Saturday June 26, 2010
Let's begin with a comparison of the 'real thing' the $VXX or volatility index with the ETF for that index the VXX. The real thing, the index itself, is shown in the solid black line. The ETF is the red and black bars. Immediately one sees that the real thing is much more volatile than the artificial construct, why?
The answer is that fund manager for such intangible derivatives have to re purchase their positions daily given the amount of money on hand. So the ETF can trade higher or lower depending on compounding and on the R correlation with the underlying derivative. Now the prospectus make this clear, that overall long term results may not match actual fluctuations of the underlying index.
Here is a comment from Pro Funds description of its 2X reverse Dow Jones Real Estate Index SRS.
This ETF seeks a return of -200% of the return of an index (target) for
a single day. Due to the compounding
of daily returns, ProShares' returns over periods other than one day
will likely differ in amount and possibly direction from the target
return for the same period. Investors should monitor their ProShares
holdings consistent with their strategies, as frequently as daily.
Interest in the short side of the markets, betting they will fall rather than rise is growing again. Beware that returns as explained in such short instruments may not reflect actual events. And beware that bear markets are subject to sharp bull rallies. And frankly a lot of great bear possibilities, like the casinos, are rear view mirror events in that the collapse of 2008 will not be duplicated again from current dollar levels. Now to the markets
From Stockcharts.com
The McClellan Summation Index is a popular market breadth indicator that is ultimately derived from the number of advancing and declining stocks in a given market. It is derived from the McClellan Oscillator by tracking its daily accumulation or "summation".The McClellan Summation index generally oscillates between 0 and 2000 although it can move outside of this range during extreme or unusual market conditions. Historically, major market bottoms occur after the index falls below -1000. Readings above +1600 often indicate a major top is near.
Again a theme of this blog will be underlying strength or breadth of the market. We hope this chart makes it clear that internally, the markets measured by the NYSE peaked in Sept of 2009. Indeed many tech analysts called for a top then. They were right as to participation but the overall indices held on until late April 2010. Note that the McClellan readings are on the left scale. And as the above mentions, it looks like the Summation index topped near 1600! It has already fallen to a negative 400, we are on our way to the bottom. Also note that the actual index is back where it was when the Summation Index topped.
See the similarity in the two boxes? The NYSE index poked above the multiple ribbons of MAS in April May of 2008, it did the same thing in the same months of 2010 ! Now the index is dropping below all those MAs just as it did then. The summation overlay in the preceding graph shows you why this is the case, the internals are deteriorating well in to the bear zone. AT bottom the MACD on this weekly chart has broken over, peaking in late 2009. Interesting how the various indicators top at different time, eh? A glance at the CNBC tickers hardly tells the whole story.
Let's pull into that same chart for a closer look. We emphasize that the weekly charts are much more important than dailies. Here the crop below all the MAs is clear. in June the market struggled to come back, and failed badly this week, note the 6763 close is below all the MAs. Coupled with the summation index above this is a powerful argument that the bear market is well underway. Before one gets too bearish now however, note that the MACD has fallen quite a bit, again the fifth wave low as we discussed earlier this week lies ahead.
Let's look at bit closer at how 2008 unfolded, here is 2008 in all is disastrous glory.
Then as now it made a clean break below all the MAs by end of June but gee what's 500 MYSE points in a lazy hazy summer, eh?September lived up to its reputation letting everyone enjoy the Labor Day weekend and then, everything started falling apart. Again look at our second chart on the summation index. The internals were deteriorating much worse than the index would suggest, finally the wheels came off.
As always there are no guarantees, markets love to trick and fool, like the Sirens luring Ulysses onto the rocky shore, but this is an interesting analog, eh, we will continue to follow it and other breadth indicators for you.