Medium term
Trade view / 19 January 2015 at 0:58 GMT

For US equities, the only victor was volatility

Managing Partner / Spotlight Group
United Kingdom
Instrument: USMV:arcx
Price target:
Market price:
Background

Trading drew to a close with losses for the main US equity indices:

Index Weekly Percentage Move
Dow Jones Industrials -1.27 
Standard & Poor’s 500 -1.25 
NASDAQ -1.48

Within the weekly losses was a strong close on Friday that terminated a run of five consecutive losses.

As one would expect in such a week, the real star was the heightened level of volatility as the CBOE VIX closed above 20.00 from Tuesday through Friday.
 
However, one should not assume that this is a wholly new phenomenon driven by the tumble of oil and the sudden rise of the Swiss franc. The chart below reveals that the VIX often trades at aggressive levels during October, late December and mid to late January.

VIX

Source: www.investing.com, Spotlight Ideas

For my trade, there is a chance that the VIX can tick a degree higher. However, I see the pattern that will retreat back in the spring so I will open a short with a target to cover the trade at lower levels. I say this as with still half of the month to run, the next two weeks may show whether US equities are actually undergoing the much-touted correction or could it be that the recent run of losses are a simple downward rotation in the impulsive channel.

What one is to make of the recent declines is far from clear although I have to say I am long-term bullish and recognise that the sell-off has left the forward looking PE ratio of the S&P 500 at 16 when the NYSE closed on Friday, down from 20 at the end of 2014.

Feeding the volatility have been several exogenous factors, such as the retreat in the commodity space e.g. oil and copper emit strong signals about the health of the global economy. Further muddying the water was the move on Thursday by the Swiss National Bank to scrap a three year-old currency cap, an about-face that sent the CHF soaring against the USD and EUR. 

However, on a broader basis, the USD has gained steadily against a basket of major currencies by 16% since the end of June.

Reading the economic tea leaves is rather tricky as US exporters will find their goods more expensive to sell abroad. The stronger currency, though, helps in the fight against inflation, which could encourage the Federal Reserve to keep its accommodative stance a while longer to help boost economic growth.

Management and risk

Parameters: CBOE VIX

Entry: Sell at 20.95

Targets: 20.49…19.33…18.38…17.43

Stop: 24.35

Time horizon: Medium-term

— Edited by Gayle Bryant

For more on equities click here

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Non-independent investment research
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