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ETF Periscope: Does the Jumpy VIX Indicate a Volatile September Ahead?
“You should sit in meditation for twenty minutes every day, unless you’re too busy; then you should sit for an hour.” -- Old Zen adage
In terms of volatility, what a difference a month makes.
Back at the beginning of August, the Chicago Board Options Exchange Market Volatility Index (VIX) was hanging around its low point for the year, ending the week at just a shade below 12.
As a reference point, consider that placed it at its lowest level since March of this year. In turn, it also set it on par with the pre-crash levels of mid 2007.
But the worm seems to have turned these past four weeks as the VIX, inevitably referred to as the “fear index,” has climbed over 40% since then.
Keep in mind that the VIX generally goes up as the market goes down, and vice versa.
This reversal of fortune in the VIX was mimicked by the major indices over the course of the last month, not much a surprise as the VIX is arguably one of the better indicators of investor sentiment.
All three indices suffered some moderate damage in August, with the Dow Jones Industrial Average (DJIA) losing 4.4%, the benchmark S&P 500 index shedding 3.1%, and the tech-heavy Nasdaq parting with 1% off its bottom line.
So what is shaking up the volatility cocktail currently being served up on Wall Street?
First, and perhaps the foremost reason for the strong move has to do with the Federal Reserve Board and its signals to the market that the end of free money is at hand.
The Fed’s most recent round of benevolence in the form of approximately $85 billion per month in the current bond-buying program may begin tapering off as soon as this month, if you can believe Ben Bernanke and his disparate band of central bank officers.
Though the specific date has not been set in stone, there are indications that a reasonably strong national jobs report this week could provide the Fed with adequate cover to begin the tapering process, maybe as soon as this month.
So what will the market do when the tapering actually goes into effect?
Tilt towards correction territory possibly, as capital could quickly flow out of equities and into asset classes deemed less risky than equities at that specific point.
A number of investors have made out quite well over the last few years, thanks to the Fed’s assorted stimulus programs during this time. The tapering could serve as a direct cue to take some medium-term profits off the table.
A correction could also occur if any Fed tapering dovetails with unrelated events from out of the geopolitical arena, such as the Syrian crisis, a situation brimming with a huge array of potential hazards.
Another source of potential negative market impact is the scheduled selection of the next Fed president, though Obama’s likely choice of either Larry Summers or Janet Yellen may be viewed more as a difference in style than substance.
It is exactly this combination of uncertainty that is the engine that is driving the VIX train upward.
And, with September serving as the month with a tradition of high volatility and poor performance, the VIX could easily remain as a train worth hopping aboard, at least in terms of acquiring the protection of having volatility as an asset class in one’s portfolio.
A relatively simple method of hedging your portfolio against sharp volatility is to acquire a VIX derivative, such as VXX (S&P 500 VIX Short-Term Futures ETN), which tracks the S&P 500 VIX Short-Term Futures Index Total Return.
Just in case September proves to be its usual, volatile self.
What the Periscope Sees
The Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis.
The top tier of the pecking order that has been in place for most of the summer remained intact, with the Technology Sector once again leading the SectorCast rankings, this time with a score of 87. The Financial Sector assumed the penultimate position, with an Outlook Score of 73.
Next in the rankings came the Energy Sector with a score of 63, supplanting the Consumer Goods Sector that had ensconced itself in the third position for a run of several weeks.
Here is the current list of some of the top-performing Technology Sector ETFs year-to-date, as of the end of the final week in August:
FDN -- First Trust Dow Jones Internet Index Fund, +27.23%
SOXX -- iShares PHLX SOX Semiconductor Sector Index Fund, +19.93%
FXL -- First Trust Technology AlphaDEX Fund, +18.63%
QTEC -- First Trust NASDAQ-100 Technology Sector Index Fund, +18.18%
IGV -- iShares S&P GSTI Software Index Fund, +16.45%
SMH -- Market Vectors Semiconductor ETF, +14.88%
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.