This has been quite an astounding bull market. No great leaps, it just keeps steadily climbing up, and up and up some more. Back in February of this year if you were bold enough to call a top at DOW 20,000 you got burned because by May the DOW breached 21,000. If you went out on a limb and called that as the top it only took another three months for the DOW to break 22,000. All said, the DOW has climbed almost 3,500 points (over 18%) in the last twelve months.
The market has moved up and to the right with very, very little volatility. It just rises up with no significant pullbacks. The strong trend upwards has had little volatility which has left the CBOE Volatility Index (The VIX) at all times lows. When I say all time lows, I mean multi-decade all time lows.
The market’s continued march upwards demonstrates how dangerous it is to call a top. However, I’m willing to bet some measure of volatility will return to the market relatively soon. It defies history and logic for the market to keep rising without any significant pullbacks. Since when has the stock market provided such a smooth ride?
Trump Effect
This is partially a bet on Trump. So far he has been really great for the US stock market, but all good things must come to an end. Maybe he’ll try to fire the Robert Mueller, the special prosecutor investigating all things Russia, and cause a constitutional crisis. Perhaps he’ll threaten war with North Korea or Iran. Perhaps some bad news will get leaked out of Mueller’s investigation. With Trump you never know from day to day what could happen. The political circus that has been Trump’s world so far has to bare some volatility sooner or later!
Dysfunctional Congress
Congress needs to raise the debt ceiling and get a budget passed all within a very narrow window. Can the Democrats and Republicans come to an agreement on both quickly? Or will there be grandstanding and posturing up until the last possible minute? Will they shut the government down? Who knows, but the uncertainty could lead to a high level of volatility in the market. If the worst case scenario comes true and the parties are unable to agree then my bet the markets would completely melt down spiking volatility to astronomical levels.
Buying VIX
You can’t outright purchase the VIX, you have to play it with ETNs (Exchange Traded Notes) or ETFs. I’ve purchased the ETN TVIX, which is a leveraged ETN. This ETN returns 2x the daily returns of the VIX. So if the VIX has a 2% spike tomorrow this ETN should return 4%.
This isn’t a long term position, this is a trade, a bet. Leveraged ETNs/ETFs are not investment vehicles, they are strictly for trading. One should never “buy and hold” these instruments, they’ll eat all your capital up over time. I’m currently in this trade at $16.25 and I’m hoping to at least catch a double by the end of September. TVIX was trading above $32 in mid May, so that target doesn’t seem impossible. Congress needs to have there work done by the end of September and I’m betting between the parties and Trump it won’t go smoothly.
It’s hard to set a target for downside risk, again we are already at multi-decade lows. I’m sure nine, six, three months ago people were thinking the VIX could go any lower and low and behold it went lower. Since we are at these lows I can’t look at a chart and pick a resistance level. I’m going to be subjective and accept a 20% risk to the downside.
This is all new to me, I’ve never traded the VIX or leveraged ETNs before. Hopefully my first experience with this will be a profitable one.