Want to Trade the Market's Volatility? Here's Why You're Probably Doing It Wrong

Toni Turner |

With more and more of the market assuming they have a firmer idea of the Fed's timeline for the first eventual rate hike, a growing number of investors and traders will attempt to get ahead of the news. This jumping-the-gun behavior will likely lead to more volatility in the market. In our latest interview with Toni Turner of TrendStar Trading Group, we discuss areas of opportunities and how a misperception of trading vehicles can be disastrous. 

EQ: The market has been trading in a range for quite some time, uncertain which direction to go. Stocks are getting a bit of a boost from the Fed comments this week. What key levels are you watching right now?

Turner: Well, I’m watching to see if the S&P 500 can actually close over 2120 and remain over that level into the first of the week. We have to keep in mind that seasonally speaking the market tends to sell off the week after June option expirations. While that’s not a reason to sell everything, it is a point to keep in mind.

If we manage to close above 2120 through the first of the coming week, after that we’re looking at the prior all-time high set on May 20 at nearly 2135. So that would be our next resistance level to watch. 

EQ: You mentioned recently that a lazy market is a good time for bottom-fishing trades. Summer is a notoriously lazy period for the market. Is now a good time to practice bottom-fishing? What are some tips that you have?

Turner: One bottom-fishing strategy is to check out  a sector or an industry group that has had a rough time but could potentially be ready to reverse higher. Whether it’s short term or long term, I have trade signals that dictate what timeframe I’ll consider the trade to be.

Recently, I have been looking at gold (GLD) and silver (SLV) .   Last week, I got into some gold and silver miners, and as you can see in the short term, that worked out pretty well. The GLD and the miners have jumped in the last few days. Now, I suspect some of that is because the market now expects inflation to come in.   With the economy at what is considered to be near “full employment,” inflation typically comes on stage at that point, and gold and silver are considered to be a hedge against inflation. EQ: For a while now, traders and investors were expecting a pickup in volatility. One way to play that might've been the iPath S&P 500 VIX ST Futures ETN (VXX), but when you compare it to the CBOE Volatility Index (VIX) since the start of May, there has been a huge gap between the two performances. What can we learn from this? Is the VXX just broken?

Turner:  As you know, you can’t trade the VIX itself. So to make it trade able, the VXX exchange traded note is offered, based on the two front months of VIX futures. Trading the VXX can be very disappointing because it’s a vehicle meant for very short-term trading, mostly intraday or at most one or two days.

 Based on how it’s constructed, the VXX is more willing to track the VIX when it closes to the downside, and less willing to track the VIX when it trades to the upside. It doesn’t like to track it as accurately when the VIX moves to the upside, and most traders buy the VXX expecting that they’re hedging their accounts against volatility, but the trouble is that the VXX doesn’t track the VIX futures very well.

All you have to do is simply look at the daily chart of the VXX. It has been losing value dramatically since February, and if you compare it to a daily chart of the VIX, they do not resemble each other.  I think any traders who go into the VXX should do so with an extremely short-term timeframe. Trade it intraday, but unless we have an exogenous shock come into the market, I believe it’s unwise to go long the VXX with the idea of holding it for more than a day or two.

EQ: What sectors or industry groups are you watching now?

Turner: Absolutely. Certainly, the Fed’s decision to keep interest rates low right now—for the summer, anyway—has given quite a boost to the market. I’ve been looking at the iShares US Home Construction (ITB) . The Industrial Select Sector SPDR Fund (XLI) looks good. Health Care Select Sector SPDR ETF (XLV) is breaking out into new highs, and of course The Financial Select Sector SPDR Fund (XLF) looks strong, too. So there are a lot of very attractive places right now to enter the market, or to add to positions. Again, my only caveat is that many times in the week after June expirations, the market has been known to move down. So with that and the Greek tragedy continuing, I am going to be very conservative.

 

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