Saturday, 24 March 2012

TVIX..and other failures

The much touted P3, the 'wave of doom'..whatever you want to call it, has not happened, and right now, doesn't even show any sign of beginning. The doomers (or raging depressive maniacs?) are still being systematically wiped out. There really can't be that many left now.

The VIX - mid-term decline, single digits to come?

The VIX itself is merely a calculation, I won't cover all the details of what it really measures (many have already published plenty on that aspect), and I'm not even sure it matters too much in the scheme of things. Suffice to say, the VIX is merely an indicator of the prices people are paying for options - which often can be a guide to underlying market mood/price volatility.

Playing the VIX itself is of course impossible, but the financial institutions sure have come up with some truly wacky and creative solutions to such a problem.

The VXX - plain 1x LONG VIX (short term futures ETN)

Despite the huge rise - as a result of last summers major down cycle, the VXX is suffering from accelerating decline. Until the TVIX appeared, VXX was always my favourite ETN to highlight as the worse thing any trader can meddle in. The VXX has consistently failed to match good up moves in the VIX, and has merely decayed across the mid-term - even though its not leveraged!

TVIX - 2x LONG VIX (short term VIX futures ETN) 

*I've left the original 'bullish targets' on this chart, as well as what was the important floor of 14. I think too many chartists sometimes are too quick to remove old levels/remarks, in fear of looking stupid.

So, the TVIX has collapsed over a 2 day period of horror, from 14 to around 7. There is lots of talk out there about how TVIX diverged from its net asset value, but I'll leave that for others to discuss.

What is clear is that TVIX has FAILED. It is not only suffering from statistical decay, but the regular rolling of futures contracts is causing havoc. I'm also suspicious that maybe those who are managing the TVIX have somehow messed up in some kind of huge failed futures trade/s. Regardless, the old target levels of 25 and 35 are completely to be discarded now.  From a chart perspective, 14 would now be the resistance for any bounce. It sure is one ugly situation.

UVXY - just another way to lose money

UVXY was the hot new thing, and seemed to be replacing the TVIX as the way for non-options players to trade the VIX. However, its just collapsing away like its TVIX cousin. There is nothing good about this, and even though it just recently had a reverse split, it may need another one within 3 months - not least if VIX 12 or less, and if SP' can break above the next level of 1440.

The target for all such derivatives is...0

Even Credit Suisse have on page'1 (I believe) of the prospectus stated that the long term value for TVIX, and other related products is 0. The statistical decay issue is pure math, and no one...bullish or bearish..can deny the math.

The past two days trading of TVIX is as good a reminder as any that these crazy VIX derivative instruments are for short term trading only. - arguably ONLY for day-trading, with no overnight holds.

For the TVIX holders this weekend, getting back to Wednesdays close of 14, looks a real challenge right now. The notion of 20 is probably out of the window, unless we get a severe multi-month down cycle from current levels - and such a decline looks less likely after Fridays action.

Knife Catching Bearish Lunatics

I can't blame a complete novice for making such a mistake, but its been very disturbing to see across many message boards in the last two nights, traders noting their new TVIX buy trades. Scrolling through the various posts, seeing trades at ..13, 12, 11, 10, 9, 8, and now 7...its a quite saddening thing to see. If the market merely melts up just to SP'1435/40, the TVIX will be in the 6s, if not the 5s.

If the bigger monthly 'bullish outlook' is correct, and SP'1550 is hit, that will take VIX to under 10, perhaps as low as 7 by late summer. In which case.. TVIX will be 3, maybe even the equivilent of 1. By then of course, they'll have done another reverse split, so that it can decay again from a higher level.

I certainly have sympathy for the TVIX holders right now, but they did have a good floor of 14, from which to have placed a last 'line in the sand' dead-stop of 13.75/14.00.

Have a good weekend.