John Nyaradi | Aug 29, 2012 03:35PM ET
One of the worst investments over the last few years has been iPath Short Term S&P 500 VIX ETN (NYSEARCA: VXX), which is off more than 90% since its 2009 highs. The decline has been due to a combination of falling volatility and contango in which the new futures contracts going into the ETN are more expensive than the expiring ones such that the ETN experiences continual price decay. Some analysts are even forecasting this ETN will soon undergo a reverse split.
Taking a look at the “big picture” for VIX, we see that the index recently made new lows not seen since 2007, then bounced slightly and is now stalled at its 50-day moving average. It’s also below its 200-day moving as the two indexes have formed what’s known as a “death cross,” a sell signal indicated by the 50-day moving average dropping below the 200-day average.
Why Is The VIX And Its ETNs So Weak?
Everyone has been trying to figure out why VIX and VIX ETNS like (NYSEARCA: VXX) and VelocityShares Daily 2X VIX ETN (NYSEARCA: TVIX) have been so weak.
Some experts believe that its due to lack of retail investor participation in markets while others believe that volatility now is completely driven by short-term news events and that traders and investors are only active on days that contain market-moving news. According to an article in International Financing Review , “baseline volatility -- the amount the market moves on an average, non-event day -- has plummeted over the past four years….The median daily move for the S&P 500 index has dropped from over 1% in 2008 to just 0.4% so far this year, despite large daily moves occurring at a consistent rate over the last few years.”
The VIX hit its five-year low on August 17 and is averaging in the high teens this year compared to its normal average in the low-to-mid 20s.
Major VIX ETNs Decline
A look at most of the major VIX ETNs reveals significant declines this year:
So it’s easy to see that, generally speaking, being long volatility and long VIX ETNs has been a losing trade for 2012. Fundamentals point to the likelihood of a low VIX ahead and technical indicators confirm a bear market in VIX and its related VIX ETNs. VIX and VIX ETNs are definitely not suitable for buy-and-hold investments and require a proven trading strategy and good risk management in order to be successful in this tricky market.
Bottom line: Overall, the most important factor likely driving the VIX lower is the belief that the Federal Reserve will continue to be able to protect investors from declines in the equity markets. This action will likely keep VIX at low levels as it tends to move inversely to equity prices. Keep a close eye on Jackson Hole and Dr. Bernanke’s speech on Friday for new factors influencing the price of VIX and VIX ETNs.
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