Britain sinks into the sea, the sky is falling, and the market crumbles.
Or you would have thought so reading the last week’s worth of news, but the Brexit U.S. market correction has been about as mild as they come so far.
Sure, there is going to be a headwind on and off for years as this all pans out, but as I said over the weekend, it was a tempest in a teapot.
At least as of the writing of this article, the S&P 500 is back in the green by about 1.5%, and after the first bounce since the drop, it is only off about 2%.
To put that in perspective, the index was at a lower level just a couple weeks ago on June 16th, when the threat (still widely ignored) of the vote combined with general economic uncertainty, and four previous days of mild declines.
So here we are, right where we have been several times before this year, and right where we have been since 2014.
However, it has hardly been uneventful. The stress from market volatility is palpable, the liquor cabinets are in desperate need of restocking, and traders and investors are afraid.
We’ve collectively built a market that is right on the cusp of what it can sustain.
Prices can easily go up, and probably will, over time as money flees other developed economies that are stagnant, or worse.
But it wouldn’t take much to make current multiples look wildly unsustainable, and no one wants to be the last out the door.
This is especially true for institutional investors, who can move faster, with minuscule fees, and effectively profit through extracting a percent or two on entering and exiting a trade from mom and pop investors.
The market may soar, crash, or stay level overall, but we’re in a new era of volatility, and setting up trades that can take advantage of this is a wise move to make.
There is the VIX, but…
Everyone should be familiar with the VIX by now.
Often called the fear index, it is a good measure of the implied volatility of the S&P 500 index options.
However, trading it creates issues. It isn’t a stock, it is just a tool, and there are only a handful of derivatives.
There are exchange-traded notes, like the iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX), and leveraged and inverse products that are similar, but they have many shortcomings:
- They are not institutionally owned,
- are hard to sell during intraday spikes,
- track a revolving basket of underlying options, and thus
- returns do not match the underlying VIX they attempt to track.
These can be quite profitable for traders willing to establish small positions with very short time frames, and constantly track them, but aren’t a good way to profit off of volatility over time.
Check out this chart of the last five years. The interest in VXX has simply fallen off since it was created in 2013.
The VIX spikes, but the VXX is off by over 100% combining its drop with the VIX increase.
However, a longer-term play is possible, and it depends on market volume and volatility over a much longer time span. That’s exactly what we want.
The Safe, Wildly Profitable Volatility Play
Market volatility hit a low back in mid-2014, and has steadily risen on average ever since.
The way we want to capitalize on the new market volatility that will persist for the foreseeable future is to find a trading vehicle that depends on these overall higher levels we’re seeing today, and will trend higher going forward.
Here is a chart of the VIX with a 200-day moving average:
The VIX is spiking all around, and buying something like VXX would fall short on returns while exposing you to very short windows to get market timing right, something that is notoriously hard to do.
However, over this time frame, the 200-day simple moving average is up from 11.26 to 17.94, representing a 59.32% increase. Annualized, to mitigate the time frame, that comes out to over 29%.
Of course, we cannot trade on this exactly, but it is the trend we want to play on.
Jimmy Mengel, investment director of a thousands-strong financial advisory, has uncovered a way to profit from rising volume and volatility without the downfalls of an exchange-traded note, or the short-term spikes that die off, or the difficulty of unloading shares, and it manages to pull in a decent dividend.
Over the last two years, this investment would have produced an annualized return of 19% in total, all with a single trade. Plus the single trade is less than half as volatile as the S&P 500.
Meanwhile, the SPDR S&P 500 ETF (NYSEARCA: SPY) annualized return, including dividends, would be about 5% over the same time frame.
If you’re worried about the rise of volatility, or want to capitalize on a trend while the underlying market see-saws back and forth without going anywhere, or both, I’d suggest checking out Jimmy’s research today.
