The case for VIX right now - Margin Debt down 4.3%
Hi folks!
As you may know, FINRA published the Margin Debt Statistics for July the other day.
As you may also know, tops in prolonged and explosive runs in margin debt usually precede big corrections/crashes in the S&P500 by a couple of months
[advisorperspectives.com/dshort/updates/2021/08/12/margin-debt-and-the-market-down-4-3-in-july-first-decline-in-15-months,
yardeni.com/pub/stmkteqmardebt.pdf,
finra.org/investors/learn-to-invest/advanced-investing/margin-statistics]
The Margin Debt reading was down 4.3% from July after 15 consecutive months of increase (!)
Here is my idea on how to play the situation:
The VIX (CBOE Implied volatility from Option premiums on S&P500 for the next 30 days) is currently sitting at a measly 17.12 (albeit after a massive surge from a steal of 15.22 last week) -
below its historical average of 19.52.
Now, since the margin debt very likely topped out in July and the market tends to follow suit a few months later (in addition to just about every thing else - monetary policy, delta, debt ceiling, labor exodus, inflation etc.), it is reasonable to assume that the probability distribution is heavily skewed to the downside for the time to come. Being able to buy the VIX - which is an estimate of future volatility - below its average at such a state seems worth considering.
Based on this idea, I took the liberty to create a chart marking the following - in addition to S&P500 and VIX from 1999:
(1) Tops in margin debt (Black verticals)
(2) Bottoms in VIX before crashes (Cyan verticals)
(3) Sell signals based on concurrent bearish DIV in RSI+MACD (Red verticals)
(4) Beginning of market crashes (red cross)
(5) Current VIX level (orange vertical)
As we can see, the S&P500 do usually take a big tumble a couple of months after tops in margin debt.
More interestingly is the VIX bottoms, however - the VIX usually also bottom out some time before markets crash (this makes perfect sense, as bottoms represent states of the market where very few expect volatility).
Thus, although it is hard to time the markets, this might be one of the very few really good Risk adjusted bets you can find right now.
My strategy since the end of June has been to just sell a little bit of my stock portfolio every week to buy some VIX, and then sell some VIX contracts during periods of small volatility spikes to cope with the future premiums over time. I bought a massive position on Friday and another one today due to the Margin Debt reading. I will continue to buy as long as complacency dominates the market.
On another note, I always use historical data to weight my bets according to the Kelly Criterion (ex: frontiersin.org/articles/10.3389/fams.2020.577050/full)
The simplest way to trade the VIX unless you are familiar with derivative platforms is to buy ETFS such as VXX, VIXY, VOOL.DE etc*
Disclaimer:
This is not financial advice.
I urge everyone to always do their own research, and never take the word of other for granted.
In addition, never take advise from someone who has nothing to lose from giving it to you nor follow the advise themselves - that is why I disclose my positions.
I wish you all well!
Good luck :)
As you may know, FINRA published the Margin Debt Statistics for July the other day.
As you may also know, tops in prolonged and explosive runs in margin debt usually precede big corrections/crashes in the S&P500 by a couple of months
[advisorperspectives.com/dshort/updates/2021/08/12/margin-debt-and-the-market-down-4-3-in-july-first-decline-in-15-months,
yardeni.com/pub/stmkteqmardebt.pdf,
finra.org/investors/learn-to-invest/advanced-investing/margin-statistics]
The Margin Debt reading was down 4.3% from July after 15 consecutive months of increase (!)
Here is my idea on how to play the situation:
The VIX (CBOE Implied volatility from Option premiums on S&P500 for the next 30 days) is currently sitting at a measly 17.12 (albeit after a massive surge from a steal of 15.22 last week) -
below its historical average of 19.52.
Now, since the margin debt very likely topped out in July and the market tends to follow suit a few months later (in addition to just about every thing else - monetary policy, delta, debt ceiling, labor exodus, inflation etc.), it is reasonable to assume that the probability distribution is heavily skewed to the downside for the time to come. Being able to buy the VIX - which is an estimate of future volatility - below its average at such a state seems worth considering.
Based on this idea, I took the liberty to create a chart marking the following - in addition to S&P500 and VIX from 1999:
(1) Tops in margin debt (Black verticals)
(2) Bottoms in VIX before crashes (Cyan verticals)
(3) Sell signals based on concurrent bearish DIV in RSI+MACD (Red verticals)
(4) Beginning of market crashes (red cross)
(5) Current VIX level (orange vertical)
As we can see, the S&P500 do usually take a big tumble a couple of months after tops in margin debt.
More interestingly is the VIX bottoms, however - the VIX usually also bottom out some time before markets crash (this makes perfect sense, as bottoms represent states of the market where very few expect volatility).
Thus, although it is hard to time the markets, this might be one of the very few really good Risk adjusted bets you can find right now.
My strategy since the end of June has been to just sell a little bit of my stock portfolio every week to buy some VIX, and then sell some VIX contracts during periods of small volatility spikes to cope with the future premiums over time. I bought a massive position on Friday and another one today due to the Margin Debt reading. I will continue to buy as long as complacency dominates the market.
On another note, I always use historical data to weight my bets according to the Kelly Criterion (ex: frontiersin.org/articles/10.3389/fams.2020.577050/full)
The simplest way to trade the VIX unless you are familiar with derivative platforms is to buy ETFS such as VXX, VIXY, VOOL.DE etc*
Disclaimer:
This is not financial advice.
I urge everyone to always do their own research, and never take the word of other for granted.
In addition, never take advise from someone who has nothing to lose from giving it to you nor follow the advise themselves - that is why I disclose my positions.
I wish you all well!
Good luck :)
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