June 23, 2009 at 2:00 pm by Tom Lydon
As the macroeconomic outlook is beginning to weaken, investors are seeing signs of market volatility and related exchange traded notes (ETNs) can be a way to play investor sentiment in either direction.
Trader sentiment is growing more pessimistic and the Chicago Board Options Exchange Volatility Index (VIX) is past the 30 level, which forecasts a sharp drop from stocks, according to Yahoo! Finance.
Readings of 30 or higher usually translates into high volatility and a bearish sign for the Standard & Poor’s 500 index. Another typical bearish sign for the S&P is the growth of VIX spot number and VIX futures spread, which is above a 3.20 premium.
The VIX may keep gaining as investors start taking profits from the recent rally that had stocks shoot up 35% higher from March lows.
Troubling signs for the market are cropping up, with the World Bank issuing a lower outlook for most world’s economies, commodities stocks are weakening and the Dow transports falling about 4%. With second quarter reports on the horizon, investors are fearful of potential low results and a national unemployment rate that is close to 10%.
- iPath S&P 500 VIX Short-Term Futures ETN (VXX): down 8.1% in the last three months
- iPath S&P 500 VIX Mid-Term Futures ETN (VXZ): down 0.3% in the last three months
When considering the VIX ETNs, it is imperative to know exactly how they work. They don’t track the VIX; what they do is track a basket of volatility futures and produce a negative return where the yield on the cash that serves as collateral for the futures softens the blow.
For more information on market volatility, visit our VIX category.
Max Chen contributed to this article.
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