What We Might Expect in 2013?

Another year and another set of doom and gloom forecasts. Of course this was the case for 2012.

There was one individual who indicated that a Bear market has three legs: the initial drop, followed by a rally (which he calls a Bear Trap) and followed by another bigger drop.

I am not sure that has been my experience (maybe my timeframe is just not that broad).

In any event with all that negative energy over the past year you can see that the SPY rallied from a low of 122.50 to a high of 145.

Our Retirement Portfolio was Bullish and Members have generated fabulous results all at a time when the general consensus was Bearish.

I am hoping that all of the Smart Traders can see the wisdom of knowing that price rules the market!

I do believe however that the coming year may create a potential for future price drops. Just realize that if that is the case then the opportunity for the generation of wealth is huge!

The only way to get an indication of future potential price movements is by keeping your eye on the $VXO. As the VXO goes down the stock market goes up and as the VXO goes up the market can drop.

Keep Your Eye on the $VXO
• When the $VXO is in the teens the market volatility is low and we can see low IV’s on stocks.
• When the $VXO is in the 20’s – 30’s the market volatility is high the IV’s on stocks begin to rise.
• When the $VXO is in 40+ we have a market volatility that is now at extremes

When I began trading I was told that when the VXO is low it is time to go (sell bullish positions) and when it is high it is time to buy. Nothing could be further from the truth!

June 2006-February 2007
The VXO hits a low of 9 in December 2006 and the market continued its uptrend into July 2007. So selling our positions and going short would have had negative consequences on our portfolio.

March 2008 – November 2008
The markets behaved just fine from July 2007 to August 2008 (a whole year). The VXO was between 10 and 38. By September 2008 the VXO was above 40%. Now it is time for us as Smart Traders to realize that something pretty big to the downside may be coming. In September 2008 the SPY drops from 115 to 67.50 in just 3 short months!

May 2009 – June 2010
In May 2009 the VXO was back in the 30% range so things started to look quite bullish for the markets. The SPY rallied from $80 all the way to $113 all the while the VXO dropping to 17%.

Feb 2011 to October 2011
The VXO hit a high of 40% on 5 August (probably coinciding with a NFP event) and the following week the SPY went into a slide that last into October 2011. The VXO has not hit those high levels since October 2011 and the SPY has rallied from 110 to yesterday’s high of 152.

Protecting our Portfolios

Remember that when the VXO rises the IV on stocks can also rise so that low IV styles of trading can be challenging and I would only do so if I was hedged.

As an alternative “Investing After Earnings” trading method (which our Smart Traders know how to trade under low IV environments) can also be a high IV style of trading.

Where to Invest in 2013?

If the VXO gets into the 30%+ range we need to be prepared to capitalize on some fairly large moves that only come around once every few years.

Gold: I do like the gold mining ETF so here is a chart (wait until there is a close above the 200dma and the VXO is rising).

SQQQ – This is a Bearish ETF on the Nasdaq. It is a Proshare (moves more than the actual index).

FAS – This is a banking ETF so best to be bullish when the VXO is low and bearish when it is high.