Patience is a beautiful flower, but it doesn’t grow in every garden.
Patience is also an attractive character trait, but it doesn’t come easy. In fact, patience is perhaps the most underrated requirement for a successful trader or investor.
Few things get contrarian investors as excited as 52-week lows. But forget about 52-week lows, the VIX has been flirting with 7-year lows since May. The iPath S&P 500 VIX Short-term VIX ETN (VXX) has seen many successive all-time lows.
How often do you get an opportunity to buy at an all-time low?
Not surprisingly, investors have been itching to buy the VIX, but like a stubborn mule the VIX continues to inch lower trampling on premature longs.
A big (impatient) ‘itch’ was reported by Bloomberg on May 21: “Trader Spends $13 Million Betting VIX Index Will Surge 56%.”
I commented on this bold bet in a May 23 article, stating that: “The odds of this bullish VIX trade paying off are not good.” Why?
There were three main reasons:
1) The VIX sliced below key support on May 21. The May 18 Profit Radar Report warned that: “Key support for the VIX is at 12. A move below 12 would suggest further up side for the S&P 500 (and down side for the VIX).”
2) Contango. Bullish VIX investment vehicles suffer from contango, which is caused by continuously rolling over the next VIX futures (tomorrows VIX futures are almost always more expensive than today’s). This condition persistently eats away at bullish VIX related investments.
The May 21 Profit Radar Report cautioned against buying the VIX: “The VIX is a tricky ‘character.’ Due to contango it takes impeccable timing and a 10 – 20%+ move to make money from a rising VIX.”
The chart below plots the VIX against the VXX ETN and highlights the magnified price erosion of VXX. The ProShares Ultra Short-term VIX ETF (UVXY) suffers from the same condition. The ProShares Short VIX ETF (SVXY) on the other hand benefits from contango.
3) This is the most important reason for a lower VIX until now: VIX seasonality suggested continued weakness. The May 21 Profit Radar Report featured a VIX seasonality chart and pointed out that: “VIX seasonality is not yet supportive of higher VIX readings." The chart also pinpointed the seasonal sweetspot for buying the VIX.
A brief look at the VIX seasonality chart could have protected premature bulls from much headache.
VIX bulls will be happy to find out that VIX seasonality is soon turning bullish. This VIX seasonality chart is normally only available to subscribers of the Profit Radar Report. However, due to many requests a free VIX seasonality chart, that highlights the bullish turnaround day, has been made available here:
This page will also include a link explaining why the 1,955 level is crucial for the S&P 500 (SPY). Due to the S&P 500/VIX correlation, how the S&P 500 reacts around 1,955 is important to VIX movements.
Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.
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