ETF Expert: Volume on the Volatility ETF (VXX) Picks Up

Commentators mark the effective start of the bear market at October 9, 2007. Thats when the major U.S. benchmarks logged record highs, including a 1565 price for the S&P 500.

Yet the actual beginning came in the sweltering heat of August 2 months earlier. How do I know this? In essence, the CBOE Volatility Index (VIX), also known as the fear gauge, spiked above 30 in August. It was the first time that the VIX had spiked to ultra-fear levels since we pressed forward with the Iraq war in 2003.

Remember what was happening 2 years ago. The Fed needed to pump $72 billion into the U.S. financial system over two days because subrpime mortgage losses were slamming the stock market. August 2007 was the beginning alright.

Yet the insidious nature of this bear was the way it translated from a recessionary bear to a systemic crisis bear. Specifically, the VIX spiked above 30 in August 2007, November 2007, January 2008 and March 2008. With each of these spikes, investors were theoretically acquiring shares at remarkable lows. In fact, throughout history, VIX spikes above 30 were signs of irrational fear that typically presented buying opportunities.

Then came Lehman Brothers and the systemic breakdown of the financial system. When the VIX spiked above 30 in September, it headed north to uncharted waters of 80 in October and November.

It wasnt until March of 2009 that the VIX even fell below its long-term, 200-day moving average. And it wasnt until this past month that weve seen the VIX fall into a more acceptable level of 25. (Keep in mind, the VIX is known for traveling between a complacent 10 and a fear-induced 30.)

So what if you think the current euphoria on the Street is overplayed? What if youre unimpressed with the so-called earnings surprises? What if you feel that the economy may not be mired in recession much longer, but that it sure isnt on its way to growing at a desirable pace? And what if you think investors will become more fearful soon enough?

Theres an investment for that!  The iPath S&P 500 VIX Short Term Futures (VXX) goes up when the level of fear in the marketplace goes up. Indeed, a contrarian investor might be tempted to purchase VXX today if he/she feels the market could become very choppy or if he/she simply believes that the CBOE Volatility Index is bound for a few up months. After all, it has gone down each month since March of 2009.

In truth, its hard to say that VXX is actually representative of complacency simply because it is 50% lower than the bear market bottom in March. Again, with the CBOE Volatility Index at 25, were a far place from the complacency of 10. Whats more, theres little technical evidence that investing in VXX is anything but an effort to catch the falling knife.

That said, the average daily volume on VXX has doubled from the last 3 months over the original 3 months since this investments inception. It follows that iPath S&P 500 VIX Short Term Futures (VXX) could, if nothing else, serve as an effective hedge against a worried investing public going into infamous October.

If youd like to learn more about ETF investing then tune into In the Money With Gary Gordon. You can listen to the show LIVE, via podcast or on your iPod.

Disclosure Statement: ETF Expert  is a web log (blog) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc.. a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Share this post: