Schaeffer's Trading Floor Blog

Happy Fifth Anniversary, Bulls!

The last bear market ended five years ago -- what volatility lessons were learned?

by 3/11/2014 7:22 AM
Stocks quoted in this article:

We had kind of a key anniversary this weekend. Sunday, March 9, marked five years since the bottom of The Bear Market. If you're relatively new to this game … well, congrats. It was ugly, so you probably saved yourself some money. You know all those serial top callers that have been so busy calling the End of the Bull that they've missed a nice chunk of this move if they're actually listening to themselves? Well, a similar group existed back in late 2008 and early 2009, calling everything a bottom, or "part of the bottoming process."

I had an options blog back then and I started calling a "Danica Bottom" in the market (don't ask) every day because I figured it would happen at some point and I could then just link back to the posting from that day and say "hey, I called it!"

Just wanted to note that, because if/when this move does top out, everyone who takes a victory lap will have likely called it way too early.

But I totally digress. Bespoke has a matrix here showing the performance of all sorts of ETNs since the market bottomed out. Here are some highlights:

US equity ETFs have posted the largest gains since March 9th, 2009. The Consumer Discretionary ETF (XLY) is up the most of any ETF in our matrix with a 5-year gain of 318%. The Smallcap Growth ETF (IJT) is up the second most with a gain of 288%, followed by the Smallcap 600 ETF (IJR) with a gain of 272%. Of the country ETFs highlighted, Mexico (EWW) is up the most over the last five years with a gain of 180.6%. The Brazil ETF (EWZ) is up the least at just +22.9%.

Looking at the commodity ETFs, silver (SLV) is up the most over the last 5 years with a gain of 57%, followed by gold (GLD) at 42.5% and then DBC at 37.7%. Oil (USO) is up 28% since 3/9/09, but natural gas (UNG) is down sharply with a decline of 79.8%. Finally, the fixed income ETFs are all up in price since 3/9/09, but not by much. The aggregate bond ETF (AGG) is up 8.5% during the current bull market for stocks, while the TIPS ETF (TIP), providing inflation protection, is up 15.5%.

I found that bond underperformance the most jarring in that study. The opportunity cost of that "income" is beyond staggering. The worst equity sector ETF was utilities, which often moves with bonds. And they were up 75%. The second worst was telecom, up 116%, so basically even a dartboard approach probably got you 150% returns if it involved anything equity related.

The CBOE Volatility Index (VIX) closed at 49.68 on March 9, 2009. As high as it sounds now, that was actually significantly lower than the readings in the 80s at times in October 2008. Our good friend the iPath S&P 500 VIX Short-Term Futures ETN (VXX) was only a little over a month old at the time. It closed at a split-adjusted price of $7,284.48 on Bottoming Day.

VIX futures smartly knew that the historically high VIX levels would likely wane over time. Here's how the term structure looked (click to enlarge the chart, courtesy of VIX Central):

VIX Futures Historical Prices

Incidentally, they still overpriced the future of VIX. By mid-November, about when the above graph ends, VIX was in the low 20s. Pretty much buying any duration on that curve worked out horribly, which is a good lesson any time you're tempted to buy VIX futures at a discount to "cash."

So five years from now, are we going to look at today's prices in awe? I'll virtually guarantee now that future-split adjusted VXX will be lower in five years than it is now, regardless of what happens in volatility itself. Otherwise though, I'm not going to hazard a guess.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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