Investors Have Declared the Dow Pullback Over

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrials (DJINDICES: ^DJI  ) are celebrating Tuesday, rising 144 points as of 12:30 p.m. EST after the latest word on Federal Reserve policy remained much the same, if not even more accommodative, on the monetary-policy front. Not only has Fed Chairwoman Janet Yellen's testimony on Capitol Hill sent stocks higher today, but it has also taken much of the fear out of the market -- at least according to the S&P Volatility Index (VOLATILITYINDICES: ^VIX  ) , also known as the Fear Index, which has fallen almost 6% today to return close to its position before the market correction began. But should you be convinced, or is it smarter to remain fearful as others turn greedy?


Image source: Victor Bezrukov, commons.wikimedia.org.

Investors have looked for ways to profit from a potential pullback, and volatility-linked investments have seemed like a natural choice. In general, volatility spikes higher as the market starts to drop, and that happened over the past couple of weeks. From Jan. 22 to Feb. 5, the iPath S&P 500 VIX Short-Term Futures ETN (NYSEMKT: VXX  ) soared almost 35% despite representing an unleveraged vehicle tracking volatility futures. The leveraged VelocityShares Daily 2x VIX ST ETN (NASDAQ: TVIX  ) posted a better than 72% gain over that time frame.

As happened repeatedly during 2013, however, spikes in volatility have proven short-lived. In less than a week, the two investments above have lost 19% and 35%, respectively, showing that betting on volatility is itself a volatile bet. That's the same kind of price action that sent both of those investments to big losses last year.

Investors seem to be getting the message. For the first time ever, the inverse-volatility VelocityShares Daily Inverse VIX ST ETN (NASDAQ: XIV  ) had more assets under management late last week than the iPath VIX ETN. In other words, investors are willing to put money behind their belief that the complacency in the market will continue. That's been a winning move lately, but it also relies on stability in a market that has been known to defy expectations at every turn in the past.

For now, investors are showing their belief that the Dow's pullback is over by bidding up volatility investments that do well in bull markets. Contrarians should take note, especially given the rapidity with which sentiment is shifting back and forth, and avoid assuming that everything will be rosy for the rest of 2014.

Don't let volatility knock you out of the market
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2834466, ~/Articles/ArticleHandler.aspx, 9/21/2014 6:31:52 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement