Once the investor has calculated risk and decided on a suitable time horizon, they may be wondering how to best start doing research on particular stocks and the market in general. One theory that's emerging: the curious case of the tail wagging the dog.
The higher the number of the VIX, the more volatility we see in the market.
Several risky funds that reward investors when the markets are quiet imploded in the global market rout. For the Dow, the fall at one point of almost 1,600 points was the biggest intraday point loss in Wall Street history. After the dust settled, the combined assets in the two exchange-traded products shrank to $135 million.
ProShares officials said they would continue to manage ProShares Short VIX Short-Term Futures as usual.
"The last two days of trading has thrown a giant bucket of cold water on the short volatility trade and I think we're now in for a prolonged period of elevated volatility generally", said David Lafferty, chief market strategist at Natixis Investment Managers.
The problems these tracker funds are facing should not cause permanent damage to the broader market, investors said, as the total assets under management pales in comparison to the broader options market and equity market overall. And market participants knew it.
Tracking other technical indicators, the 14-day RSI is presently standing at 75.58, the 7-day sits at 80.66, and the 3-day is resting at 82.18 for VIX Mid-Term Futures ETN Ipath (VXZ).
The so-called VIX index is often referred to as the "fear gauge", as it measures expected short-term volatility in the market.
"Really the scrutiny will be around how they were sold and who they were sold to", he said. Many chart analysts believe that an ADX reading over 25 would suggest a strong trend. VIX Short-Term Futures ETN Ipath (VXX) now has Return on Equity of 3.14.
However if a stock breaks below the 50-day line in heavy volume for the first time in a run and can not rally back, it is often a signal that buying demand is drying up and the stock's run is ending.
Two investment products linked to the Cboe Volatility Index (VIX) imploded in U.S. after-market trading on Monday. The opposite would be the case for a falling ADX line.
Bond volatility, as measured by three-month option contracts on Bank of America, has risen to $61 from $58 a week ago, but remains well below a 2016 high of $86. More recently, Societe Generale's head of global asset allocation, Alain Bokobza, compared the continued VIX shorting by hedge funds to "dancing on the rim of a volcano". The ETN's market closing Monday was $99, but its closing indicative price as listed on the VelocityShares website was just $4.22.
But even as 2018 kicked off with soaring stocks and subdued volatility, signs of complacency in short-vol land had cropped up.
The VIX instruments derive their returns based on futures contracts, which also explains why their meltdown occurred at the end of futures trading.
VIX-linked ETPs' net short exposure hit a record high on Thursday, Omprakash estimates.
The SVXY was down about 1 percent Wednesday.
"On the 30th, when February VIX futures went over March, that was my signal to get out and walk away because stuff gets out of control when the board goes backward", he said. What does this all mean and why should you avoid these ETFs?