Equity markets have seen only one day of relief this week, as the short-term trend is now lower. After peaking near 1600 last week, the S&P 500 has sold off by over 50 points in a five-day period. Today is no exception, as stocks are trading lower, and the benchmark index is testing its 50-day moving average near 1543. It appears that this level will break, and the next layer of support rests in the 1525-1530 area.
Presently, the Nasdaq is today’s relative laggard, down about 1.2% for the day. Much of this weakness can be attributed to Apple (AAPL), which has now broken the 400 level and is off another 2.4% for the session. The S&P 500 and Russell 2000 are each about 0.5% lower, while metals are seeing some relief, led by the miners. GDX, the gold miners ETF, is higher by over 3.5%, while gold is up about 1.3%. Bonds are only seeing a slight bid, up about 0.2% on the day, and volatility continues higher, with the VIX up by 4.7%.
CHART OF THE DAY
iPath S&P 500 VIX Short-Term Futures (VXX) – Everyone’s favorite short now looks ripe for a nice bounce. While this ETF has a “built in” decay feature that makes holding VXX for the long term suicide, it can be an attractive short-term trading vehicle. Without getting too in depth, VXX mimics the front three months’ VIX futures, and there is an associated roll cost that has a dampening effect on price over the long term. However, you can reap some nice profits over the short term if you time your entries correctly.
Given that I’m looking for the market to move lower, I like buying VXX here as a hedge and/or speculative short. Volumes on VXX options have skyrocketed lately, largely because the crowd now “knows” of the decay, and are looking to profit from it on the downside. However, the recent glut of bearish positions on the ETF make it a ripe candidate for an overshoot to the upside. I like a long entry here with a stop on a close below 21. I would initially target a move to 25, with 28 as a stretch target. Don’t get too greedy in this one, as days of equity strength can cause it to get crushed after periods of increasing volatility.
WHAT I’M EXPECTING
A test of the 1525-1530 area next week on the S&P 500. Below there, there is support at 1500 and 1475. Above 1570, I would consider this thesis to be wrong and look to accumulate long positions again.