Woohoo!…U.S. stocks racked up their biggest quarterly advance since 1998! The Standard & Poor’s 500 Index soared more than 15% between March 31 and June 30 - lifting its year-to-date performance marginally into the black, and breaking a streak of six consecutive quarterly declines for the S&P 500, the longest since 1970.

This champagne-cork-popping performance obscures a few trends that should be worrisome to the celebrants. First, the S&P 500 has gained no ground whatsoever since May 8, the first trading day after the Federal Reserve triumphantly announced the results of its banking sector “stress tests.” Second, the BKX Index of financial stocks has DROPPED more than 16% since May 8. (As we have noted in prior editions of the Rude Awakening, the finance sector has been leading the overall stock market - both to the upside and downside - for the better part of four years.

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In our ETF based newsletter, the carry trade is one of the strategies that we employ.  For those unfamiliar with the carry trade, you are essentially trading the interest rate differentials of different countries.  You short a low-yielding currency and go  long a higher-yielding currency.

You can make money in two ways.  You earn the “carry” if the currencies remain very stable, and neither move.  You can also make money in this trade by being correct in the direction.  For instance if you are short the Japanese Yen and long the Australian dollar, then you can also make money if the Australian dollar goes up, and the Yen goes down.

As an example of how to earn the carry, lets look at the Japanese Yen versus the Australian Dollar.  The Yen has been the carry trade vehicle of choice for much of the past decade because Japan has

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The stock market has rallied over 20%. Everyone thinks that we’re in the midst of the next ‘suckers rally’. I’m even convinced that the market will head up over the next few months. But the Volatility Index (VIX)  is still saying ‘buyer beware’.

(If you’re unsure what the VIX is, check out this explanation here.)

As you can see in the chart above, the VIX formed a support line at around 40.

This is a very important line because it hasn’t been breached since late September - just after the Lehman fiasco.

Considering the VIX index measures fear, a break under it would symbolize a less fearful and volatile market. And less volatility correlates perfectly with higher stock prices.

So if you want to be extra safe before buying stocks, wait for the VIX to break under 40 before jumping in.

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img src=”http://photos1.blogger.com/img/43/5843/160/thinking.jpg”br /br /emfont color=”#0000FF”(P.S: Sorry for any disturbances the advertisements above may have caused you)/font/embr /I like reading the Review segment of the Straits Times because there are occasionally interesting analysis, and Andy Ho sometimes has interesting articles. This guy writes extensively on a variety of topics ranging from health to science to philosophy to political systems to economics … all of which interest me (save maybe for health). Saturday’s article in ST is the inspiration for this latest blog entry.br /br /I had read a book on chaos theory some years back, which is the subject of Andy Ho’s article, but had not really made the connection to stock market dynamics then, probably because my market experience then was not too extensive for me to make that connection. But some years later, on reading this article, it struck me how economic and stock market behaviour can be described …

Since Donald Coxe’s departure from BMO towards the end of last year, I have been inundated with enquiries about whether his much-revered “Basic Points” research reports would still be published. The good news is that Donald is planning on resuming these reports, and a new issue may very well appear later this month.

In the meantime, Donald has also resumed his weekly audio commentaries, which can be accessed by clicking here or on his image in the right-hand sidebar of this site.

The latest recording was made on February 6 (althought the webcast site incorrectly mentions January 30). A full transcript of this recording was produced and is shared with you in the paragraphs below (courtesy of Green

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The much-anticipated VIX-tracking ETNs start trading on the NYSE Arca on Friday. 

 

 

The much-anticipated exchange-traded notes that are designed to track the CBOE Volatility Index, or the VIX, officially launched on Friday.

The new ETNs are the first of their kind on the market. They are the: iPath S&P VIX Short-Term Futures ETN (NYSE Arca: VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSE Arca: VXZ). Both come with an expense ratio of 0.89%.

The opening of trading comes after Barclays recently filed with regulators to come out with the new products. It raised a lot of initial interest, although analysts were quick to point out — as well as the ETN’s index provider, Standard & Poor’s — that VXX and VXZ are going to be different sorts of animals than the actual VIX index. 

A caveat with these ETNs is that the underlying indexes were designed for traders,

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If you're waiting for the IRS to formally OK the favorable tax treatment of commodity ETNs, Jim, it's never going to happen.

But I think you can still take advantage of the favorable tax treatment for as long as it lasts (which may be forever). People tell me they won't invest in ETNs because of the tax risk.  What tax risk? In the worst case, ETNs are treated the same as ETFs from a tax perspective. Currently, they're treated better.  So all you have is upside.  (Whether that upside balances the credit risk is another matter, but the tax issue is clear.)

ETNs are certainly top-of-mind right now because of the flurry of excitement surrounding the VIX ETNs. As has been discussed in many places, there are some important issues with these ETNs. 

For starters, they don't track the VIX. People really want to invest in the spot VIX, mostly because

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Income is vital for investors right now, says Eric Roseman. He says investors should begin to accumulate long-term positions in “busted” credit markets. Investment-grade corporate debt currently offers great yields and, in some cases, is government-guaranteed. These bonds may not have bottomed out yet, but now is the perfect time for value investors to test the waters.

This from Sovereign Society:

“This aging stock bull market is looking increasingly like a scarred prizefighter after winning too many championships. Indeed, the market is looking increasingly fragile, bruised and battered since the bear market low in October 2002.”

In January 2008 I made the above observation about stocks as the market was coming undone. Of course, almost a year later the stock market has collapsed with stocks likely to post their worst calendar year of performance since 1931. Over $10 trillion dollars of global stock market values have been wiped-out in 2008.

So

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Current crisis proves that Volatility Index VIX as a investing indicator is not as sufficient as expected. a href="http://stockweb.blogspot.com/2008/09/volatility-index-vix-above-40.html" target="_blank"strongHistory showed level of 40/strong /aas an indication of market bottom. But it has not been case of current market. VIX crossed easily above 40 and jumped to 89. Similar situation happened during October 87 when VIX peaked at 150. p/ppimg id="BLOGGER_PHOTO_ID_5272961483636998178" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 237px; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_28p7XDn4Qb0/SS1SiDKAACI/AAAAAAAABTw/sSVey4DehMo/s400/commercial+papers.jpg" border="0" //pbr /pMore accurate indicator for coming turmoils have been spreads. Either a href="http://stockweb.blogspot.com/2008/10/falling-ted-followed-by-easing.html" target="_blank"strongTED spread/strong/a or a href="http://www.federalreserve.gov/releases/cp/" target="_blank"strongdiscount rate spread for commercial papers/strong/a. It concerns short term (up to 9 months) paper. As you can from the chart, for lower rated A2/P2 the spread reached high already in the beginning of 2008. Market had been more cautious than after 9/11/2001. This has been the first signal for lack of liquidity. /pbr ...

Tuesday’s mega-rally will have many investors itching to get back into the stock market. But Eric Roseman says chasing a short-term bounce could be a big mistake. Similar up-crashes during the Great Depression were followed by prolonged downturns. But Eric says this could be a good time to “nibble” at some quality blue chips or non-Treasury bonds.

This from the Sovereign Society:

Yesterday’s [Tuesday] spectacular 889 point rally for the Dow ranked as the sixth largest daily percentage gain in history for the world’s most widely followed benchmark. The Dow surged 10.9% on Tuesday and other international markets also followed suit with huge double-digit gains.

But again, don’t get too cocky thinking we’re at the cusp of a new bull market. It won’t happen. The economic backdrop does not portend profit recovery any time soon. Domestic consumption is still declining in the United States as Americans start saving again. A higher

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