- Market Risk Archive

Using Volatility as an Investment Hedge

Published on May 13, 2013 by DownsideHedge in Hedging Strategy, Market Risk

The past fifteen years have been a very volatile time for the stock market. Not only has the market had large corrections and bear markets it has also had huge rallies and bull markets. These swings have made and broken many portfolios. An investor can limit the violent swings in their portfolio by implementing a hedging strategy designed to limit downside losses. With the explosion of ETFs over the past few years there are now several investment vehicles that can be used as a hedge against extensive declines in the stock market. One method that is gaining popularity among investors is volatility. The most common measure of volatility is the CBOE S&P 500 Volatility Index (VIX). When an investor buys a VIX future or option they are placing a bet that the variance or deviation in the price of the S&P 500 Index (SPX) will increase at some point in the future. Basically it is a bet that the market will experience large price swings. When the stock market declines

Tags: spx, vix, xvz

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It Doesn’t Pay to be Smarter Than the Market

Published on April 13, 2013 by DownsideHedge in Market Comments, Market Risk, Quotes

It doesn’t pay to be smarter than the market. Our core market health indicators mostly improved this past week, however everything but risk remains deep in negative territory. Our measures of the economy continue to slip lower as economic reports from around the world bring disappointment. Our measures of trend slipped as well, however this is mostly due to the market stalling over the past month so we expect improvement if the S&P 500 Index (SPX) can stay above 1550 and ultimately break above 1600. Our measures of risk, quality, and strength all improved as the market showed resilience in the face of bad news. That’s probably the most important observation we make this week. There is virtually no perceived risk. I use the word “perceived” because we see plenty of risk. But if there is one thing I’ve learned over my life is that it doesn’t pay to be smarter than the market. As a result, our hedged portfolio remains modestly long and won’t be aggressively hedged unless

Tags: market health, spx

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Long / Short Portfolio – 90% Long and 10% Short

Published on January 11, 2013 by DownsideHedge in Hedge Ratio, Long / Short Position, Market Risk

Our Market Risk Indicator finally made it back to a positive reading this week. As we’ve noted in our weekly market comments, our core market health indicators have been fighting against market risk. While the market health indicators were strengthening over the past month our Market Risk Indicator stayed stubbornly negative. With the clearing of our risk indicator we move from an aggressively hedged position to a 90% long position with a 10% short position. The longs are stocks that we believe will outperform the market and the short is a simple short of the S&P 500 Index. An ETF that can be used is SH. As always, we can’t see the future so we allocate our portfolios based on the probabilities created by the history of our indicators. The current condition of our indicators suggests that the market should move higher over the intermediate term. Once again, not a prediction, merely a situation where the odds favor higher prices. The current hedge ratio is .11. The green lines in

Tags: sh, spx

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Market Overview 12/29/2012 – Make or Break Time

Published on December 29, 2012 by DownsideHedge in Market Comments, Market Risk, Twitter Stock Sentiment, Twitter Support and Resistance

This is one of the times when I really wish I could see the future. We have a market that is coiled like a spring, with conflicting signals as to which way it’s going to move. But when it does move it will be so fast that most market participants will end up chasing price…and losing money in the process. Since we can’t see the future, but we know that risk is high, we feel it prudent to position our portfolios for multiple outcomes. In short, hedge them. We’ve been comfortably hedged or 100% cash since October 19th in our portfolios that use our market risk indicator. We took a small profit on our longs and tightened our hedges again on December 19th. Our hedged portfolio currently has a slight bias to the downside. We’re still holding most of our longs, but are hedged in a way that we’ll lose money if the market goes up (or sideways) and make money if the market goes down. However, the gains or

Tags: spx

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Which Way for Volatility (VIX)

Published on December 11, 2012 by DownsideHedge in Market Comments, Market Risk

Over the past four months volatility (VIX) has been in an uptrend. During October and November VIX spiked above 19 and has been slow in its descent back to the bottom of the up trend channel it is painting. This shows that investors are concerned about the immediate future of the stock market. We’re watching the bottom of the up trend channel and also the down trend line we’ve drawn from the late May peak to the early November peak for confirmation of the next direction for VIX (and the market). In addition, we’re keeping an eye on our Twitter Sentiment indicator for VIX. From the low made in early October our daily Twitter sentiment indicator confirmed the move in volatility. However, during the move into the November peak in VIX our smoothed sentiment indicator showed a fairly strong negative divergence. This resulted in VIX falling over the next month. It traded back to near the bottom of the down trend channel and then bounced. We’re now starting to see

Tags: vix

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When Risk Rises

Published on October 22, 2012 by DownsideHedge in Market Risk

Last Friday our Market Risk Indicator went negative. Although this puts us officially in warning mode it doesn’t mean that prices will necessarily fall. For this reason, you should never use our Market Risk Indicator as a signal to go either long or short. If you do, you’ll lose money. Remember, hedging is not the same as going short. Over the last four months the market has rallied and is now consolidating. This consolidation comes above very important support levels. If we were to look at nothing but price we’d have to conclude that the market is simply pausing before moving higher. Unfortunately, what looks healthy on the outside isn’t always healthy on the inside. Our risk indicator is telling us that even though price is acting reasonably, risk is rising. The red lines on the chart below represent our market risk indicator signalling a warning. The blue line are when the warning condition was cleared. When market risk rises investors have several options available to reduce risk. In our

Tags: spx

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Market Overview 10/20/2012 – Market Deteriorating

Published on October 20, 2012 by DownsideHedge in Market Comments, Market Risk, Twitter Stock Sentiment, Twitter Support and Resistance

Twitter Sentiment, Support, and Resistance

What a week. We’re in the same place as we were last week, but it doesn’t feel like it. After making a trip to the top of the range and back down again we saw deterioration in many of our indicators. Most importantly our Market Risk Indicator went negative. This indicator overrides all of our other indicators as it often signals an acceleration to the down side. We’re not predicting a break of support in the 1420 to 1430 range on the S&P 500 Index (SPX). Rather we’ve been warned of a the chance of substantial risk so we’re buying insurance by aggressively hedging our portfolio. We’re effectively 50% long stocks we want to own and 50% short, however, we’re using aggressive hedging instruments like puts that match our portfolio or mid term volatility (like VIXM or VXZ). Market Positives Our measures of the economy and trend strengthening slightly, however they are slowing in momentum. Financial stocks are showing better relative strength which would bode well for the market if

Tags: spx

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Long / Short Hedge – 50% Long 50% Aggressively Hedged

Published on October 19, 2012 by DownsideHedge in Hedge Ratio, Hedging Strategy, Long / Short Position, Market Risk

Our Market Risk Indicator closed the week in negative territory. This signal caused us to aggressively hedge our portfolio. We’re effectively 50% Long and 50% short, but our shorts consist of instruments that will benefit from increased volatility in the market. Some examples are puts against our long positions or mid term volatility like VIXM or VXZ. A lesser alternative would be an actively managed bear fund similar to HDGE. The long portion of our portfolio continues to be stocks that we believe will outperform the general market over the long run. This move in the portfolio is not a prediction of lower prices in the market. Rather, it reflects enough increased risk that we want to insure our portfolio. As we’ve noted before, our Market Risk Indicator has many false signals that are usually short in duration. If this signal is false we expect to take a small loss which we consider paying for insurance. If the signal proves to be correct we expect to make money as volatility

Tags: hdge, vixm, vxz

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Critical Day for the Market in Your Near Future

Published on October 9, 2012 by DownsideHedge in Market Comments, Market Risk

Just after Labor Day we made a post about value stocks warning of the market nearing a top. Today we’ve updated the chart that shows Berkshire Hathaway (BRKB) and the S&P 500 Index (SPX). As you can see, the rotation to value has continued over the past month. This is evident by the price of BRKB continuing up while SPX moves sideways. As we mentioned in the previous post, this is a sign that we’re closer to the top of a rally than a bottom. Money managers continue to move slowly but surely to safety. This in itself isn’t a near term problem because it takes managers with a lot of money time to make major adjustments to their portfolios. Big dollar sellers try to sell into strength so they don’t move the markets much as they change positions. This slow steady distribution and rotation is what creates tops that last several months before they are recognized. When we look at value stocks (using BRKB as a proxy) out performing

Tags: brkb, risk, spx

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Market Overview 9/8/2012 – Cautiously Optimistic

Published on September 8, 2012 by DownsideHedge in Market Comments, Market Risk, Twitter Stock Sentiment, Twitter Support and Resistance

Over the past week we saw improvement in almost all of the market health indicators that we track allowing us to move to a 100% long position in our hedging strategies. Our measures of market quality improved slightly, market strength improved substantially, and our trend indicators finally confirmed. Our measures of the economy turned positive, but are still on the weak side causing concern that the positive signal may not last long. Our measures of risk remained positive, but flat, even as the market moved higher. Positive Our Twitter sentiment indicator for the S&P 500 Index turned positive on a short term basis. In fact, it had the highest reading to date on a daily basis. This reading signified confirmation of the close on SPX above 1422. Our smoothed sentiment indicator has strengthened over the past three weeks, but is still painting a series of lower highs for the entire rally out of the June lows. This comes as a result of many market participants tweeting over

Tags: risk, spx

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Page 1 of 212

Using Volatility as an Investment Hedge

It Doesn’t Pay to be Smarter Than the Market

Long / Short Portfolio – 90% Long and 10% Short

Market Overview 12/29/2012 – Make or Break Time

Which Way for Volatility (VIX)

When Risk Rises

Market Overview 10/20/2012 – Market Deteriorating

Long / Short Hedge – 50% Long 50% Aggressively Hedged

Critical Day for the Market in Your Near Future

Market Overview 9/8/2012 – Cautiously Optimistic

Twitter Support and Resistance
S&P 500 Index

Support: 1650 and 1600

Resistance: 1665 and 1700

Current Market Conditions

Twitter Sector Sentiment

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