By Thomas H. Kee Jr.
Last week I wrote an article that suggested the VIX was a consideration, but probably not the best hedge for long equity positions. I also suggested that I liked the play, but I offered words of caution given its periodic uncorrelated moves. One would think that VIX should increase if the market falls, but sometimes that does not happen. In fact, usually, during times when the VIX is resilient to market declines, it also is vulnerable to market increases; that is exactly what we saw on Monday, and that is exactly what prompted me to write this follow-up article.
After the decline in the VIX and Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN /zigman2/quotes/202248173/composite VXX -6.03% that occurred on Monday, anyone who has been considering either initiating a position or adding to a position should do so immediately. Again, I do not want anyone to overload VXX or other VIX-related ETFs like ProShares VIX Mid-Term Futures ETF /zigman2/quotes/205971581/composite VIXM -0.86% , ProShares Ultra VIX Short-Term Futures ETF /zigman2/quotes/201343976/composite UVXY -8.62% , or ProShares VIX Short-Term Futures ETF /zigman2/quotes/204693647/composite VIXY -5.86% , so check with your financial advisor before allocating any monies to these, but check with them right now; If you have been considering VXX, in my opinion, this is the time to get into a FULL position.
At these prices, VXX could double or maybe even triple over the next six to eight months.
Everyone who reads this, and then looks at a one-year chart of VXX and acknowledges its ability to move rapidly, but more importantly in an almost perfect neutral cycle, should also ask themselves why certain people fail to sell into market strength, and alert people who have not made any positive headway over the course of this past decade to stop, think about the relative highs in the market right now, and strongly consider protecting their monies from the forthcoming market declines so that they can buy back when everything looks ugly again.
Ultimately, that is the only way for the normal person to make money in this market. Be willing to sell, hedge or short near market tops, and get 100% long at market bottoms, and repeat the process until The Investment Rate tells us to stop.
For the very aggressive, I am pounding the table on VXX here. It is not going to stop being a frustrating trade because the occasional miscorrelations will never stop, and no one should have a significant chunk of their investments in VXX because of its volatile nature, but for a small portion, an aggressive part, this ETF looks like a home run to me.
VXX is a double or triple from here.
Lastly, if you have been holding XIV, you should consider selling it.