Look out for a message tomorrow about Martin Carter’s MRP Strategy.
There’s a lot of sense in trading hedged positions – as Martin says, this is the safest way to trade, and how all the big players make money from the market.
Personally, I never believed that hedged trading could be made this simple – but Martin’s results speak for themselves.
If you’d like to try it out, you can get your name down for a risk-free trial .
Beware of warm weather…
Back in the spring I have to admit to being one of those doom-mongers who was predicting a wash-out summer and seriously considering emigrating to warmer climes.
As it is, the summer has been a pleasant surprise, even with the slightly cooler, damper weather of the last couple of weeks.
There have been barbeques (without anoraks)… pub gardens… a bumper strawberry crop… and even a few mosquito bites… joy!
But I’m afraid that old doom-mongering devil on my shoulder has been whispering in my ear again: ‘Have you seen the level of the VIX? You know what it means when the VIX does that while you’re enjoying the August warm weather?’
Here’s the rub…
If you’re not familiar with the VIX, it’s the short name for the CBOE Market Volatility Index – also called ‘the fear index’.
The VIX is calculated on a weighted blend of prices for a range of options on the S&P calls and puts.
The method of calculation isn’t too important to us – we simply need to understand that, in essence, it is a gauge of investors’ confidence in the market.
A declining stock market tends to be more volatile, while a rising market is viewed as less risky.
For this reason, the VIX in general has an inverse relationship to the market. So, the VIX goes up as stocks decline, and the VIX goes down as stocks go up.
A low VIX means that traders are confident about market conditions. A high VIX means that they are fearful.
These charts show the S&P index and the VIX over the last six months – note how every spike in the VIX is accompanied by a dip in the S&P…
So, at the moment, we have a low VIX… That’s good news, right?
Of course, the problem with a low VIX is that everyone starts to predict a bottom, which means a end for the rising equities markets.
Here’s some history…
From 1990 to 2012, the VIX hit its low for the year in the summer 16 times. And 14 of those 16 years, the low was followed by a spike before the end of the September.
Looking back over this period shows that the VIX rose in the August–September window on 14 out of 23 occasions, with an average gain of 13.1%.
The S&P is certainly due to stop and take a breath on it’s meteoric climb – and when an index is in uncharted territory like this, it’s notoriously difficult to judge where that will happen.
We just don’t have any historical resistance levels for it to get stuck at.
That’s why the VIX is very useful as an indicator that things could be about to turn in the equities markets.
Keep a beady eye on the VIX, as an upward surge here is like a canary for warning us that the S&P is about to take a tumble.