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Moment of Truth for U.S. Stocks and VIX ETFs

We should see a wild ride in VIX ETFs and ETNs with more brinkmanship in DC ahead


U.S. stocks and ETFs started 2013 with a bang as the Dow Jones Industrial Average gained 331 points from its close on December 31st to Friday, January 4th.  The S&P 500 jumped 2.8% over the same period while the Nasdaq 100 climbed 2.4%.

The catalyst, of course, was the partial resolution to the fiscal cliff debate and the positive mood was also bolstered by relatively good news on the economic front.

On a technical basis, major U.S. indexes like the S&P 500 stand at significant resistance levels, and fundamental factors like earnings season, the upcoming debt ceiling debate and future policy by the Federal Reserve now all come into sharper focus.

The next few days and weeks will likely be volatile as stocks and ETFs stand at a critical crossroads.

On My ETF Radar

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The chart of the S&P 500 shows how the major index has returned to bullish status with a double top breakout, a “buy” signal, generated on January 2nd.

However, the recent rally stopped exactly at significant resistance levels marked by the horizontal red lines and a breakout above these levels is required to confirm the sustainability of the current advance.

Failure here would form a “quadruple top” which would be particularly bearish from a technical point of view.  Recent stock and ETF action is bullish, but since no one has a crystal ball, we will have to wait and see if the uptrend can continue or not with a breakout above the 1470 level on the S&P 500 Index.

As always, VIX and VIX ETNs were impacted by the action in equities markets.

VIX ETFs have had a fiscal cliff of their own after Congress and the White House finally resolved their fiscal cliff issues.  The VIX Index and VIX ETFs rose to high levels of fear right before the fiscal cliff deadline, only to have their fears dashed when a resolution actually passed.

From a fundamental perspective, the VIX fiscal cliff is really no surprise, as all fear left markets after lawmakers finally cut a deal.  More fear is on the horizon though, as the debt ceiling debate and sequestration debate scheduled in the next few months will likely spur more brinkmanship and fear in markets.  If investors were scared of the fiscal cliff, they will be even more scared of a possible US default (think last August), and so I would imagine the VIX and VIX ETFs are in for a wild ride, to say the least.

Volatility Index – New Methodology (VIX): Index: 13.83, -39.13%

iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX): -22.24%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.

VelocityShares Daily 2X VIX Short-Term ETN (NYSE:TVIX): -41.45%, This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

iPath S&P 500 VIX Mid-Term Futures ETN (NYSE:VXZ): -10.77%, This ETN is designed to track volatility in the markets as measured by the CBOE Volatility Index futures contracts.

S&P 500 Dynamic VIX ETN (NYSE:XVZ): -5.82%, This ETN is designed to track volatility in the markets as measured by the S&P 500 Dynamic VIX Futures Total Return Index.

Velocity Shares Daily Inverse VIX Short-Term ETN (NYSE:XIV): +19.98%, This ETN is designed to inversely track the volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.

For the week of January 6, 2013, we continue to HOLD Velocity Shares Short Term VIX ETN (NYSE:VIIX)

We also continue to HOLD iShares 20+ Year Treasury Bond Fund (NYSE:TLT)

Wall Street Sector Selector remains in “yellow flag” mode, expecting a possible trend change if current resistance levels are broken.

Disclaimer: VIX ETNs are extremely volatile and can easily sustain large gains or losses. Risk management and position size are extremely important. Read the prospectus to understand the potential risks and rewards. It is possible to lose your entire investment. The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector’s Disclaimer, Terms of Service, and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.


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