Our VIX long certificate justifies our investment

What a crazy January on the stock market! It's simply incredible! Would you have considered the Nasdaq 100 dropping so strongly within a month without any early warning signal? We definitely didn't. Times like these aren't easy for the psychology of investors. But especially in these times the great investors and the best strategies can make the ultimate deal. Do we belong to this list? Time will tell.

As mentioned in our previous post, the current market movements are very interesting to study. We see them as the perfect material to learn from, also for our implemented strategy. We do not call these movements 'crash' or 'panic' or anything like that as we cannot find patterns that would allow us to define the last month as such. The main reasons why we do not claim this to be a typical crash are:

  • There is no harsh drop or hyperbole in market indices. Volatility within a day is very high and shows up in both directions.
  • There are only a few stocks that are treated the same when comparing the market movements during European market hours and American market hours. Stocks that recover in the European market hours deteriorate in the American market hours and vice versa. For some stocks, this is like the two different continents would be of a totally different opinion about the quality of certain stocks. 
  • Growth stocks are hit the worst, but they are not the only ones suffering from these heavy market punches - also evergreens such as Microsoft lost more than 7% after its Q2 earnings release today.

Most typically, the real crashes happen in a short timeframe with tremendous severity. They leave investors speechless on the sidelines. In these situations, most investors do not have enough time or room for thoughts to act against the market behavior and, consequently, sell at low levels. Many investors then get desperate about their stock market experience and quit investing in it.

Would you say that this behavior is observable currently? We don't think so.

Still, our check.markets market indicator did us a very big favor to invest in the VIX certificate. "The Cboe Volatility Index (VIX) is a real-time index that represents the marketโ€™s expectations for the relative strength of near-term price changes of the S&P 500 index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility." And as market sentiment is very fearful at the moment, the VIX has enough reason to rise. Currently, it trades at around 30. This is high compared to the usual level at around 20 but still not at levels indicating a crisis. We invested in the certificate at EUR 1.49. It reached its high yesterday trading at 1.93(!). At this level, this would have been a profit of 29% within just two days.

The VIX went to the moon. As the check.markets market indicator is still negative, we didn't sell at this high. Since we consider the market to be very volatile during the upcoming weeks, we feel better by continuing to follow the advice from our market indicator. The only thing we did in order to not make any loss after these huge gains is to put a stop loss at EUR 1.63. Sometimes, the volatility can decrease although the S&P 500 continues to drop which is what we've seen today.

Unfortunately, our stop loss mark at EUR 1.63 was executed today. We don't appreciate this sell as much, but we can also be proud of our strategy which made us profit strongly: We gained 8% within these 3 days. Tomorrow we'll check the markets at 8 a.m. Should the market levels have appreciated this night, we will buy the VIX certificate again.

Will there be a crash coming up in the next few days?

We can't predict the future. Nevertheless, we see tendencies that make us believe that a strong and clear buy signal could be months or years away. Macro-economically, nothing's changed which makes us confident that we do not see the market crashing. BUT: What we will see is a revaluation of stocks. The upcoming interest hikes will result in a challenge for certain stocks, especially growth (and tech) stocks that have reached price levels and multiples in December that many couldn't have imagined. 

In December, we had the first signs that there is a big disparity between the market movements of the leading tech stocks and the movements of the general market indices. While market leaders like Apple, Microsoft, Amazon, Facebook, Tesla or Nvidia climbed from high to high, we could also find that there were more stocks reaching their 52-week lows than their 52-week highs in the Russell 2000 index. Disparities as such are important to be taken into consideration by investors as they show that the rising index levels are mainly supported by the leaders only. In our view, this indicates that there is weak support for the continuation of further price increases and that the top-level can be reached soon.

Although this sign makes us raise our cash ratios, nobody could have estimated such a bad year start. In my private account, I currently have a cash ratio of 88% in my trading account and 40% in my investment account. My crypto wallet only holds 13% of its volume in stable coins and my CFD account is totally in cash at the moment.

  • We would not be surprised to observe strong price increases after the Fed will have published its further measures tomorrow. 
  • We would also not be surprised to observe further market drops down to 30% away from the market indices' record highs.

No matter which scenario we will have the chance to see from tomorrow on, we are sure that the record highs will not be reached again in 2022 due to the inflation and interest rate hikes planned by the Fed and discussed by ECB members. 

So my advice to you is to keep your cash ready. Let market indices find their bottoms and then buy your favored shares at low prices to profit even more from dividends and price increases. I'm looking forward to that moment! Stay tuned!

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