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Dow 14,000: The Death of Volatility ETFs?


Exchange traded funds linked to futures contracts based on the CBOE Volatility Index, or VIX, yawned at the disappointing jobs report Friday. Even seemingly bad news couldn’t shake the bears out of hibernation and lift the VIX.

The iPath S&P 500 VIX Short-Term Futures ETN (VXX) declined 6.2% Friday and the ProShares Ultra VIX Short-Term Futures ETF (UVXY) dropped 12.4%.

The VIX was down about 10% to trade below 13 on Friday. The VIX is known as Wall Street’s fear gauge and volatility-linked ETFs have been pummeled as stocks rise and investors grow more complacent about the market and the possibility of a correction.

Meanwhile, the Dow Jones Industrial Average crossed over the 14,000 mark for the first time since October 2007, the Associated Press reports. The Dow has only crossed the 14,000 level 15 times in its history and it has only closed nine days above the point. [Dow Tops 14,000]

While the unemployment rate inched up to 7.9% from 7.8% in December, markets focused on the positive reports of higher-than-expected hiring growth last year.

Government data revealed that the economy added 335,000 more jobs than originally calculated last year, along with an additional 150,000 in the last quarter, on top of the previously announced fourth quarter job growth of 603,000 and 2012 total growth of 2.2 million, the New York Times reports.

The lower VIX, coupled with a rallying stock market on the first day of February, suggests that the S&P 500 is on track for a new high. [VIX ETFs Rise After S&P 500 Clears 1,500]

“ We’ve got to get to 1,553 which was the closing high for the S&P 500 in 2007,” Bob Doll, chief equity strategist at Nuveen Asset Management, said on Yahoo Finance Breakout. “That’s less than a 10% gain. My guess is we’ll meander our way through, that we’ll grind higher.”

Investors are looking at the positives while the economy goes through the slow painful grind of healing. But the current market conditions may indicate we are getting some traction.

“People think you need good news for markets to go up when often all you need is just less bad news, or clarification,” Doll added.

Still, some analysts are warning that investors should be on guard when fear disappears from the markets.

“These days, many indicators suggest we are in an extremely low-risk market environment,” Dean Curnutt writes at Bloomberg. However, recent history is “rife with periods when the price of risk failed to reflect obvious financial realities.”

iPath S&P 500 VIX Short-Term Futures ETN

For more information on the CBOE Volatilty Index, visit our VIX category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.