A "Panic" Trade Setup with Triple-Digit Potential

Interest rates are falling around the world, and policy makers are finding new ways to add liquidity to the economy. There is a sense of panic in the news, and Bloomberg noted that the European Central Bank, Bank of England and People's Bank of China acted within 45 minutes of each other to add liquidity to the economy. While these three actions dominated the market news, central banks in Kenya and Denmark also reduced their interest rates before U.S. stock markets opened after the July 4th holiday.

Synchronized rate cuts and quantitative easing show the banks are worried about the economy. These actions follow another round of easing seen last month when the U.S. Federal Reserve announced an increase in its quantitative easing program and were joined by central banks in Australia, Switzerland and four other countries. Central banks usually act independently and the flurry of activity is leading some analysts to believe they are coordinating their actions like they did when the global financial crisis struck in 2008. Coordinated central bank action would indicate the problems with the economy are severe, and the policy makers must be very anxious if they are working together.

These actions follow several weeks of economic news that has generally been "worse than expected". Several economic indicators are pointing to a very strong chance of a recession in the U.S. One of the most reliable economic indicators, the ISM Report on Manufacturing, slipped into contraction territory in June.

In other words, central bankers are worried... and traders should be ready.

During a recession, stock prices usually decline... and fast. Given these facts, it makes sense for traders to get ready for a decline. There is one trade that could deliver big gains if stocks fall - an exchange traded note (ETN) that tracks market volatility, Velocity Shares 2x VIX Short-Term ETN (TVIX).

An ETN is like an ETF in that it tracks an index, however, an ETF buys the stocks in the index that it tracks. ETNs buy notes, or derivatives, that track the index. That can lead to pricing anomalies. Take a look at this chart of TVIX to see what I mean...



This ETN is backed by Credit Suisse and when the company suspended issuing new shares in TVIX, the price soared. Once they lifted the suspension, the price collapsed. This can be seen in the center of the chart. Because of those problems, some traders seem to be wary of TVIX, but that creates a potential buying opportunity. The price is near a 52-week low and offers very inexpensive insurance against a stock market crash. (more)