Volatility ETN May Hold the Answer to S&P 500's Future

Since late April, U.S. stock assets have labored in an extensive period of corrective activity. Bulls believe that the pullback is helping to restore health to the markets. They contend that the weak run for the hills, providing opportunity for savvy shoppers to buy great bargain companies at  discounted prices.

Bears explain that the lengthy period of volatile price movement is merely a prelude to the next great disaster. Not only will sovereign debt default fears be troublesome, but austerity programs to help alleviate unsustainable deficit spending will damage economic prospects. On top of that, bank balance sheets will be exposed, real estate will “double dip,” and stock prices will erode rapidly.

The strong divergence of opinion has left stocks vulnerable to erratic price swings. And yet, after all the noise, S&P 500 stocks remain smack in the middle of a trading range(1020-11150)… 1085 as I type.

One thing that I haven’t seen many folks discuss, however, is the buying that’s occurred at the 15% correction level on 3 separate occasions. More precisely, the S&P 500 hit 1040 on August 25, but closed much higher at 1055. the benchmark hit 1040 gain on August 27, only to close even higher (1064) that afternoon. And as recently as the last day of August, the heralded index hit 1040 before ultimately closing at 1048.

Some may think, “What’s the big deal?” But is it truly coincidental that buyers came to the marketplace on 3 separate days to defend a level that is 15% below the 52-week high of April 23? it seems plausible that program trading has been “programmed” to buy at the exact discount.

Stocks certainly won’t get a free ride from September forward. Taxes, unemployment and the mid-term elections loom too large. Neither the bears or bulls can win the battle until November clears away some of the fog.

(With that said, the likely outcomes for tax policy, the mid-term elections and corporate hiring after those elections favor the bulls. Review my previous commentary to learn more.)

Right now, investors should be encouraged to see that the S&P 500 Mid-Term Volatility Futures ETN (NYSE: VXZ) has hit “lower highs” in each consecutive month since May. Investors should also be pleased that VXZ fell below a 50-day moving average. And should VXZ be on its way to dropping below a 200-day MA… U.S. stock assets might just finish 2010 on a high note.

 

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