a prudent position to take for hedging your portfolio. As the VIX tends to move very rapidly, usually the extent of its move in a week or so, setting your sell limit at the time of purchase would be a good idea. A sell trigger at $48 would capture the move of the VIX going almost to 30. It is unlikely for the VIX to go into extreme levels of fear with recent US economic data showing small steps of improvement and a certain degree of numbness to headlines out of Europe. If you want to be a little more conservative on your sell trigger you could increase the probability of a hit at $46. That’s still better than a 50% move off of $30.

Today the market looks to be stalling on low volume. Should we get a little spike on enthusiasm (or the Algo) in the next day or so, it could put VXX in our sub $30 price range. “Hedge to avoid the ledge” as a great trader friend often says.

Related: ProShares VIX Short-Term Futures ETF (NYSEARCA:VIXY), VelocityShares Daily 2x VIX ST ETN (NYSEARCA:TVIX), iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX), iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA:VXZ), VelocityShares Daily Inverse VIX (NYSEARCA:XIV).

Americans Raid Savings Accounts to Stay Afloat and Maintain the Dream

by Mac Slavo,

Retail parking lots may be full and Americans may be buying must-have electronics, home decor products and new cars, but where’s all the money coming from?

As we’ve suggested previously, the economic destruction following the collapse of 2008 is slowly, but surely taking its toll, forcing many people still holding on to a paradigm of consumption to dip into cash savings, retirement accounts and personal credit lines:

More than four years after the United States fell into recession, many Americans have resorted to raiding their savings to get them through the stop-start economic recovery.

In an ominous sign for America’s economic growth prospects, workers are paring back contributions to college funds and growing numbers are borrowing from their retirement accounts.

Read More @

Why Tops are More Difficult to Call than Bottoms - Why a Top Seems Imminent

It's said that all good things are worth waiting for. Even though waiting is so yesterday in a world of instant gratification, there's no doubt that patience in investing remains a virtue.

There's one very specific timeframe in the market's boom and bust cycle that requires more patience than any other - the topping process - and I believe we are there right now.

Unfortunately, tops are tougher to call than bottoms. Here's why I think yet another top is forming and why it will be difficult but rewarding to sell stocks and/or go short.

Bottom Fishing ... October 2011

For some reason, calling a bottom comes easier to me than calling a top. This could be due to a variety of reasons; I happen to believe that calling a bottom is more 'scientific' than calling a top.

Using the October 2011 bottom, allow me to explain what I mean by 'scientific'. From May to August, the S&P had lost as much as 270 points. On August 12 the S&P closed at 1,178.

Via the August 14 ETF Profit Strategy update I listed 5 reasons why the S&P will make a new low before the next multi-month rally. The reasons were:

1) Sentiment

2) Seasonality

3) Elliot Wave Theory

4) 200-day SMA death cross

5) The VIX (Chicago Options: ^VIX)

The August 21 ETF Profit Strategy update added # 6) RSI

The two most 'scientific' of the above points where the VIX and RSI. Here's what was stated about the VIX in the August 14 update:

'The VIX high generally does not coincide with an S&P bottom. Neither the October 23, 2008 nor May 21, 2010 VIX highs marked an S&P low. There was a 21-trading day lag time between the VIX high and the S&P bottom in 2008 and a 28-trading day lag time in 2010. Based on this pattern a new price low may occur in 17 - 24 trading days.'

In other words, the VIX suggested a new price low for the S&P () unconfirmed by a new VIX low.

Here's what the August 21 update stated about RSI: 'My analysis shows that there tends to be an RSI and general breadth divergence (see August 8 TF) whenever significant lows are reached. It would therefore make sense to see a new price low unconfirmed by a new RSI low.'

The expected new price low occurred on October 4, 2011 when the S&P briefly dipped as low as 1,075. The October 4, VIX high of 46.88 remained below the September 8 high of 48. The October 4, RSI low of 40 remained far above the September 8 low of 20. The October 4, bottom adhered exactly to all expected parameters. The chart below illustrates the RSI divergence.

In addition to the above-mentioned studies, the S&P was also close to crucial support at 1,088. The October 2 ETF Profit Strategy update outlined the ideal bottoming scenario: 'The ideal market bottom would see the S&P dip below 1,088 intraday followed by a strong recovery and a close above 1,088.'

... March 2009

My call of a major market bottom in March 2009 was mainly based on extremely bearish sentiment. The March 2, 2009 Trend Change Alert recommended to buy the S&P (SNP: ^GSPC - News), Dow Jones (DJI: ^DJI - News), Nasdaq (Nasdaq: ^IXIC - News), Russell 2000 (NYSEArca: IWM - News), financials (NYSEArca: XLF - News) and corresponding leveraged ETFs and stated that:

'This counter trend rally will have to be broad and powerful in order to relieve investor's pinned up urge to buy. Nevertheless, keep in mind this will be a counter trend rally, the down trend will resume once the rally exhausts itself. This point of exhaustion is likely to happen at a point where optimism takes over and investors think that the Q1 2009 lows are here to stay.'

Fishing for a Top

Even though RSI divergences can suggest a market top (in fact there's one right now), they can go on for longer than expected. There is no specific VIX pattern that suggests a top and sentiment can always get more bullish.

QE2 made it difficult to pick a top in 2010/2011. If you subscribe to the ETF Profit Strategy Newsletter or read any of my articles you know that I was early in suggesting a market top until I realized that it's foolish to fight QE2 (I shared my 'aha experience' in the October 15, 2010 Newsletter).

Higher prices were likely in late 2010 and even after the March 2011 Japan earthquake correction, the April 2 ETF Profit Strategy update pinpointed the next target for a top: 'In terms of resistance levels, the 1,369 - 1,382 range is a strong candidate for a reversal of potentially historic proportions.' On May 2, the S&P briefly spiked to 1,371 before assuming its painful 300 point or 22% summer decline.

After finding a bottom, the October 4 update outlined the target of the current rally: 'From a technical point of view this counter trend rally should end somewhere around 1,275 - 1,300.' Via the October 11 update I admitted that: 'This rally from the 1,075 low is a miniature version of the March 2009 - May 2011 rally. I expect some difficulties in forecasting the exact route of this rally.'

The Reward of Fishing for a Top

What's the point of bucking the trend and fishing for a top? All good things are worth waiting for. The 'good thing' for investors willing to buck the prevailing trend/opinion and go short in 2011 was a 22% (300 S&P points) top to bottom decline.

250 of that 300-point loss, or 76% of the entire decline, happened within 12 trading days. Bear markets are faster than bull markets and can be hugely profitable (or devastating if caught on the wrong side). Stocks take the steps up and the elevator down.

Regardless of the reward, picking the top remains tricky. The 2011 topping process has taught us some valuable lessons on trading in such a market.

Low-Risk Strategies

The most important rule is to limit risk. The best way to limit risk is to identify strong resistance levels. Resistance levels often work like price traps. They attract their prey and then kill the up trend. In other words, they attract prices before repelling them.

The low-risk strategy is to sell long positions against resistance and initiate short positions with a stop-loss just above resistance. Another low-risk strategy is to go short once a major index falls below support with a stop-loss above support.

2011 - 2012 Comparison

Here's a quick review of year-to-date 2012 market action:

- Trading volume is anemic (YTD daily average is only 750 million shares, about 30% lower than previous years).

- Market breadth is weak (the percentage of stocks above their 10-day SMA and the number of 52-week highs is declining even as prices have reached new recovery highs).

- Sentiment is heating up (51.1% of advisor are bullish and only 17.2% of investors are bearish.

- The market is shrugging off bad news

- Momentum is strong

Isn't that exactly what we saw in early 2011? What happened once momentum was broken?

Chart of the Day - Monster Beverage Corp (MNST)

The "Chart of the Day" is Monster Beverage Corp (MNST), which showed up on Tuesday's Barchart "All Time High" and the "Gap Up" list. Monster on Tuesday gapped higher to a all-time high of $101.55 and closed up +3.68%. Tuesday's rally was sparked by Goldman Sachs' upgrade for Monster to Conviction Buy from Buy and the hike in the price target to $124 from $95. Monster on Jan 11 declared a two-for-one stock split as of Feb 15. Monster Beverage Corp, with a market cap of $8.3 billion, wells energy drinks, fruit juices, fruit juice smoothies, juice cocktails, iced teas, lemonades, and still water.


McAlvany Weekly Commentary

Interview with John Williams of Shadow Statistics

A Look At This Week’s Show:
-The United States is insolvent
-The Government will print money until it fails
-Loss of confidence in the dollar is a prerequisite to hyperinflation

About the Guest: “John Williams’ Shadow Government Statistics” is an electronic newsletter service that exposes and analyzes flaws in current U.S. government economic data and reporting, as well as in certain private-sector numbers, and provides an assessment of underlying economic and financial conditions, net of financial-market and political hype. To subscribe to Shadow Government Statistics, Click Here

Click Here to Order, When Money Dies

John Embry: Gold to Rapidly Triple in Price on This Move

from King World News:

With gold holding on to gains above the $1,650 level, today King World News interviewed John Embry, Chief Investment Strategist of the $10 billion strong Sprott Asset Management, to get his take on where he sees gold headed from here. Embry informed KWN that gold was very close a major breakaway move to the upside. Here is what Embry had to say about the situation: “I’ve been of the mind for a considerable period of time that the gold price really wouldn’t accelerate to the upside until such time as the physical market finally overwhelmed the paper market. But I think we’re reaching the stage now where there is mounting buying of physical because people are starting to realize the paper price is fraudulent.”

John Embry continues: Read More @

Good Time To Invest In U.S. Oil? : APC, CHK, RDS.A, RDS.B

The United States has more oil and natural gas resources than previous estimates, according to a study by National Petroleum Council. The study also concluded that development of these resources will reduce but not eliminate dependence on imported energy and production, and delivery of these resources should be done in an environmentally responsible manner.

The National Petroleum Council is a federally-charted but privately-funded organization set up after World War II to advise the government on issues pertaining to oil and gas matters.

The industry is well represented on the National Petroleum Council, with James Hackett, the CEO of Anadarko Petroleum (NYSE:APC), Aubrey McClendon, the CEO of Chesapeake Energy (NYSE:CHK) and Marvin Odum, the director for Upstream operations in the United States for Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) as members.

Natural Gas
The study's first conclusion is rather obvious given the recent media spotlight on domestic onshore natural gas development. The United States is the world's largest producer of natural gas and has an enormous natural gas resource base that can meet demand for generations if new basins are allowed to be developed.

Although this conclusion seems obvious to us now, just a few short years ago, many observers were climbing over themselves to come up with the direst predictions of falling natural gas supply in the United States. The conventional wisdom at that time was that the United States needed massive investment in liquefied natural gas (LNG) facilities to provide for soaring future domestic demand for natural gas.

One finding that may surprise some investors and also strike some fear into peak oil advocates is the conclusion that crude oil is much more abundant in the United States than previously thought. This new supply is coming from a number of different areas, including tight oil areas where new technology has been applied to develop resources that were previously not economic to produce. In the long term, supply will come from offshore areas, the Arctic region and even shale oil deposits in Colorado. (For related reading, see Unearth Profits In Oil Exploration And Production.)

A recent report from an analyst at Goldman Sachs (NYSE:GS) predicts that the United States will surpass Saudi Arabia and Russia and becomes the world's largest oil producer by 2017. The firm expects United States production to reach 10.9 million barrels per day by 2017. This production figure includes natural gas liquids in the total.

This level of production is certainly doable given the current level of industry activity in the United States. The U.S. Energy Administration reported that the United States produced 8.95 million barrels per day of crude oil, natural gas liquids and other liquids in May 2011. The 10.9 million barrel projection implies total production growth of 21.8% over the next six years.

Despite the optimism on oil production, the United States will still be a net importer of this commodity even under an unconstrained development scenario under which production rises to approximately 22 million barrels per day by 2035.

Environmentally Responsible Development
The final conclusion was that the oil and gas resources need to be developed in a responsible manner to gain the trust of the public. The study also recommended educating the public on the risks of drilling and quoted a study from MIT that found only 43 gas well accidents out of nearly 20,000 wells drilled over the last decade.

The Bottom Line
The conventional wisdom on the amount of natural gas and oil resources in the United States appears to be incorrect, with the only question being whether we will allow these resources to be developed.

Resource Stocks Breaking Out Of Bases and Forming New Uptrends (GLD, SLV, GDX, GDXJ, URA, UUP, TLT)

The end of 2011 and the beginning of 2012 greeted investors with spooky market stories to scare investors. A prominent cartoon in the Wall St. Journal depicted a pretty lady shrieking, “The DOW Sank 17%”. Another balloon read “The US Loses Its AAA Rating”. She is screaming, “Who Will Fix Europe?”. Another caption reads, “$71 Billion Yanked From U.S. Stock Mutual Funds”. Another hysterical cry exclaims, “I Want Treasuries!”. As if that cartoon wasn’t enough to scare readers, the headline read, “Spooked Investors Seek Safety: Volatile Quarter Leaves Market Victims Wondering What Is Next”. Another ghastly pronouncement we wrote in early October to the surprise of many was, “Beware Of Stock Market Rallies Ahead”.

There was altogether too much gallows talk in circulation when we sent out the above chart on the S&P500 (NYSEARCA:SPY). We were brief and to the point and expected a potent rally especially in our oversold uranium (NYSEARCA:URA) and rare earth miners (NYSEARCA:REMX). In early October, we noticed positive signals on our indicators suggesting that an impressive rally was in the offing especially in our deeply oversold industrial metal miners (NYSEARCA:DBC).

Cutting straight to the chase we have witnessed a potent rebound where many of the oversold miners rebounded impressively in 2012. This demonstrates that there is plenty of cash waiting on the sidelines to continue supporting a strong rally. As we said, “When the need is sorest, so the answer comes soonest.” Suffice it to say, that the rally in the undervalued junior (NYSEARCA:GDXJ) and industrial (NYSEARCA:REMX) miners has begun and is continuing.

As we write Bernanke is testifying that the “Federal Reserve is ready to take further actions to spur growth”. They are meeting next week and may announce a transparent horizon of accommodative actions. This is in keeping with our expectations of a potent, surprise rally.

The recent rally in the U.S. dollar (NYSEARCA:UUP) and the long term treasuries (NYSEARCA:TLT) represents a thin blanket for a cold night that is not going to last. This liquidity crisis is presenting a buying opportunity for promising, oversold and beaten down natural resource equities which have been pummeled in a merciless market. Since early October, we are continuing to watch this impressive rally and the breaking out of many quality companies into new uptrends.

Gold’s (NYSEARCA:GLD) accelerated move to $1900 prior to the decision past overhead resistance indicated the market was waiting for an inflationary QE3. The market got a surprise as Bernanke announced a tepid twist. Negative news which causes a temporary decline with a rapid recovery indicates resilience. The precious metals market appears to be finding its footing and now may return to close some of those downside gaps created in 2011.

The recent selling panic in gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) bullion at the end of 2011 has abated and reversals are beginning to occur.

The uranium (NYSEARCA:URA), silver (NYSEARCA:SIL), copper (NYSEARCA:COPX) and rare earth stocks (NYSEARCA:REMX) appear to be breaking downtrends and out of bases. The juniors (NYSEARCA:GDXJ) look like they are beginning to outperform the majors (NYSEARCA:GDX). The smaller miners have reached compelling valuations that long term, contrarian investors can use to their benefit by adding to positions or initiating purchases in favorite stocks or sectors which one has not participated in yet. We must understand the long term trends and realize this is a rare opportunity to pick up resource stocks just beginning new uptrends and breaking out of bases. Don’t ignore this recent rally.