Over the past several years there were a few things you could count on…
Interest rates would stay low, central bankers around the world would print more money, and momentum stocks would go nowhere but up.
In the equity markets this led to the death of volatility, which was nicely illustrated by the iPath S&P 500 VIX Short-Term Futures Exchange Traded Note (VXX), which tracks futures based on the Chicago Board of Options Exchange Volatility Index. This security is usually viewed as a hedge against the markets falling, which explains why it has done so poorly for so long.
The value of VXX goes up and down with the volatility of the S&P 500. Since stocks have been marching higher with very little retracement until the end of 2014, VXX was a losing bet much of the time since it was introduced at the beginning of 2009.
In fact, the note lost so much value from inception through the summer of 2012 (more than 95%) that in October of 2012 it did a 1-for-4 reverse split. Barclay’s, which maintains the note, exercised its right to recall all shares of VXX and issue one new share for every four shares that were outstanding. This brought the price of VXX from just under $9 up to the mid-$30s.
Unfortunately, that wasn’t good enough…
Tides May Be Turnrning
In 2013, Barclay’s did another 1-for-4 reverse split of VXX, taking the stock price from around $12 to near $50. Even with this, VXX traded at just under $27 last month.
But the fortunes of VXX might be turnrning. The rollercoaster ride in the equity markets over the last six weeks has pushed VXX back up to the mid-$30s. At the same time, many of the high-flying momentum stocks have fallen out of favor.
Two of the darlings in the last several years have been Keurig Green Mountain and Apple. Both have had their ups and downs. Keurig was a target of famous short-seller David Einhornrn. As he drew negative attention to the company the stock price took a hit, but soon rebounded and shot to new heights as Coca-Cola started buying chunks of the company.
Apple was knocked back on its heels around the time Steve Jobs passed, but has since come back with a vengeance. Since November, both stocks have fallen from grace along with several other high-flying names. Just in the few trading days of 2015, Keurig is off more than 2%, while Apple is down 4%. Other fast-movers have fallen even more, with Priceline off 11% and Tesla down more than 13%.
In my Triple Play Strategy, where I hold three stocks that are trending higher, I let go of both Apple and Keurig at the start of the year and rotated into traditionally less volatile names. I like both of these companies and think they have a lot of potential, but they occupy the rarified air of momentum stocks.
My goal is to book profits, not stick with stocks as they drop because I think they might turnrn around some day. With all of the gains that have been made in companies like Apple, Keurig, and Tesla in the past several years, it makes sense that as fear and uncertainty creep back into the markets, investors will lock in their gains and head for safe harbors.
The markets are bracing for the last big bang of stimulus from a central bank when the ECB announces its expected bond-buying program this week. But then what?
The Federal Reserve is leaning toward raising interest rates, not printing more dollars and China just popped its latest bubble, which was a huge run in stocks over the past three months.
Earlier this week, the Bank of Japan announced there was no need for additional stimulus until at least mid-year so that previous programs could be given time to work through the economy. With the ECB program announced, and the Fed, the People’s Bank of China, and the Bank of Japan sitting this one out, what is going to lift equities?
It doesn’t appear as if global growth is rebounding, and commodities are still trending lower. It could be that the drug of printed money is finally going to lose its effect. If that happens, be sure to look through your own portfolio to see if you own a stock that is greatly over extended, or perhaps even a market darling that is quickly falling out of favor.
It could be time to move.
Today is John Del Vecchio’s first time with Ahead of the Curve. He’s talking about market valuation and the S&P 500. We’re very excited to welcome him to Dent Research. He has a lot of experience and we’re sure you will benefit from it. Read on…