Stocks Taking it on The Chin
Today there was a 12% move in Volatility (it went up 12%) and I would say many funds
are long volatility today as a trade to help the performance of the fund, and the VIX acts as great downside insurance so they are happy.
Volatility however can blow up in your face if played from the short side. Most short volatility players are the market makers at the CBOE who take the other side of these Vol Trades, and on a day like today they are adding to the selloff by selling S&P Futures to hedge their positions in short Vol.
This is a bit much for many to grasp, but its pretty simple in concept when u think of it like insurance for your car.
Global Markets are pulling back today and have lost about 2% at mid day. I expect the market to give back nearly half of it's 10% rally over the next few trading days, but not without bargain hunters showing up soon. I think Friday and Monday are the key days for this summer trade and I see Volatility trades remaining on thru Labor Day in most cases, this is the protection many portfolio managers have so they can avoid a big downdraft. Also understand that many Indexes are flat on the year and investors in many funds will start asking questions about what kind of downside protection they have for the portfolioand many will say they have a VIX Clone..
(Reuters) - Stocks tumbled 2 percent and turned negative for the year on Wednesday as softer Chinese factory data and a weaker outlook from the Federal Reserve increased worries about the recovery. The benchmark S&P 500 index was on track for its biggest daily percentage drop since July 16, with the S&P materials index (^GSPM - News) down 3.2 percent. An index of semiconductors (^SOXX - News) dropped 4.5 percent.
Volatility jumped, suggesting investors see further choppiness in the market.
China reported a slowdown in factory output, while on Tuesday the Federal Reserve downgraded its outlook on the economy. It also said it would take new steps to offset a weak recovery.
The Fed highlighted growth worries and signaled it would do more to support the economy if necessary.
"The Fed wanted to be reassuring and not cause a panic and let the system work through on some of these issues on its own. I think that's a wise course of action," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio.
Still, he said, "As investors look forward, it's hard to see anything on the horizon that will be reassuring."
The Dow Jones industrial average (DJI:^DJI - News) was down 231.43 points, or 2.17 percent, at 10,412.82. The Standard & Poor's 500 Index (^SPX - News) was down 29.24 points, or 2.61 percent, at 1,091.82. The Nasdaq Composite Index (Nasdaq:^IXIC - News) was down 66.62 points, or 2.93 percent, at 2,210.55.
The three major indexes once again turned negative for the year. The Nasdaq was down 2.7 percent for the year, while the S&P 500 was down 2.1 percent and the Dow was down 0.2 percent.
All of the S&P's sectors were negative on the day, and, on the New York Stock Exchange, decliners beat advancers by 13 to 2. China's news added to the view of weaker global growth.
"We're expecting China to help the U.S. economy and obviously if China is slowing, that's not going to be as much of a factor," said Alan Lancz, president, Alan B. Lancz & Associates Inc., an investment advisory firm in Toledo, Ohio.
Among top decliners was Cisco Systems (NasdaqGS:CSCO - News), which is due to report earnings after the bell. The stock was down 2.8 percent to $23.64.
According to Goldman Sachs derivatives strategists, as of Tuesday's close, "options are pricing in a 5 percent earnings day move, but (Cisco) shares have a median realized earnings-day move of less than plus or minus 3 percent over the past eight quarters."
Stocks Taking it on The Chin
By: Ronald Russo
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