VIX: Be a Market Timing Sleuth (1 Indicator)

Hi friend! This is Peter Bain. Yes, it’s true. I’m back. I started TradingSmarts some 15 years ago, at least as of this writing.

I then went on to found a hugely successful forex site – the forex being my first love of all the markets, given its price efficiency, amongst things, but more on that later. So, I’ve been away from TradingSmarts for 10 years at least, and anxious to get back in the saddle.

The original premise of TradingSmarts was to impart everything I knew about commodities, currencies and stocks – and, oh yes, to sell my book, ‘How to Trade Like a Pro in One Hour.’ It did very well, selling in the thousands – which would make it a best seller in its category.

I am in the process of re-writing it (it is sorely in need of a revamp) – this time in the form of an e-book.

If you want to reserve a copy, just grab yourself a free copy of my hot-off-the-press e-book below, and you will automatically be notified when my book is all set to go.

So, what is the purpose of TradingSmarts this time around?

Well, I still plan on dealing with all three markets – identifying my favourite commodities, currency pairs and stocks, providing trading hacks – but, more importantly, giving you a chance to have a say in what I present.

And, I hope to show you my favourite stocks on a regular basis – those that are set to move.  There’s actually one later on in this post.  When I see opportunities with the other markets – commodites and currencies – I will keep you informed as well.

You will have a chance to ask questions, comment on my posts, post trades, etc.

I will also give a weekly update on what the Big Dogs are doing with their positions, so that you can take advantage of their market intelligence and prosper.

Further… I will share with you money-making tips that may have nothing to do with trading whatsoever, but which will put money in your pockets.  After all, we are all interesting in having more money – however we get it legitimately.

If you are looking for some magic potion or pie-in-the-sky false promises that you find in some other trading circles, you will be sorely disappointed here.

I hate hype – like that guy standing beside his fancy car and jet airplane.  There will be none of that at TradingSmarts.

There will be no pipe dreams or smoke and mirrors – just plain ’ole stuff that works, based on my own personal experience and input from members and participants – and my extensive (and intensive) research.

I read a lot, so I am thoroughly plugged into the markets.  Ah yes, I watch CNBC on a regular basis.  And, I have a lot of skin in the game.

This time around, TradingSmarts will be all about what you want to hear from me.

So, if you want to participate in my newly invigorated TradingSmarts site, and enjoy all of its benefits, please be sure to grab a free copy of my new newly-minted e-book referenced below:

Not only will you get this hot-off-the-press gem, but you will hear from me from time-to-time with all the latest and greatest happenings in the trading world – no matter if you are interested in commodities, currencies or stocks.

For six years, when I was the most active in my forex site, I particularly enjoyed what I called the AM Review. Some of you may remember it.

It was a forum for members to submit comments, questions, trades and what not, to which I would offer my recommendations, suggestions and thoughts.

I would also provide an update on price action and price direction.  Plus which, it was a lot of fun for all parties concerned.  And, the members seemed to like it, from what I was told.

Getting back to why the forex is my favourite market, let me elaborate in a future post.  I want to do that market justice by devoting sufficient time to it.

My comments will not be copied from some text book, but rather will stem from my dozen or so years of experience in that market.

Don’t get me wrong… there’s still merit in the other markets, and I will be addressing those too in other blog posts – stocks this time around.

For this opener, I had to start somewhere – but where? – not having the benefit of having asked for your opinion in advance.

Once I start hearing from you, that will give me some idea as to what you want me to talk about.

One word before I carry on… I am not going to blog post you to death.  I believe in providing first class quality content.  I will post when I have something meaningful to say to you.  I won’t wait forever to post again, but I won’t post on a daily basis like some other bloggers do.

So, I tossed a coin, and it landed on… the ‘investor fear gauge’ – coming up a little bit later in this post.

But, first:

Don’t click away too soon, as I have some trading hacks for you coming up now and later on in this post that you won’t want to miss.

I will always present you with the most successful trading strategies I am aware of, including day trading strategies.  And, I won’t forget about commodity trading strategies, currency trading rules, currency trading tips, and free COT charts.

Of course, I would love to hear about stock trading strategies that work for you, plus those you employ for the other markets as well.

Stock Market Successful Trading Strategies – Trading Hack No. 1:

RSI is a good indicator to use to gauge momentum.  In other words, if a stock has been falling, look for RSI to turn up in the opposite direction. 

This is called divergence, and signals seller exhaustion.  Translation:  look for a good buying opportunity to the upside.

Correction:  The Sky is Not Falling –

As the stock markets plunged early on Monday, August 24/15 everyone on Twitter instantly became a financial expert.

Traders in the U.S.-$5.3-trillion-a-day foreign exchange market were busy that day.

New Zealand’s kiwi swooned by as much as 8.3 percent – the most in 30 years – as currencies of resource-rich countries declined during a global market sell-off.

Conversely, haven currencies surged amid concern that China’s slowing economy would dampen global growth.  The yen climbed the most since 2010.

At the same time, the U.S. dollar weakened, as traders doubted that higher interest rates would be initiated by the Federal Reserve any time soon.

The Canadian dollar continued its trek south – closing at 75.40 cents U.S. – down 54 cents from Friday’s close.

August is traditionally a very volatile month so I guess, if we were going to have a correction, it may as well be in that month.  Since the 2008 stock market crash, share prices have been up in five of six years.  A stock market pullback should have come as no surprise.  It was on everybody’s mind.

Investors and traders alike have been worried about the implications of China’s devaluation of its currency and its attempts to keep up its growth rate.  The market rout appears to have been “imported from abroad – namely China – not made in America,” to quote David Rosenberg.

The situation in Canada is especially worrisome, in that 30% of its stock markets are tied to energy and metals.  A slowing China is partly to blame for the decline in oil prices and the plunge in stock prices.

Stock markets don’t like uncertainty, and that was reflected in the market swoon of Monday, August 24/15.  Speaking strictly from an investor’s point-of-view, most people will make all the wrong decisions.  A good number will bail, and then wonder when to get back in – in some cases, getting back in long after the market has rebounded.  Investors with portfolios soundly constructed of a solid mix of stocks and bonds really have nothing to worry about over the long haul.

It should be noted that, during that panic sell-off, stocks paying dividends fell 20% less than the rest of the market.  So, there’s something to be said for holding such stocks.

The financial market rout of the past week is more than likely the result of worries over China’s four-headed monster: 

  1. a massive debt overhand;
  2. economic weakness;
  3. an equity bubble;
  4. and, a newly-implemented floating exchange rate.

A secondary consideration is probably the prospect of the Fed tightening later this year, even though Larry Summers is calling for QE.

This market weakness is looking more and more like a temporary correction than a permanent new trend. 

The current economic recovery in the U.S. is in its seventh year, and represents one of the longer recoveries in U.S. history.  It will undoubtedly last for several more years, even though certain aspects of the recovery are looking old and tired.  This leaves the market vulnerable to corrections and volatility that we just witnessed.

It is quite normal for stock markets to swoon by 10 percent or more every few years, with markets then normally reclaiming lost ground in short order.

Before the correction took place, stock market valuations were fine. 

Classic measures, such as the price-earnings ratio and more advanced ones like the risk premium between stocks and bonds, auger well for equities being considered a good buy – especially now, after the recent meltdown.

Policy makers generally do what they can to restore tranquility to financial markets.  Witness Chinese policy makers cutting their rate for the fifth time since November of 2014, in an attempt to stimulate the world’s second largest economy.  It is highly unlikely that the Chinese slowdown will induce a recessionary nadir at the global level.

On this side of the pond, it’s a good guess that the Fed will not tighten rates in September – possibly leaving that decision to as late as early next year.  This eliminates one of the original catalysts for the stock market correction.

Economic weakness in the emerging markets and expectations of rising U.S. interest rates should spur the U.S. dollar to further heights.

The latest bout of low interest rates and low commodity prices are both conducive to global growth.

Looking ahead, when viewed within the framework of the U.S. presidential cycle, a classic technical indicator – the bellwether S&P 500 – usually declines in similar fashion to this correction somewhere in the year before an election, before surging back to new highs later that year.

Technicals:

Now, let’s get back to the situation at hand… I am a market technician, who keeps his eye on fundamentals – looking for clues.  But, I base my trading decisions on what I see in the charts.  Take the S&P 500, for example.

Let’s have a look at a futures chart – see the daily futures chart for the S&P 500 – the first chart coming up.  You will notice the Inside Bar following the market swoon Monday, August 24/15.  That is a bullish indicator – meaning, we should see a rise in the market from there – denoting the formation of a bottom in the market.  A GREAT TIME TO BUY (which I did)!

Okay, now take a look at the next daily futures chart for the S&P 500 (second chart), and you will plainly see that we did get the rise that we had expected.  AND, I BOUGHT AGAIN!  I WILL BE BUYING YET AGAIN SOON, WHEN AND IF THE TECHNICALS SUGGEST I DO SO!  

The third futures chart for the S&P 500 is the weekly chart for the week ending Friday, August 28/15.  It shows that price has found a good support level.  Translation:  We may have found a bottom for the S&P 500 for this correction.

Now, I’m not saying we won’t experience further weakness in the markets.  All I’m telling you is what I see from a technical point-of-view in the here and now.  That’s all I can go by.

S&P 500 Futures Daily Chart With Inside Bar

S&P 500 Futures Daily Chart After Inside Bar

S&P 500 Futures Weekly Chart

Confession Time:

I have a confession to make.  Going back to the 2008 crash, I drew a line in the sand, and decided that I would bail, if the market crossed that line.  Well, it did, and I was out en masse.  I’m not talking about a day trading decision here.  I’m talking about long-term holds that had been doing quite well for me up to that point.  I ate a huge loss on my portfolio.  I wasn’t prepared to see my entire portfolio get wiped out that I had worked so hard to amass.

Woulda, coulda, shoulda?  Looking back, I wish I had hung in there.  Never again will I ever pull the plug on my long-term investments.  Instead, I will buy more, when prices are down – subject to technical confirmation.  It’s called, ‘buying the dips in the uptrend’ – the age-old Golden Rule.

All the while during the debacle, I kept asking my portfolio manager at my local bank for his advice.  He said, in his 30-odd years in the business, he had never seen such a correction, and didn’t know what to say.  I took matters into my own hands, and pulled the trigger on my own counsel – getting back in later, after the market had recovered.

What lesson did I learn?  Right after the recent mini-crash, I held onto my portfolio, and bought into the market – not once – but twice, for legitimate technical reasons that I have already presented.  I will be on the lookout for further entry points along the way, again using sound technical judgment.

Stock Market Successful Trading Strategies – Trading Hack No. 2:

When the highly anticipated U.S. interest rate increase finally comes, load up on U.S. treasuries.  This strategy has always worked in the past.

What’s in a Word?

Professional traders use the term ‘whipsawed’ to describe an asset that moves consistently in one direction, changes course abruptly, then changes to its original direction.

Discount Rate Hike Anybody?

As everybody knows by now, the Federal Reserve is nearing its proposed first rate hike in nine years.  The stock market has developed a bad case of the jitters.  The markets are trying to digest the reality of the central bank possibly raising interest rates into an emerging worldwide deflationary collapse.

The Fed usually raises rates during a period when inflation is becoming intractable, all the while robust growth is sending long-term rates spiking.  However, the proposed rate-hike cycle is being bandied about during a time of anaemic growth and deflationary forces that are causing long-term U.S. Treasury rates to fall.

That said, Janet Yellen is probably taking into consideration the fact that the U.S. powered to a 3.7 percent growth rate in the second quarter – a far bigger rebound than first thought. 

The robust second-quarter numbers indicate a level of growth that outpaced the rest of the developed world, bolstering confidence and providing a solid footing heading into the second half of the year – despite global headwinds.

Larry Summers is calling for QE, not tightening.  Hmmmmm…

Stock Market Successful Trading Strategies – Trading Hack No. 3:

This is called ‘Jon’s Retail Trade.’  It goes as follows, “Buy Best Buy, Costco and Walmart on Labour Day, and sell on Black Friday (December 1).”  This has worked for Jon before, and it should work again.  (Courtesy Jon at CNBC)

Stock Pick:

Fiserv Inc. (FISV – NASDAQ) – a U.S. provider of information technology services to the financial industry, which produces steady non-volatile organic growth.

Earnings per share are expected to rise by 10% annually over the next five years.

This company is the backbone for many banks and insurers.  With more than 14,500 clients globally, Fiserv is the absolute leader in this niche.

Now, Back to the Investor Fear Gauge – The Straight Skinny:

There are three variations of volatility indexes: the VIX tracks the S&P 500, the VXN tracks the NASDAQ 100, and the VXD tracks the Dow Jones Industrial Average.

DEFINITION of ‘VIX – CBOE Volatility Index’

The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index reflects the market’s expectation of 30-day volatility.  It is constituted of the implied volatilities of a wide range of S&P 500 index options.  It is intended to be forward looking, and is calculated from both calls and puts.

The VIX is a widely held to be a measure of market risk, and it is considered to be the ‘investor fear gauge.’

There are three types of volatility indexes:  the VIX for the S&P 500, the VXN for the NASDAQ 100, and the VXD for the Dow Jones Industrial Average.

The first VIX came in 1993, courtesy the CBOE.  It represented a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options.

Then, ten years later, it was expanded to use options based on the S&P 500 – a broader index.  This upgrade facilitates a more accurate view of investors’ expectations concerning future market volatility.

VIX values greater than 30 reflect a large amount of volatility resulting from investor fear or uncertainty.  Values below 20 are associated with less anxiety surrounding the markets.

The VIX is usually higher during the months leading up to a rate hike (the highly anticipated jittery stage) and yet again months later, after everybody realizes that the US$18-trillion U.S. GDP is still alive and well, even after the Fed has done its thing with rates.

Historically, it is the last rate hike, and not the first one, that brings the market to its knees.  Bear markets never emerge with the first Fed rate increase, nor the second or third.  When the Fed makes its move, markets are usually only a third of the way through the expansion and bull phases.

The investment cycle began two years ago, helping U.S. stocks recover the huge losses from 2007 to 2009.  When the S&P 500 rebounds from bear market losses during recessions, it usually rallies for another 45 months with average gains of 160 per cent.

In sum, the VIX is often referred to as the ‘investor fear gauge,’ which measures the expected volatility in the S&P 500 over the next 30 days, as implied by the price of options for the benchmark U.S. equity index.  Typically, the VIX index and the S&P 500 move in opposite directions.  As investors expect larger near-term fluctuations in stock prices, the S&P 500 tends to decline.  Hold that thought, and get ready for the Commitments of Traders (COT) information below.

Whoa Nellie:

I just looked at what the Big Dogs are up to with the S&P 500 and the VIX.  What a shock!  Here’s what I saw – as at Friday, August 28/15:

S&P 500 COT Graphs End of Aug 2015

Remember what I just said about the VIX and the S&P 500 moving in opposite directions?  Well, as you can see in the COT graphs above, the Big Dogs are extremely long the S&P 500 and extremely short the VIX.  Accordingly, the S&P 500 and the VIX should move opposite each other.

Translation:  Expect an up-trending S&P 500.  And, we should see a fall-off in the VIX.  Remember also what I said above about the VIX – “The VIX is usually higher during the months leading up to a rate hike.”  Given what we see in the preceding graphs, it is highly improbable that a rate hike will take place in September of this year – assuming the VIX falls per COT above.

As I mentioned previously, the U.S. dollar weakened Monday, August 24/15, as traders downplayed expectations for higher interest rates from the Federal Reserve.

A word of explanation is in order here.  By Big Dogs, I mean the institutional traders who trade thousands of lots worth millions of dollars at a time.  As such, they have a direct influence over where the markets are headed.  According to the preceding graphs, they are extremely bullish on the S&P 500 and bearish on the VIX. 

The last time we saw this kind of bullishness towards the S&P 500 was during the April timeframe earlier this year – as you can see in the preceding graphs.  Just look at the number of weeks from January – roughly 16 weeks, or four months. 

When a Rate Hike Finally Happens:

It usually takes about three rate hikes before the bubble bursts.  Even after the final rate hike, both GDP and stocks have another 20 percent gain to go.  I’ve seen the prognosticators all over the map on timing – from 2016 to 2018 – before we should throw in the towel.

Until that eventful moment, corrections along the way should be viewed as mere pauses in the upward trajectory of the S&P 500 – opportunities to buy the dips in the uptrend.

I am a buyer of late – having bought the market twice since the breath-taking swoon Monday, August 24/15.  What a tremendous buying opportunity.  Buy those dips in the uptrend my friend.

If You Are a Numbers Person (otherwise, skip this section):

The S&P is still only trading at 18x earnings – which is well within its historically average range and nowhere close to bubble territory.

The benchmark equity index’s forward price-to-earnings ratio is at the highest level since 2004 at 17x.

But, since 1998, it has traded at 17x earnings 15 other times.  It has always generated positive returns in the ensuing 12 months.

Ditto for 16x and 18x earnings in terms of earnings a year out.

At 17x earnings, the S&P 500 has averaged a 12-month return of 13 percent, with gains ranging from zero to 31 percent.

Check It Out:  

If you want to know where I got the preceding graphs, please grab yourself a copy of my exciting free e-book in the offer window below:


Quote of the Day (paraphrased) – courtesy Simon Black


infoThe United States of America hit $16 trillion in debt just recently.  This makes the US, by far, the greatest debtor in the history of the world – on a gross, nominal basis.

The United States’ first trillion dollars of debt was accumulated over the span of 200 years.  Yet, the most recent trillion dollars of debt took only 286 days to accumulate.  200 years vs. 286 days. […] It is a massive understatement to say that the trend is unsustainable.

At an average interest rate of 2.13%, Uncle Sam will spend $340 billion just in interest payments this year… and that number is only going up.

To put it in context, the INTEREST INCOME China receives from the Treasury Department is nearly enough to fund their entire military budget – this due to China owning so much US debt.

The Ottoman Empire was facing a similar debt crisis in the 19th century.  The Ottoman central government went from spending 17% of its tax revenue on interest payments to spending over 52% – in just 11 years.

Then the default came.  The U.S. stands at 15% right now.  When will the interest burden to become unbearable?

This isn’t the first time that a superpower bucked under the weight of its debt.  It could happen again.

Stock Market Successful Trading Strategies – Trading Hack No. 4:

If you want to participate in the Chinese market, but don’t know how, there’s an exchange-traded fund to do just that.

Direxion Investments has started the first ETF that is intended to provide twice the daily return of mainland Chinese stocks using leverage.  It tracks the CSI 300 index.

This ETF is the first in the U.S. to use derivatives to piggy-back on the return of mainland Chinese stocks – so-called A-shares.

The Direxion Daily CSI 300 China A share Bull 2X Shares (ETC)… trades under the ticker CHAU.  It has an expense ratio of 1.11 per cent, making it the most expensive among China-focused ETFs.

With all the turmoil in Chinese stocks lately, the CHAU ETF has taken a hit.  But, this could represent a tremendous opportunity to participate in the Chinese market, when it recovers.  Keep an eye on it, and wait for a turnaround before jumping in.  China isn’t going away any time soon – at least not the last time I checked.  It is that big elephant in the room.

As at Friday, August 28/15, I saw divergence between MACD and price – price in a decline, and MACD diverging up (called positive divergence MACD-to-price).  That is considered to be a buying signal.  

Thank you friend for your attention to this blog post.  Stay tuned… there will be many, many more to come.

In the meantime…

If you would like to help me start a forum and be a moderator, I would love to hear from you.  Just drop me a line using the Contact provision at the bottom of my site.

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I won’t live long enough to know it all, and I won’t live long enough to make all the mistakes myself.  So, hearing your story will be most helpful not only for me, but also for my other beloved readers.

Please share this post.  Sharing is caring.  Thank you!

I look forward to your articles, feedback, ideas, stories, and suggestions for my blog.  Please post these on my blog at the Contact link below.

HAVE FUN and ENJOY LIFE!  Remember – FAMILY comes first!

Here’s To Your Success and Quality of Life,

 

Peter R. Bain
PS:  Don’t let them steal your dreams!
PPS:  I will help you achieve your dreams!

About Peter R. Bain

peter

Peter R. Bain

I am a speaker, trader, writer, aviator, car nut, Harley enthusiast but, above all else, I am here for you at TradingSmarts, which I founded some 15 years ago.

TradingSmarts is your best friend when it comes to finding anything and everything to do with trading.  Through my blog you will always find guides, news, reviews, tutorials, and much, much more.

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peter

Peter R. Bain

I am a speaker, trader, writer,
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