As per the request for analysis on VXX from @lkeno in the trading room, my charts on both $VIX (spot VIX, CBOE Volatility Index) and VXX (iPath S&P 500 VIX Short-Term Futures ETN) are below. As the underperformance/tracking error of the volatility/VIX tracking ETNs are among the worst of just about any exchange traded products out there, I also include the chart of the spot VIX ($VIX) in my analysis for the VIX tracking ETNs. The abysmal underperformance, particularly when holding the VIX tracking ETNs for more than just a quick trade, can easily be seen in comparing these two year charts of both below. In fact, from that reaction high back on February 11, 2016, VXX has lost about 89% of its value vs. a drop of about 68% on the VIX, a significant underperformance. Keep in mind that one can not trade the spot VIX directly but can trade VIX futures, options on those futures or the VIX tracking ETNs, all of which require fairly precise timing.
Just as with an stock, index, commodity, etc.., positive (bullish) divergences in the $VIX almost always result in a rally. The most recent divergent low on May 9th has already played out for a spike but based on the scope & magnitude of the divergences, I believe a much larger rally in the VIX is coming soon. Note that any new low in the coming sessions will still be another divergent low, or more accurately, an extension of the already very large bullish divergence that has been building between price ($VIX) & the price & momentum indicators & oscillators.
$VIX daily May 26th
While VIX tracking ETNs such as VXX make horrible long-term trades, a nimble/quick trader with good timing skills can certainly attempt to position for some of these rips that follow divergent lows. The key is not to stay too late to the party: Identify your entry & price target(s), get in & get out. While VXX & the other VIX tracking ETNs make horrible long-term holds, the basic premise that applies to all other securities of using divergent highs & lows to identify likely trend changes clearly works just as well with VXX as evidenced by 5 divergent lows over the last 2 years (not including the current DL), all of which were followed by rallies of 20% or more
VXX daily May 26th
On a somewhat related note, I just wanted to shed light on what may seem like one of the most powerful trends in the US stock market in years. If I had a nickle for every time that I’ve heard in recent weeks, “Wow, the stock market just won’t stop going up!”, I’d be rich (or at least have a lot of nickels). Well, that’s not a very accurate statement as the tech & top-weighted component top-heavy Nasdaq 100 is, by far, the least diversified & representative (of the US economy & stock market) of all the major indexes. The $NDX, largely boosted by the FAAMG stocks, has gained about 3.65% this month with the S&P 500 & Dow barely positive after going negative last week & the Russell 2000 trading in the black nearly all month.
NDX, SPX, DJIA & RUT M-T-D May 26th
‘Cherry picking the time period?’, one might ask. No, I simply picked the beginning of the month to illustrate how each of the major US stock indices have performed so far MTD. In fact, what is widely considered to be the most representative index of the US stock market & economy, the S&P 500, is currently trading a mere ½ of 1% above it’s high back on March 1st, nearly 3 months ago, and the Dow Jones Industrials Average, the most often referenced index in the financial media, is currently trading below it’s comparable March 1st reaction high.
The “stock market” has gone nowhere for 3 months now, having traded in a sideways range of just over 3% from high to low. Those that are bullish on the stock market will cite that while the stock market might not be going up, the fact that it refuses to fall is bullish. On the flip side, those expecting a correction, like myself, can argue that the fact that the stock market has failed to move higher over the last 3 months is a sign of fatigue & likely portends a trend reversal (correction). One can argue either side & only time will tell which argument proves right. As always, JMHO. Comments & feedback are welcome.