The three major asset classes of equities, bonds, and gold have all enjoyed solid uptrends in recent years -- but not every bull market is created equal. In the latest installment of Bernie Schaeffer on Charts, I analyze the five-year returns for the SPDR S&P 500 Trust (SPY), iShares Barclays 20-Year Treasury Bond ETF (TLT), and SPDR Gold Trust (GLD). To find out which asset class scored the highest -- and which chart is stretching the "bull market" definition -- click over to "Grading Stocks, Bonds, and Gold."

Readers of our Monday Morning Outlook recently received a crash course on the equity-only ISEE call/put ratio, which measures the level of call buying relative to put buying among customers on the International Securities Exchange. This metric also served as the inspiration for my Jan. 17 guest column in Barron's, as the ratio currently seems to be signaling a surprising lack of enthusiasm among call players -- even as the S&P 500 Index (SPX) visits multi-year highs.

To learn more about the historical significance of the current ISEE reading, and what this might mean for stocks, click through to "Bulls Rejoice: Options Traders Still Fearful."

The following is a reprint of the market commentary from the January edition of the Option Advisor, published on Dec. 27. Prices and the chart are as of the close on Dec. 27. For more information or to subscribe to the Option Advisor, click here.

Last month in this space, I discussed what I described as "the biggest stock market 'fail' of 2012" – the 75% year-to-date decline in the iPath S&P 500 VIX Short Term Futures ETN (VXX), and the fact that this VXX implosion was reflective of the monumental losses incurred this year by those (heavily populated by hedge funds) who attempted to "buy volatility" as a hedge against a major decline in the stock market. These huge hedging losses may explain (along with a general aversion by hedge funds to equity exposure, a case in which the sentiment of the so-called pros eerily echoes the epochal fear and loathing of equities by the general investing public) the "barely above break-even" performance of hedge funds in 2012 in the face of equity index benchmark returns in the 10-15% range.

About 6 weeks have now passed since my December issue commentary, and the VXX is still approximately 75% lower than where it started the year. But more recently there have been some major twists and turns, as market volatility took a further tumble, culminating in the VXX year-to-date loss peaking at slightly above 80% before doing an about-face as "fiscal cliff" concerns loomed more urgently. In fact, at its high today of 35.88, the VXX had rallied by over 28% from its 52-week low of 27.94 set just 6 trading days ago.

So where do we go from here on market volatility? Attempting to divine this is no mere academic exercise, as the answer will likely go a long way toward revealing (and explaining) the direction of the stock market over the critical beginning months of the New Year. Will the "protection trade" finally prove its value to those whom it has been bleeding dry? Or will volatility continue its inexorable downward march, interrupted only by well-contained peaks during periods of unusual investor worry or distress? The accompanying daily chart of the VXX over the past 15 months (along with its 80-day moving average) may help us piece this puzzle together.

Constant readers of this space are aware of the emphasis I place in my chart analysis on moving averages, particularly those off the road that's very heavily traveled by such "textbook" moving averages as the 50-day and the 200-day. Two of my favorites for shorter-term analysis are the 40-day and 80-day moving averages. The 40-day can often identify entry opportunities that followers of the 50-day will miss, and the "slower" 80-day often serves to provide less noisy entry points than the 40-day, and a greater measure of consistency, while still allowing the trader a leg up on those who follow the traditional 200-day moving average. And the 80-day moving average for the VXX has not disappointed. As indicated on the chart, note how the move below the 80-day moving average late in the fourth quarter of 2011, followed by an unsuccessful attempt to re-take the 80-day, was indicative of the beginnings of the VXX decline that, with some bumps along the way, has carried into December 2012. Note as well that the "bumps" in the form of counter-trend VXX rallies were concentrated in the May/June 2012 period, which were contained at (or for some brief periods, slightly above) the declining 80-day moving average.

The fact that today's VXX rally managed to penetrate the 80-day on an intraday basis but then closed back below is by no means infallible as an indicator that volatility peaked in today's session and has nowhere to go from here but lower. The 80-day is one of many "place markers" for VXX price action. And while I do find it additionally interesting that the VXX also failed to sustain a move today above the level that corresponds to a 75% year-to-date loss (and above yet another level representing a 25% gain from its recent lows) these are, once again, just some additional place markers of which all traders should be aware but that come with no guarantees.

But the idea of developing these place markers is to allow us to create an edge in our directional forecasting compared to that of the crowd, and in this regard the fact that the CBOE Volatility Index (VIX) also managed to be turned back just shy of the key 21 level today is of more than passing interest. Since June, all VIX rallies have been capped at 21 on a closing basis, and today's VIX high was 20.90. Todd Salamone provided some fascinating insights into the dynamics and the significance of the VIX "cap" in the 20-21 area characteristic of the second half of this year in this week's Monday Morning Outlook. So we have yet another place marker for an argument that the year-end volatility pop will likely be contained not too far from current levels.

The perversity of the financial markets, while fairly well known, is rarely appreciated to its full extent. Explosions in volatility have a very strong tendency to occur at junctures when they are least expected and against which they are very sparsely insured. In fact, the crash of 1987 culminated a period during which the preferred strategy in the index option markets was to sell naked puts on the S&P. So not only did such players go unprotected against a crash, their losses as the market plunged actually accelerated as the puts they had sold surged in price. In 2012, we have had an epic battle between a community of hedgers that increased the size of their bets throughout the year even as their losses from such activities mounted and a market that simply refused to cooperate – in part (and perversely) because of the very fact that so many hedges were already in place. Yet the hedgers have not backed down, as indicated by the record VIX call open interest that has characterized the 5 most recent VIX option expirations. But this is not a battle between an irresistible force and an immovable object – the only entity in this conflict that can be so described is the market. So my conclusion must be that unless and until the white flag begins to be waved by the hedgers in the form of a sharp decline in VIX call open interest, the immovable object should continue to prevail.

On Friday, Nov. 23, I was the featured Market Monitor on PBS's "Nightly Business Report" with Tom Hudson. The topic of the day was volatility -- namely, the much-anticipated spike in volatility that never quite played out the way many investors expected. Check out the video below for more details, including:

• The dismal performance of a popular volatility-based ETN this year, and how this plays into my stock market outlook for next year


• Why investors shifted toward VIX calls over SPY puts as their option "hedge" of choice


• How I'm playing bonds in the current market environment

The following is a reprint of the market commentary from the December edition of the Option Advisor, published on November 15. Prices and the chart are as of the close on November 15. For more information or to subscribe to the Option Advisor, click here.

With about 6 weeks of trading remaining this year, what would you characterize as the biggest stock market "fail" of 2012? Facebook's (NASDAQ:FB) May IPO and the subsequent negative price action (culminating in a decline in excess of 50%) that may have further ramped up the already robust level of ill-regard for the stock market held by individual investors? Apple's (NASDAQ:AAPL) 25% decline from its peak closing level in September, which lopped off about $170 billion in market value from perhaps the only stock on the planet in which huge swaths of investors actually had a high level of optimism and belief? Or the fact that the Market Vectors Gold Miners ETF (NYSEARCA:GDX) is down 10% this year (and down 20% over two years) with gold prices gaining 10% and 20%, respectively, over these periods, thus harpooning investors who take bullish gold positions through mutual funds that invest almost exclusively in the gold stocks and not in the metal?

While none of the above is pretty, particularly when viewed from an individual investor's perspective, I'd suggest the biggest stock market disaster of 2012 has been the utter demolition of the growing contingent of big-money investors who use call options on the CBOE Volatility Index (VIX) to hedge the downside risk in their portfolios. And I'd also suggest this demolition has had a non-trivial negative impact on the performance of hedge funds this year, whose generally mediocre results have put a crimp in the returns of such entities as pension funds.

The accompanying chart displays the levels of VIX call and put open interest from January 1, 2011 to date, and it well illustrates the phenomenal growth in VIX call open interest over this period (the VIX open interest peaks generally occur on option expiration day). VIX call open interest peaked at 3.9 million contracts on 8/17/11 (labeled "A" on the chart) during the heart of last summer's market weakness. This call open interest peak was then matched on 2/16/12 ("B"), and was followed by a regular series of higher peaks this year that reached 6 million contracts on 10/15/12 ("C"). And there is still a possibility that VIX call open interest - currently 5.7 million contracts ("D") - will match or perhaps exceed October's all-time high by the time the November VIX options expire next Wednesday. (Click on the chart below to enlarge).

But the huge dollars flowing into these VIX calls this year is only half the story. The theory behind buying VIX calls to protect a portfolio from a market decline is that market volatility will rise as the market declines, thus driving the VIX higher and causing VIX calls to appreciate on a leveraged basis. But the S&P 500 Index (SPX) has declined by about 7.5% since its October 18 peak, while the VIX has gained a tepid 3 points over this 4-week period. And since VIX call options can be argued to carry a "double premium" (consisting of time value and the higher forward pricing of the VIX futures), the 3-point gain in the VIX over this period has resulted in losses for most VIX call buyers even as the market was declining sharply. And the utter futility this year of buying VIX calls as "protection" is even better illustrated by the fact that the VIX is flat in the wake of the market's 5% post-election decline.

A "hedge" is not in reality a hedge when both legs of the trade lose money. And the fact that many big players have been long the market in recent weeks only because they felt their downside was protected by their VIX call positions has served to exacerbate the market's weakness, as many of these low conviction longs are forced by these circumstances to pare down their stock positions. And while individual investors are not known to be volatility traders, Michael Santoli of Yahoo! Finance in his piece entitled "On Wall Street, Selling Fear is Good Business" observes "Easily the most successful new class of tradable instruments in recent years has been exchange-listed notes tied to the ... VIX." And, I would add, the iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX) has declined by about 75% so far this year, a loss neither Apple nor Facebook have managed to approach.