U.S. equities have been pushing toward new record highs this year, but the momentum has sputtered out in recent weeks. Nevertheless, investors who are concerned about further market pullbacks can incorporate a CBOE Volatility Index or VIX-related exchange traded fund hedge into a diversified portfolio.
A number of signals are pointing to weakening market momentum. For instance, the S&P 500 has had a hard time holding above its 50-day simple moving average, a sign of weakening trading momentum, reports Chris Dieterich for the Wall Street Journal. The longer the benchmark takes to break above this trend line, the sturdier this technical resistance will become, pressuring potential gains.
Looking at individual securities, the percentage of S&P 500 components trading above their 50-day averages has dipped to 46%, compared to 75% just one month ago. Bespoke Investment Group argued that the weakness has not reached extremes, which leaves further room for deterioration before the markets look “oversold.”
William Delwiche, an investment strategist at Baird, noted some S&P 500 components are hitting new 52-week lows and the number is rising. The proportion of stocks at their lows as the highest since early 2016.
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Katie Stockton, a technical strategist at BTIG, saw that a number of S&P 500 companies broke down past key technical levels and now outnumbered those breaking out by about 2.5-to-1 over the past three weeks, another sign of waning market momentum.
Traders who are wary of further dips can look to VIX-related exchange traded products to hedge their exposure in case of another sudden fallout.
For instance, VIX traders may look to the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY), VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) and REX VolMAXX Long VIX Weekly Futures Strategy ETF (BATS: VMAX).
The VIX, or so-called fear index, is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index. ETPs that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns. VIX exchange traded products track the VIX futures market, not the VIX spot price.
For more information on the CBOE Volatility Index, visit our VIX category.