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We took some big lessons from the Money Morning LIVE trader's summit we just closed in Chicago (by the way, watch your inbox for replays - hot stuff.)
One of the biggest lessons was this: Capitulation, the moment where investors throw up their hands and stop trying to buy the dips, has simply not happened yet.
The market remains vulnerable to more downside simply because people who bought after the pandemic broke, investors who have impressive gains on paper, are treating the market like its Bitcoin circa 2013.
That also means there is a persistent degree of volatility, and it doesn't look like it's going away anytime soon.
Now, high volatility is most often associated with downward trending prices. So there really isn't any way of getting around it. Prices are more likely to fall than to rise.
Fortunately, there are ways to play both the market tumble and volatility to your advantage, both in terms of short-term trades you can do now, and in setting yourself up for success with the eventual rebound.
Let me show you what to do...
Play Both Sides of Volatility with These ETFs
There's a new ETF in town that should be on the radar of every investor right now: the -1x Short VIX Futures ETF (BATS: SVIX) from Volatility Shares LLC.
From their website: "The Short VIX Futures Index expresses the daily inverse performance of a theoretical portfolio of first and second month VIX futures contracts that are rolled daily. The Index determines its daily settlement price from the Time Weighted Average Price (TWAP) of its theoretical portfolio over the last 15 minutes of the regular equity trading session."
In essence, what this means is you don't have to open a futures account and short the VIX futures if you want to benefit from the VIX falling lower. Now you can just buy this ETF.
That said, you may not want to go out and buy a bunch of this just yet. As I said, the volatility we're seeing right now is persistent, which means the VIX is bound to stay level for a while, as we continue in this yo-yo pattern of small bumps followed by further downturns.
But think about it for a minute: If the VIX is inversely correlated to the S&P 500, shouldn't an inverse VIX fund be positively correlated with it?
Turns out that's exactly what happens. So right now, the much smarter move is in the good old SPDR S&P 500 ETF Trust (NYSEArca: SPY). Let me show you a comparison chart:
What I did here is put SVIX in as the bars, and SPY in the background as black and white candles. What you see is that the inverted VIX index is holding flat, while the S&P 500 continues to fall.
Option market makers seem to be saying that the SPY may make a little rebound here, but that the level of volatility will still remain high. Trading SPY, especially options spreads, lets you make money off those bumps as we continue to sink toward capitulation.
As the market rebounds, the VIX will absolutely start to come down, and depending on how the recovery goes, it could happen very fast. When that time comes, anyone with money in SVIX is going to see skyrocketing returns.
It's more important than ever for investors to find solutions that can help counteract the volatility we've seen this year. As interest rates rise and the market teeters, banks are one area where investors are taking refuge.
But we've identified two other key market sectors where a new flood of buying is going to create opportunities for potentially massive profits, especially in small-cap stocks that often get overlooked by the major players.
Money Morning Chief Investment Strategist Shah Gilani has a strategy to narrow thousands of these stocks down to the few with the biggest potential to be the next market winners.
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About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.