The Title I listed above may have varying degrees of concern for Americans depending on a few things. If you own a nice sized business and have employees healthcare to cover, then you may be pre-occupied with a fear of Obamacare, or those that can’t believe how our debt has gotten so much out of control that the government would be in jeopardy of being shut down, then the Debt Ceiling may be on your mind.
But the one thing that scares me more is the upcoming Homeland Security Maneuvers scheduled for District 3 this October. Here is a map of all of the Districts, I happen to live in Delaware which is part of District 3:
If you go to Youtube, there are many videos extolling the fear surrounding what many purport might happen during these exercises. I found this video both informative and disturbing: http://www.youtube.com/watch?v=mJmHY_iWsmA
Here is a list of what disturbs me and then how I believe it will affect our markets:
1. The increasing size and scope of our Militarized Police State
2. The Dept of Homeland security buying over 2 BILLION bullets to use here in the US. The entire US military used only 70 Million rounds in Iraq last year: http://www.freerepublic.com/focus/f-bloggers/2921337/posts
3. FEMA buying over 2700 light armored TANKS for use on American soil
4. Increasing amounts (I dont know how many) Drones to be used on American soil
5. Over 15,000 Russian troops brought here already training with the military to help quell civil unrest. Unrest? Where?
6. Lord knows how many FEMA camps being prepped and readied? For who?
7. FEMA purchasing multi millions of MRE’s (ready made meals) and water pouches to be delivered by October 1st to district 3
8. Nine Week training courses for UN “Peacekeepers” to learn urban warfare (to be used where??) English and US weapons usage by October 1st
9. $11 Million in Antibiotics ordered by the CDC to be delivered to region 3 by October 1st
10. Why did the World Health Organization Known as WHO met in only their 2nd emergency meeting to discuss the MERS Virus and ordrered that vaccines be in place by October 1st
11. No leave for any US Military from September 28th through Nov 5th
12. DHS agents must be proficient in the use of AR15 Machine guns by September 28th (Over 7000 of these weapons were ordered by FEMA)
Here is a video outlining all that I have mentioned above. It does seem a bit scary, not only the info above, but this video does play into it a bit: http://www.youtube.com/watch?v=f6pT1oVASQE
SO… What does this have to do with the Market, trading and us as traders/investors and people and then what are we supposed to DO in the face of all this “supposed” potential terror, Mr Levin, you ask?
Easy, take a look at the major averages, the S&P and the NASDAQ in particular. They actually don’t look too bad and have had a great year So Far. But what is to come?
Here is the S&P over the past 7 years, so we can see the collapse in 2008:
Here is the NASDAQ:
What is missing here is how volatile the markets have been. Not from a volatility of the almost pure up movement, but in the pricing of volatility as an instrument of risk management. Here is a chart of the actual VIX during the same time-frame:
As you can see, we are hovering slightly above historicly low levels of volatility even though we have come so far since the lows of March 2009. The S&P has advanced around 1030 points from the low of 667 or about 154% in 4 1/2 years. The Nasdaq has advanced about 2178 points from the low of 1041 or about 209% during the same time span.
So if the markets are way up, doesn’t the potential for a fall/pullback mean that the volatility should be up too? You might think so, but the markets and this index don’t necessarily work that way. Here is a link that describes how the VIX works: http://www.investmentu.com/2012/March/vix-indicator.html
Normally, the higher the market goes, the lower the VIX goes and vice versa, but at “some” point, isn’t it prudent to take some $ off the table and wait for a pullback?
I always believe that and especially when events stack up that may throw a curve ball at the market. The upcoming initiation of the Obamacare bill, the haggling and hoped for handling of another US debt ceiling limit and the FEMA/DHS maneuvers/exercises all happen to coincide with the end of the 3rd Quarter and the beginning of the 4th quarter.
I have always liked to be ahead of the curve before anticipated events are due and I am surprised that no one seems to be talking (Bloomberg, CNBC especially) of a potential “air pocket” in the market coming up the next few weeks, so this is what I propose:
1. Take a position in the VXX exchange traded note (ETN) which is an equity designed to mimic the movements of the VIX. It is way down this year and again, to ME, is a way to hopefully play a market decline or a pop in the volatility if things don’t go well for Obama, Obamacare, the Debt ceiling or if things go horribly wrong with the FEMA/DHS exercises coming up here in District 3. Pay as much as $14.25 if you have to, but I reccomend getting in as soon as possible, under $14. Remember, these events are all due to happen over the next 3 weeks.
The price of the VXX closed at $13.62 Thursday which is only $.12 off the lows that just occurred last week and the high this year was $36.79 which happened in early January. In prior years this was much higher as the chart below will show, but when an index like this reverse splits, which this has, the former highs and lows seem quite exaggerated. Nevertheless, it seems quite low relative to the events which will be unfolding over the next 1-3 weeks:
You will notice that the VXX wasn’t invented til early 2009 when the markets were at their lows and that the scaling from those lofty levels almost doesn’t allow you to see the latest action with clarity so I will show you the past year or so for you to get how low this is in comparison to the VIX and where the markets are at today:
This is just from May of 2012 and yet it still shows that if there is some sort of real volatility to the market then I believe there is considerable upside to this index/equity.
It should be noted however that there are many views (and rightly so) that various ETF’s and ETN’s like the VXX are NOT suitable as investments because of their inherent “lack” of true tracking of the underlying vehicles that they intend to mimic. Here is a link to such an article from Scottrade for your own due diligence: How VIX based ETF’s work, or don’t
For those like myself, who also like leverage or to live on the edge, there are even options on the VIX as well as the VXX and if one were to trade these upcoming events as if the market would react negatively, to go down and for volatility to spike, here is what I would do. I would do 2 different call options on 2 timeframes on the VXX:
1. Using the normal October series (expires on Friday the 18th of October) with 24 days of life. Buy the VXX October $15 Call options which are currently bid $.41 to $.45 I would pay as much as the offer of $.45 and would feel comfortable with the options having over 21,000 contracts in open interest. If the VXX pulls back a little more, you may be able to get them for $.40 each as well.
2. Using the normal November series (expires Friday November 16th) with 52 days of life. Buy the VXX November $16 Call options which are bid $.64 to $.67 I would pay $.65 for them.
What can we expect if Volatility increases?
I personally feel that the VXX could at least pop up to the $17-18 level as it recently did in August when there was potential strikes against Syria and if things really get out of hand, $24 doesn’t seem out of the question.
Here is a chart with a few trendlines for resistance:
That would take the $15 calls past $2.00 for the Oct series if the VXX went to $17 and lets say an outlying pop to $22 would take those options to $7+ for the $15 strike. HIGHLY unlikely though, remember, we are talking a major volatility spike in the market, an almost “Henny Penny” type of move, but when these things happen, they happen quickly, not slowly. They also tend to happen overnight and over weekends, so in conclusion here, please keep your eyes/ears peeled and tuned into the markets and the news to make sure you are not caught off guard regarding these potential hazards in the market.
And if you DO take any positions that I have outlined here, do so at your own risk as there are Never any guarantees in the market and very often things expected have a way of not turning out like we think they should.
Happy & Profitable Trading to all, Mike Levin