2019 Markets: Betting on Volatility (w/ Mark Newton) | Trade Ideas | Real Vision™


Welcome to Real Vision’s Trade Ideas. Today, we’re sitting down with Mark Newton
of Newton Advisors. Great to have you here. Thank you, Justine. So what are you watching in the markets today? I want to talk about the use of implied volatility,
and why I think increasingly it looks quite attractive here after having been cut in half
over the last three and a half weeks. The VIX traded up as high as almost 36, I
believe, into Christmas Eve, back on the 24th of December. As of now, it’s trading right around under
18. At current levels, technically the VIX pattern
still looks quite bullish. It looks just like a pullback within an ongoing
basing pattern. And the market still has a number of different
challenges ahead of it, not only technical, but also fundamental from a larger macro point
of view. There’s still increasing tension with the
Chinese and not knowing whether these tariffs are going to be lifted or not. People are debating the end game for rate
normalization and what the FOMC is doing. And we still have the standoff in the government,
where the government’s been shut down for the longest period ever. So there are a lot of potential reasons it
could cause volatility to rear its ugly head yet again. And it’s tough to really think that this has
just been a quick 15% to 20% pullback in three months, and that it’s off to the races. So with that in mind, we’ve seen almost an
11% rally now in stocks in the last three and a half weeks. It’s been a terrific rally for those that
chose to stay invested and/or buy dips. However, now we’re at levels where increasingly
it’s getting a little bit more challenging. As I like to tell people, the easy part is
done. Now comes the tough part. The S&P is now challenging the lows that we
saw last November, along with the Dow, which is right near 2,630 on the S&P, a very important
level technically. The markets have gotten short term overbought,
but yet the weekly patterns and the monthly patterns remain negative. So that’s a concern. Increasingly, everybody seems to think that
something will happen with the tariffs and is trying to get back involved in the market. I just think that might be a little far fetched
to think that we are going to move right back to new highs right away. So with that being in mind, it’s tough, necessarily,
to sell out of stocks and get short here. But I think an attractive way to play that
is just by adding the VIX to your portfolio, by buying implied volatility, buying some
gamma and Vega, using the options market as a way to potentially add that layer of exposure,
in case risk starts to come back, we see the market turn back lower, that one is protected
after something like the VIX has fallen in half in recent weeks. What are some technicals that you’re looking
at in terms of the market that suggest that volatility or something else might happen
in the near future? Well, a couple of things. Interestingly enough, when you look at just
the last week, the breadth of momentum has been very lackluster on this recent lift. The market had a good initial move off the
lows. We were down at lows of near 2,350. Rallied up. The breadth was pretty strong on that move. Since then, though, the market, just in the
last week or two, has gone very much sideways. And people note the degree of correlation
between the treasury market, and crude, and equities. And the S&P largely has gone sideways. And then we started to lift up out of that
range, above 2,600. Well BRETT has been about 3 to 2 positive. It hasn’t been as strong as we’d like to have
seen. Financials in particular were under a little
bit of pressure. We see technology didn’t really participate
as robustly as we want. So that could be an issue, when you see even
breadth on days when the market rallies. Momentum on a weekly or monthly basis remains
negative. And the chart patterns also remain negative
from last September. So despite the fact that we are in short-term
up trends, most of the weekly and monthly trends are still negative. So with that in mind, it doesn’t really pay
to second guess and think, well, maybe, how about if this doesn’t work. It says, you know what, we’ve been given a
gift in the last few weeks. Markets are up 11% and there’s still a lot
of negatives ahead of us, both from a technical and fundamental potentially perspective. So it might be right to buy some volatility
as a way of using that to hedge your long equity exposure. OK, so how would you go about doing this? What are the levels you’re looking at? Well, with the VIX currently under 20, I think
it’s attractive just to consider buying options on the VIX, or buy VIX futures. There’s two certain ways of doing that. There are ETFs out there. The popular VXX is ending, and it’s going
to be rolling into an ETF called the VXXB, is the ticker. And so that’s also an alternative for investors
to consider as something to buy, which might give some exposure to implied volatility. There just seems to be a lot of warnings out
there with regards to what could potentially happen. And of course, that hasn’t been on the front
burner of late, as equities rallied. But for me, it’s tough to think that it goes
from a level of 100 to zero right away. And so we’ve been given a nice equity rally. And it’s a way for investors to potentially
dampen the amount of volatility in their own portfolios if they’re exposed to equities
when stocks start to turn down, which is likely, in my opinion, in the next few weeks, before
this rally can continue. How high potentially do you see the VIX going? Well, I think on any sign of the market starting
to turn down, I think we should recapture at least 50% of what we’ve lost in the VIX. So we went from 36 or so down to 18. So I would say at least 27 to 30, for me,
is a level the VIX likely can get back to you on any sort of retest at a minimum. And so that’s a decent return for investors
looking to potentially try to find something to capitalize on that move. And you’re looking at this trade over the
next month or so? This is a short-term trade? That’s absolutely right. I think between now and the middle part of
February, I see the equity market stalling out and turning down. And we’re at pivotal levels currently. It doesn’t mean it has to happen right away. There are some cyclical reasons, based on
approaching an anniversary of last year’s all-time highs. And the market’s been very similar to last
year. We both rallied sharply in January. We peaked, and now we’re approaching that
anniversary date, and we’re exhibiting classic signs of near term overbought conditions,
and deteriorating breadth, and the marked exhaustion for those that utilize that type
of thing. And so it makes sense to consider measures
like that as a means of protection for a long portfolio. Great. Can you break down this trade in 30 seconds? So I like buying implied volatility at current
levels, by means of vehicles that can profit on the VIX going higher. The VIX right now has gone under 20. It’s right near 17 and a halg, 18. So my thinking is buying futures or options
on the VIX. Thinking that we can move back to the high
20s makes a lot of sense as a way to hedge long equity exposure, because of technical
concerns, because of fundamental concerns, because of macro concerns as well. Great, Mark, thank you so much. Thank you. So Mark is interested in buying volatility. Specifically, he suggests buying the VIX at
18, with a target price between 27 and 30 over the next month. Just remember that this is a trade idea and
not investment advice. You should do your own research, consider
your risk tolerance, and invest accordingly. For Real Vision, I’m Justine Underhill.

4 thoughts on “2019 Markets: Betting on Volatility (w/ Mark Newton) | Trade Ideas | Real Vision™

  1. yieldcurve forward moved from 36m to 60m shows exactly the correlation between VIX and YC. When you dont see the macro trade…. Free money long VIX.

  2. Betting on volatility – kinda like betting on a coin flip. And if the gamble goes against you – you can say you would've been right eventually! Ha! At some point in the future the chart will hit various values after all!
    Question to all the traders: Don't you think others are looking at the chart and also seeing the recent high – and thus, naturally, be inclined to assume a reversion to the mean, i.e. the chart will perhaps move up, because it's now so low but it was so high? If it was that easy, who's on the other side of these bets?

  3. This is so dumb. Basically if he is right you will lose less than usual and if he is wrong you will make less since you are long the market with a put. These are weak sauce strategies. Hedging is for the 80s. Take positions in uncorrelated assets instead.

  4. Most times experience is the best teacher, initially when i started trading about 9 months ago i lost my money due to lack of good strategy and automated signal decoder. I was made to understand that most posts here are scam but thank God for my colleague who introduced me to Carla Lorraine who restored my happiness. she is so amazing with her automated trading signal decoder which indicates when to place trade. I recommend all traders to go learn her strategy and benefit from this. You can reach her on Email : [email protected]
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