The Deals You Could Have Made In The New Year

The skyrocketing biotechnology sector has long been a favourite destination among investors. However, the tide slowly began to turn in September of last year after the iShares Nasdaq Biotechnology ETF (IBB) entered into bear market territory. Investors who were able to anticipate more volatility for this highly speculative sector could have capitalized on the Proshares UltraShort Nasdaq Biotechnology ETF (BIS), a fund that seeks two times (2x) inverse exposure to the Nasdaq Biotechnology Index[1] The BIS surged more than 30% in the first three weeks of January, compared with a 15% decline in the iShares Nasdaq Biotechnology ETF.

Longing VXX ETN

As they say, when in Rome, do as the Romans. So when the markets are volatile, then trade volatility. That’s what the iPath S&P 500 VIX Futures ETN (VXX) does so exceptionally well. The VXX provides exposure to the Chicago Board Options Exchange Volatility Index,[2] also known as the “investor fear gauge.” The markets experienced heavy volatility in January, with the S&P 500 Index falling more than 7% through the first three weeks. The VIX Volatility Index shot up nearly 30% over the same period, resulting in a similar increase for the VXX ETN.

Conclusions

Applying retrospective analysis is always easy; predicting market behaviour accurately is extremely difficult. If January taught us anything, it’s that 2016 is looking to be a highly volatile year for global finance. While there’s no telling how the future will pan out, the picture through the first four weeks of January has made it pretty clear. Uneven global growth, unwillingness or inability on the part of central banks to curb market volatility and a pervasive supply-demand imbalance in the oil markets all present well-prepared traders with opportunities.

[1] Zacks.com “How to Short Biotechnology Stocks with ETFs.” Nasdaq.

[2] IPath. Product Summary: iPath S&P 500 VIX Short-Term Futures ETN.

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