This Market Looks Cooked – Should I Buy VIX (VXX)?

 

Hi Dave,

I thought I would take up your invite to ask any question.

I’m not very familiar with the financial sector (I’m a production artist), but in general the market seems unreasonably high and not sustainable. With that said would you consider the VXX to be a wise buy?

Appreciate your insight.

(Note: I came across you via a re-tweet by Raoul Pal)

Regards.

John P. 

Hi John,

Thanks for the question.

The million dollar question for sure. Sadly, the argument you and many others make (myself included) would not have worked for the last several years. VIX continues to trade lower and lower despite very logical and well thought of reasons for equities to trade lower and VIX to trade higher.

Yes, at some point VIX will explode higher, but that is tough to know when. There are a few factors working against a long VXX trade right now.

  • Insane Fed policies keeping an artificial bid in the stock market
  • The massive growth in indexation essentially keeps a firm bid on the market as long as passive investors keep funneling money into these ETF’s and funds.
  • There is a lot of money chasing the ‘short VIX’ trade. Thus every rally is sold and prices then move lower.

 

Where does VIX/VXX go from here?

 

There is little doubt in my mind there will be a market dislocation at some point. I believe the catalyst will be liquidity related, or lack of. The indexation mania is simply not sustainable.

That said, watch stocks like Blackrock, Blackstone, Franklin Resources and of course the FANG stocks which are essentially keeping the market afloat. If we start to see some price deterioration in those names it could be a heads up that the plumbing is getting gummed up and lower equity prices/higher VIX prices are in the future.

If you really want a deep dive into some of the points I highlighted here, read these excellent research notes:

Volatility and The Allegory of The Prisoners Dilemma

Indexation

The Biggest Bubble Ever – Index Investing

Hope that helps.

Have a question for me? Just ask.

Comments
  • Dave Floyd
    Reply

    Speaking of liquidity issues….this sobering note from Bloomberg and Grant’s today.

    But don’t worry, just keep buying stocks….I mean index funds, what could possibly go wrong?

    “Bloomberg today relays data from Novus Partners, which analyzed liquidity conditions using their in-house “30 day liquidity” metric to judge how ably hedge funds could exit their positions if required. Novus finds that “the market could absorb only about 12 percent of the industry’s total holdings in a month right now.” That metric sits near its lowest recorded levels, and compares to its long-term average of 29% going back to 1999.”

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