The sudden surge in the TVIX would suggest the bulls are falling off a cliff edge. While the future direction of the stock market is still in limbo land, negative US futures have set the tone for the week. The Dow, S&P 500, and NASDAQ futures are down 485, 50.5, and 124 points respectively (at the time of writing). The bears are sinking their claws in markets. It seems the second bloodbath is just beginning. Many investors are optimistic about the future of the stock market. In the long-term I would agree, but right now fear has the remote control over the market.

When fear is injected with steroids, investors look to go against the market (shorting). Many bearish investors look at the Volatility Index (VIX). The VIX (aka the fear index) is “a real-team market index that represents the market’s expectation of 30 day forward-looking volatility.” (Source Investopedia). However, investors cannot trade the VIX. Because it is an index. Instead, traders look for products that replicate the VIX. A few include the VXX, UVXY, and TVIX.

 

Why is TVIX up 70% in two days?

TVIX is the Credit Suisse’s version of trading the VIX. TVIX is leveraged and aims to replicate the VIX on a ratio of 2:1. Thus if the Volatility index surges by 10% then TVIX should jump up 20%.

The VIX was up because of rising coronavirus cases in the US. Especially in the states of Arizona, South Carolina, and Texas. Rising COVID-19 cases coupled with economies trying to reopen and riots is a recipe for volatility. Hence, VIX and TVIX ETN shot up.

Also, with Wednesday and Thursday being in the red, investors are expecting the fear to stay for a while. Morgan Stanley’s Investment Manager Andrew Slimmon supports this claim as he said, “Given the magnitude of the rally, it would shock me if we had a one day-sell off, and that’s it.”

 

Will TVIX be bullish or bearish from here?

In short, negative (fear) catalysts will see TVIX increase. On the other hand, positive (greed or optimism) catalysts will see the TVIX plummet. TVIX gains feed off fear and uncertainty. Hence TVIX jumped 77% over the past few days.

Negative catalysts would include the S&P 500 crashing, disastrous economic reports, political conflict, and colossal selling pressure.

Future catalysts to watch out for include: consumer confidence data and US export/imports Friday morning, stimulus legislation talks at the back end of July, and COVID-19 cases and treatment developments.

Overall, I would expect TVIX ETN to be bullish (meaning the market is bearish) for the better half of June. Because I expect the fear train to keep on churning, disastrous economic and business reports for June, and retail investors to crack under the selling pressure.

 

Does the TVIX ETN hold any risks?

Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.

First, leveraged returns mean significant gains and losses. The TVIX ETN scored an impressive 2000% gain during Feb and March. However, TVIX posted an 86% decline between March and June. Thus, TVIX can send your portfolio to the moon in a matter of seconds but can also wipe out your portfolio just as fast. The double-edged sword effect of  TVIX should convince traders to make short term investments.

Also, TVIX, like most shorting instruments bleed capital over the long term and thus decay with time. That makes sense considering markets are usually bullish. Long-term decay should further convince investors to play the short-term game.

Exit and Entry points are crucial

Also, for anyone delving into the dark arts of shorting ETNs,  you want to plan entry and exit points. The best entry point is when the market is high, but a bear market is imminent. Because you can enter the inverse ETN at a low price. Once your in and have put on your seatbelt plan your exit price/range. Because it is not necessarily smart to keep riding the ETN with expectation of unlimited growth (greed). Because we know inverse ETF’s decay over the long run. Thus, you may want to ride the TVIX ETN rollercoaster for some capital gains before it starts to spiral down (opinion).

ASX investors looking to short the market should take a look at ASX:BBUS, ASX:BEAR, and ASX:BBOZ

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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

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Written by Patrick McLoughlin, Senior Manager of YIG.

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