Stocks started the year on the defensive amid a crash in crude oil prices, a soaring dollar, weaker U.S. corporate earnings, rising bond prices and renewed troubles in the eurozone. It looked like stocks had some sort of seasonal affective disorder. But, in the past week, several of those negatives seem to have miraculously worked themselves out, and investor confidence has risen dramatically — sending stock prices back toward their highs.
You can see the dramatic shift in sentiment in the chart below. Just since the start of this month, it appears that the clouds have started to part and the sky is becoming light again instead of gloomy. That’s in spite of the mighty Seahawks’ loss to the Patriots on Super Bowl Sunday.
The S&P 500 is now up about 3% since February dawned, in sync with improved oil prices, lower bond prices and a sense that Greece and the eurozone will work out their differences — and, after peaking a couple of days later, the S&P Volatility Index (VIX) plunged 20% to within a whisker of the year’s low.
The CounterPoint Options system’s position all year has been that it would pay to be a confident buyer of call options on the S&P 500 and Russell 2000 while everyone else appeared to be a scared seller, and also to be a heavy seller of anxiety amid the patently unnecessary blast higher in the VIX.
And, likewise, the system recommended buying put options on the iShares Barclays 7-10 Year Treasury Bond Fund (IEF) under the belief that, as soon as calm was restored, investors would realize they did not need a safe haven — and, in fact, the bonds would drag them down.
It took a while for the crowd to start coming around to the place where the system always knew it was headed, but better late than never.
To profit from a continued slide in volatility, the CounterPoint Options system is recommending a bearish trade on the iPath S&P 500 VIX Short-Term Futures ETN (VXX).
Buy the VXX Mar. 20th $29 puts at $1.16 limit, good till canceled, for target $2.32. The option’s ticker is VXX150320P00029000, and it is the monthly VXX put option that expires on Friday, March 20.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
