We All Hate the Market, But What Are We Doing About It?

Traders are betting on a volatility pop, per recent ETF stats

by Adam Warner

Published on Jun 5, 2015 at 9:11 AM

Disbelieving rallies certainly makes sense in 2015, seeing as we're in a never-ending churn. Thing is, though -- even with all the fits and starts, we sit very close to all-time highs in pretty much every index, and that's even after an ugly day yesterday.

So, while lack of conviction is understandable, it is noteworthy in the sense that while the rallies fail to impress, we've yet to have much in the way of a scary sell-off, either… well, at least until today's jobs number comes in above expectations, at which point, LOOK OUT! 

Just how much do we hate this market? There's this from some guru named Todd Salamone, Schaeffer's Senior VP of Research:

 

  

No one wants to admit they like the market. But do they actually do anything about it? Well -- yes, if you look at the CBOE Volatility Index (VIX) Industrial Complex: 

"Year-to-date, roughly $1.9 billion has flowed into ETFs wagering on a rise in volatility, while some $1.1 billion has flowed out of ETFs betting on a drop in volatility, based on a Reuters analysis of FactSet data. Investors have been punished for those decisions. 

The biggest long volatility-focused ETF, the iPath S&P 500 VIX Short-Term Futures ETN, for example, has attracted $766 million in new investments this year -- while it is down about 40 percent. At the same time, money has been flowing out of ETFs that bet on low volatility. The VelocityShares Daily Inverse VIX Short-Term ETN, for example, is up 45 percent this year but has had $680 million in outflows." 

And this:

 

 

That's a good old-fashioned roll, most likely. Someone holding VIX out-of-the-money calls rolls them out in time to play for the inevitable "someday" VIX pop. And it will indeed work someday -- but just remember, when you hear about the guy buying cheap VIX calls in size and having them quadruple, he's not mentioning that it took him six rolls at 50 cents a pop just to
get to the point where he makes back some of what he lost on the trade. 

I hate the rally, too. Or really, the lack thereof. You never feel like you missed anything. There's no sense that you better buy now lest it run away before you get around to it. I guess when I totally give up, we'll boom! 

And hey, if you want to diversify, there may be a sports investment fund opening up at a street corner near you! This, from ESPN:

"Nevada Gov. Brian Sandoval signed a bill into law Tuesday that will give out-of-state residents access to the Nevada's licensed sportsbooks through sports betting investment funds.

Senate Bill 443 allows Nevada business entities to apply for registration for the purpose of betting on sports and racing at the state's sportsbooks. Essentially it legalizes sports betting investment funds, similar to traditional mutual funds, that are registered and managed in Nevada but which could include participants from outside the state."

Going forward, game fixers will now be known as "Activist Sports Investors." 

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


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