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XIV Is Dead: Credit Suisse Pulling the Plug on Inverse Volatility Product

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Selling volatility has been a sure money maker since Donald Trump was elected president some 14 months ago. But that all came undone last week when a jaw-dropping rise in the CBOE VIX obliterated one inverse volatility product.

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End of the Road for XIV

Trading of the VelocityShares Daily Inverse VIX Short-term exchange-traded note (XIV) will officially cease on Feb. 20, according to Credit Suisse, the product’s issuing bank. XIV, which is designed to give the opposite return of the CBOE VIX Volatility Index, nosedived Feb. 5, triggering an “acceleration event” for the fund.

“On the acceleration date, investors will receive a cash payment per ETN in an amount equal to the closing indicative value of XIV on the accelerated valuation date,” Credit Suisse said in a statement. “The last day of trading for XIV is expected to be February 20, 2018.”

The XIV collapsed because of an unprecedented rise in the VIX. The so-called “fear index” spiked 115% on Feb. 5 for its largest ever single-day advance. Because XIV is designed to perform inversely with the CBOE VIX, it trades in the same direction as the S&P 500 Index – only at three-to-five times the speed.

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U.S. stocks just rounded out one of their worst weeks since the financial crisis, with the S&P 500 Index plunging more than 5%. Losses of this magnitude were enough to spike the VIX and tank products that offer inverse exposure.

Prior to last week, the XIV had dramatically outperformed the broader market, with returns of 1,200% since inception in 2010. By comparison, the S&P 500 had doubled over the same period.

To get a sense of just how dramatic the fall in XIV was, consider that the fund had nearly $1.9 billion in assets on Jan. 31. Just six days later, total assets had dwindled to just $110 million.

The XIV had at least two other close calls over the years, the first being in 2011 when the United States had its credit rating downgraded by Standard & Poor’s. As the stock market plunged, XIV fell 71% over a three-week period. A similar loss happened in 2015 after China’s devaluation of the yuan triggered a global panic sale in equities. In both instances, the XIV managed to recover.

A Warning for Other Inverse Products

The equity market’s massive slide put other volatility-related funds on the rope, including the ProShares Short VIX Short-Term Futures (SVXY). The fund is trading at a mere fraction of where it was more than a week ago, although ProShares has assured investors the product was doing what it was meant to do.

The fund manager told clients following the Feb. 5 crash that “the performance on Monday  [Feb. 5] of the ProShares Short VIX Short-Term Futures ETF (SVXY) was consistent with its objective and reflected the changes in the level of its underlying index.”

Although XIV and SVXY have almost identical characteristics, the former is an ETN and the latter is an ETF. But this difference has nothing to do with SVXY surviving the “Black Monday” crash. Despite its apparent vulnerabilities, the decision to continue SVXY was a management one. However, there is no guarantee it too won’t be terminated in the future. Based on the stock market’s recent performance, another test of volatility could be just around the corner.

 

Featured image courtesy of Shutterstock.

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4.5 stars on average, based on 161 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Analysis

Daily Analysis: The Usual Post-Fed Pump and Dump…

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Wednesday Market Recap

Asset Current Value Daily Change
S&P 500 2700 -0.51%
DAX 12,470 -0.14%
WTI Crude Oil 61.28 -0.83%
GOLD 1325.00 -0.43%
Bitcoin 10480 -8.71%
EUR/USD 1.2336 0.61%

The script that we laid out for the FOMC meeting minutes has worked almost perfectly, with the major US indices completing a roundtrip that triggered most of the “weak” stop-losses, before a powerful move lower into the close.

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The predictable late-session intraday volatility aside, markets were quiet and choppy for most of the day, and the Dow, the Nasdaq, and the S&P 500, all closed just slightly lower, while covering 2% during the session, with the tech-index’s relative strength evaporating in late trading.

S&P 500 Futures, 4-Hour Chart Analysis

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Forex Markets and Commodities

What drove the decline in equities was the renewed rise in US Treasury Yields, and to answer the most important question of the day; yes, in fact, the yield-Dollar correlation of the past few months broke down, and today the Greenback rallied together with bond yields.

10-Year Treasury Yield, 4-Hour Chart Analysis

While that is how it should work according to common sense and economic theory, the recent inverse correlation helped a lot of trends in reaching extremes, and those extremes now might reverse.

The outperformance of US markets, the Euro strength, and the weakness in European equities were among those trends, and it’s interesting to see that the bullish technical setup in the EUR/USD is crumbling and the US indices are in the deepest correction since the Brexit.

EUR/USD, 4-Hour Chart Analysis

While there is no assurance that these changes are permanent, for now, we remain short-term bearish on US equities, and continue to look for upside in the battered Dollar.

At the end of the day, the Dollar finished higher against all of the major fiat currencies, although the Yen showed notable relative strength amid the stock rampage near the closing bell. Interestingly the USD vs. risk-on pairs trend continues to lead the other asset classes, as we have noted several times, and that could be something to monitor in the coming days and weeks.

Commodities had a mixed but ultimately bearish session, with oil and gold suffering both suffering losses amid the risk-off shift, although crude already traded lower before the FOMC release, while gold traded in close correlation with the Euro throughout the day.

Cryptocurrencies

The segment had a decisively bearish session, with only a few coins showing considerable relative strength amid the sell-off. Bitcoin, Litecoin, Dash, and Monero are still the leaders of this cycle, while Ethereum is the most notable laggard, pulling most altcoins lower as well.

ETH/USD, 4-Hour Chart Analysis

On a positive note, the majors held up relatively well amid the stock turmoil, but the next few days will be crucial, as important support levels could be tested. That said, most of the coins are well clear of the crash lows, and there is more than enough support below that, combined with the still present bullish signs should keep investors confident that a new uptrend is underway and new rally highs are ahead.

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 107 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Analysis

Pre-Market: All Eyes on the FED and the Dollar (Again)

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FED-Days usually bring very special sessions with a choppy illiquid environment before the “big announcement”, an almost usual stop hunting spike in both directions right after the release, and a rather random, but strong trend in the close that usually defines trading for the next days.

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For this reason, a lot of traders like to take the day off until the FED-decision, and only trade after the event. Why are we talking about this today? Because although there is no interest rate decision this month, the meeting minutes of last month will be published this evening, and what moves the market in this period is rate expectations, not actual decisions.

And by the market, we mean basically all traditional asset classes, and through the rising trend in yields and the consequences of that, rate expectations arguably affect the cryptocurrency segment as well. So what do we expect from the FED? Nothing. We will leave that to the rest of the players, and trade upon the reaction of the market; after all that is what counts. At the end of the day, central banks will try to prop up the market, we can take that for granted.

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S&P 500, 4-Hour Chart Analysis

The overnight session in stock futures was in line with the above-mentioned expectations for a quasi-Fed day, with no clear trend in Asia or Europe, and very choppy price action across the board. Yesterday’s late-session decline is still weighing on investors sentiment, but there are clearly positive signs as well, even as we remain bearish for the coming weeks.

The key levels to watch are still the same, the 2735 and 2700 levels in the S&P 500 (25350 and 24800 in the Dow), and the Nasdaq could remain crucial to keep the hopes of bulls up, should it retain its relative strength.

Dollar-Yield Correlation Switch?

EUR/USD, 4-Hour Chart Analysis

Currency traders might have noticed a subtle shift between US Treasury Yields and the Dollar since the Volatility-Armageddon (actually a bit later than that). In the “old regime” the rise in yields was through the changes in rate-expectations was actually hurting the value of the Dollar, while lately, that negative correlation disappeared and even reversed briefly.

Why is that so important? Because the previous correlation helped the rally in US equities as yields rose, while the new regime could mean that European and Asian stocks will finally gather relative strength, should yields continue to rise. Tonight we might get closer to the solution of this puzzle, as the reaction to the FED-minutes will show how correlations are shaping up now.

Currencies and commodities are also little changed today, although the Dollar continued to edge higher overnight, while enduring a small sell-off as we approached the US open, despite the largely negative European PMI indices.

So watch the Dollar, the Nasdaq, and most of all Treasury Yields today in late trading, and expect choppy conditions until the very end of the US session.

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Market Overview

Up in the Air

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Writing to you from the airport again. Looks like my flight was delayed and I’ll have a few hours in the terminal. So the title of today’s update is really where I’d like to be.

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For the hundreds of you who responded to yesterday’s update with all of your thoughts and opinions about Nicolas Maduro and the Petro, please refer to the title as well.

Optimism is important in tough situations and this situation is particularly difficult. Will Maduro pocket the $735 Million that he raised in the pre-sale, leaving his people high and dry?

It’s quite possible, perhaps even likely. What I do know is that if used correctly, this open-book technology does have the potential to restore trust and stability to the economy but only if it’s executed correctly.

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After much consideration, I personally will not participate in this ICO until see a greater level of transparency. As with most ICOs, the details will likely emerge along the way.

Will be watching closely with hopeful eyes and wishing all the best for the people of Venezuela.

@MatiGreenspan
eToro, Senior Market Analyst

Today’s Highlights

  • The Sell Continues
  • Fed Minutes
  • Going for a Dash

Please note: All data, figures & graphs are valid as of February 21st. All trading carries risk. Only risk capital you can afford to lose.

Traditional Markets

The Dow Jones came back from President’s day with a bad attitude and proceeded to fall 1%, erasing the entire “recovery” from Thursday and Friday.

The selling action was led by Walmart, which dropped a howling 10% after a sour earnings report. This was the stock’s worst day in more than 30 years.

Still, as you’ll notice in the chart below the price is still higher now than it was in mid-November.

The funny thing is, just as with the last big drop, there doesn’t seem to be much correlation with other markets.

Gold dropped and failed to provide a safe haven against the falling stocks and the US Dollar continued its bounce off the bottom.

The Bonds are recovering slightly but Volatility is up.

Everything is up in the air.

Powell’s Etch a Sketch

The markets are focused on the FOMC minutes that will be released later today but this could prove to be a non-event.

A lot has changed since their last meeting, most importantly, their leader. I’m not sure why people are concerned with what Janet Yellen may have been thinking when Powell is now in charge.

The change in regime gives the Fed an excellent chance to change their stance and save face.

The financial markets and top economists expect to see them get tough on inflation and it’s difficult to imagine them delivering anything less. Unless of course, we do see a huge sell off in the markets.

Going for a Dash

For short-term cryptotraders, take a look at Dash. Over the last hour, as I’m writing, it looks like it’s going for a breakaway from the pack.

We’ve seen these type of rallies in this market develop quite quickly in the past. Most recently with Litecoin gaining about 50% on Valentines day.

Of course, all cryptocurrencies have an extremely high risk so trying to catch these waves can be tricky and quite dangerous. A wise investor will always do their best to create a diversified portfolio with all the tools at their disposal.

Wishing you an amazing day ahead!

This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation. The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro. Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose. Cryptocurrencies can widely fluctuate in prices and are not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework.

 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 32 rated postsSenior Market Analyst at Etoro.com.




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