So how will this all end? When will we be able to enjoy the fruits of good stock-picking, where fabulous quarters like we just got from Nvidia (NVDA) and Activision Blizzard (ATVI) , two terrific Action Alerts PLUS names written up elsewhere by Eric Jhonsa, will be rewarded with the sharply higher prices they deserve?
Or will we have to always have one eye on the exit door no matter how good the numbers, and these were spectacular.
You've come to the right place, because I am about to reveal the instruments that are making it so Nvidia isn't up 30 tonight and Activision Blizzard isn't taking out its all-time high.
First, understand that I only know this stuff because I traded stocks for years and I have had to put pretty much the sum total of all my thinking caps on this one cause it's real hard to find out and in many ways even more difficult to explain.
But there are four instruments that I am watching to figure out when this portion of the stock nightmare is over.
They are all a mouthful but I owe you the whole truth and nothing but the truth even if you actually need a rocket scientist to figure some of this out.
Let's start with the concept of the VIX. This is a gauge that is calculated all day that measures volatility, or how much up-and-down craziness there is in the market. Some people call it the fear gauge because it does tend to measure the level of panic people have about stocks.
For the longest time there hasn't been much craziness at all. We've been pretty much up in a straight consistent line. Not even a stair step. Just up!
That has meant that there is extremely low volatility.
Now on Wall Street there is a sense that everything can be traded on. We used to joke that brokerage houses would create instruments that allow you to trade raindrop races on windows. That's how addicted to trading so many people are.
So, it was a natural that brokers created securities that allow you to bet on whether there is a lot of volatility or a little.
Again, if there is a lot of fear and a lot of panic, then you want to own volatility. Think of it as an asset that you want to buy. If there isn't a lot of volatility than you want to sell volatility. Remember they will trade anything on Wall Street, including fear.
Now it isn't enough sometimes on Wall Street to just own volatility or bet against volatility, brokerages know that people crave real juice, so they invented stocks that allow you to get twice the gain of the VIX on a given day, or get twice the loss of the VIX, if it goes down on a given day.
These instruments are the proximate cause of the madness you are now seeing. Consider them a nuclear blast zone and the fallout is raining on the S&P 500 causing radiation sickness that's threatening to take the market down much further than it already has.
The instruments I keep referring to are actually funds, yes, actual funds that track futures that trade on the direction of the VIX in their own ridiculous ways.
Let's just call them wager funds.
The first wager fund is the Proshares Ultra VIX Short-Term Futures, an ETF which seeks on a daily basis to provide investment results that correspond to twice the performance of the S&P 500 VIX Short-Term Futures index. The symbol is (UVXY) .
If you look at the UVXY you will notice two things: it started at about $18 and went to $27 just today, a more than $9 gain.
That means if you owned it this morning you made nine points. But if you were short it you lost nine bucks. You may think, so what, how could this thing impact the rest of the market? I will tell you how: 110 million shares traded today. That's incredible. It sure wasn't meant to happen either.
Now there are many hedge funds managers who thought that there wouldn't be a lot of volatility so they may have sold calls against this, which is the same as getting short, or betting against it, which would have been a fantastic trade for ages. But not anymore. There are some very big funds that have bet against this thing and they have to raise cash to stay short it. They can either end the pain and buy it back or cover their call shorts or they can just keep wagering by putting more money up by selling stocks or selling S&P futures to raise money.
I know it sounds difficult to believe but managers actually considered this THE trade for ages because they simply didn't believe that the VIX would or could spike as fast as it did and they just plain got caught out of position.
The second instrument? The iPath S&P 500 VIX Short-Term Futures, which is an exchange traded note, that trades under the symbol (VXX) . This fund seeks to offer exposure to a daily rolling long position in the first and second month VIX futures contracts, another mouthful that is just another way to bet on the VIX futures going higher.
Today, this fund, the VXX, started the day at around $44 and went to $55. You would have made ten bucks on this one. Again, if you had borrowed money and bet against it you would have lost ten bucks. That's a huge percentage hit to your capital. Once again, it sounds like something that couldn't really hurt the entire market but 84 million VXX shares traded hands. So that's a lot of impact.
The third is a fund called the Velocity Shares Daily 2X VIX Short-Term ETN, or exchange traded note, known as the (TVIX) , which gives traders two times the daily return of the S&P 500 VIX short-term futures index. You can't make this stuff up, can you? Can you believe the SEC blessed this junk? Today, the TVIX started at $9 and went to $13.50, a huge gain, or a huge loss if you bet against it, too big for most funds to sustain so, again they have to sell something else to raise capital to pay off their losing wager. The TVIX traded 111 million shares today for heaven's sakes. That's insane.
Finally, there's the ETF called the ProShares Short VIX Short-Term Futures (SVXY) , which seeks, again, on a daily basis, to provide investment results that correspond to the inverse of the performance of the S&P 500 VIX Short-Term Futures index. This one goes down if the VIX spikes as it did today. This one started the day at $12.20 and sank to $9.50. If you owned it, you got crushed. If you shorted it, you did well. The people who owned it are the real problem because they lost a huge amount of money today and if they borrowed money to own it will have to put up a huge amount of collateral tomorrow. Forty-three million shares traded hands today.
So, again, you have to be thinking that anyone who wagered on these and borrowed money to do so has to put up collateral that spills into the marketplace.
You could argue that much of the downward pressure today was from various wagers going wrong and the bettors having to raise money in the stock market to meet their margin calls. They probably need to raise more money Friday when the market opens. They are desperate, they are flailing and they are crushing those people who own stocks and have done nothing wrong except happening to be in the crossfire of these ridiculous instruments.
There are at least 12 others that are like that I know of, but I have mentioned the ones with the biggest volume and therefore have the most impact.
Now we don't know when all of this tail wagging the dog will end. But if you follow the UVXY, the VXX, the TVIX and the SVXY and you see the volume dry up on these, that will mean that their power to overwhelm will diminish. It doesn't mean the stock market will automatically go up when that happens. It does mean that the coast is a lot clearer than it is now.
So, follow these funds. Recognize they are the real culprits. And when you see the volume go down, I think you have a better chance to buy good stocks like Nvidia and Activision Blizzard and many, many more at lower prices than they should be simply because of the hedge funds that are going wild, licking their wounds and getting crushed in these VIX bets gone awry.