A man needs to know stuff. Oh sure, we can bumble through life being a supposed expert on one thing or another. But to find true fulfillment… we need to know lots of stuff.
We must be curious.
It’s why we cover a lot of topics in these essays. We’ve been called dangerously curious.
Lately we’ve been curious as to what in the world is happening in a peculiar part of the stock market.
Stocks are a realm we know well. We’ve spent well over a decade poking and prodding financial data in order to find the answers we’re looking for. We like to think we know what we’re doing.
But there’s one part of the market that has us scratching our head.
Nonetheless, we’ve already found a way to profit from it (locking in a 110%-plus gain just last week). Here’s the deal…
Few folks realize that investing – and especially short-term trading – is this simple. But there are just two deep human emotions that control everything the market does.
Fear… and greed.
In fact, back when we had a whole lot more hair, we penned a daily investment column with that name.
It’s the balance between those two emotions that moves stocks. When fear outweighs greed… stocks fall. When greed outweighs fear… you betcha, stocks rise.
Right now, though, we’re seeing something we’ve never seen before.
Fear is virtually nonexistent. It’s crazy… a crazy good opportunity.
Like I said, it’s leading to strong profit potential.
AN EMOTIONAL HIGH
Most traders rely on something we call the “fear index” to measure the market’s overall mood.
It’s the CBOE Volatility Index – or VIX. And it measures fear by tracking a simple statistic called implied volatility.
In the roughest of terms, the index measures how much investors are willing to pay to buy options on the benchmark S&P 500. Because options are a key tool we use to protect our investments from wild swings, we can get a good sense of the overall mood of the market by simply measuring their prices.
Right now… the VIX is near all-time lows.
It means investors are greedy.
Fear, for some odd reason, is crazy low.
Despite a wicked political environment, a tired bull market, the drums of war in Asia and a whole host of other issues… investors aren’t bending over backward to protect their portfolios.
But here’s the thing… the VIX rarely stays this low.
Just three weeks ago, I wrote to Manward Trader subscribers and told them about this situation – and a trade to take advantage of it. When I did, the fear index was sitting at a level almost identical to where it is this morning.
But within a week… thanks to a bevy of negative political headlines, it shot up more than 50%.
We locked in quick gains of 110% (some investors made much more) on the trade.
I’m convinced it will happen again.
And when it does, investors positioned to take advantage of the move will make strong gains.
TRADING THE VIX
There are several ways to play the situation. Respecting the promise I made to Manward Trader subscribers, I won’t share the details of our recent trade here – some folks are likely still in the play.
The easiest way (though, remember, easy is rarely best) to play an impending spike in the VIX is through an ETF or similar product.
For example, you could buy shares of the iPath VIX Short-Term Futures ETN (VXX). It tracks the day-to-day action of the fear index quite closely.
When fear rises… so does the price of the fund.
If greed prevails… you guessed it.
But we can complicate things with a bit of leverage… and a lot more gain (and loss) potential.
The ProShares Ultra VIX Short-Term Futures ETF (UVXY) is similar to the iPath offering above, but instead of directly mirroring the underlying index, it uses leverage to double the daily performance of the VIX.
If we’re right about the direction of the fear index… we’ll make a lot of money.
But – this is vital – both of these funds will cost you money if you hold them over the long term. For a host of technical reasons, they are absolutely not part of a set-it-and-forget-it strategy.
Playing the VIX must be done short term.
The strategy we used in Manward Trader last month bought us a bit more time but was still a short-term play designed to last just a couple of months.
Again, it doubled subscribers’ money in just two weeks. (You can learn more about my overall strategy – and the powerful indicator I use – here.)
We hit on this subject not to brag about gains or to prove that we still have our old stock-picking might. No, we do it to show readers the importance of investing Know-How.
We learned just yesterday that Morgan Stanley is rolling out machine-learning algorithms to all 16,000 of its financial advisors. The stock-picking robo-brains will suggest trades, tweak asset allocations and, of course, make sure your “relationship” with the firm is as lucrative as possible.
It’s neat technology… but it’s one more example of how technology is eradicating the supposed need for good ol’ fashioned Know-How.
Our Triad demands we master the subject. Along with Connections and Liberty, we need Know-How to be truly fulfilled.
But we’re losing more and more critical knowledge every day.
We’re convinced it will hurt us. It will certainly hurt our wealth.
If you don’t know the investing basics – like how to play the critical emotions of fear and greed – you’ll never get where you truly want to go.
For that… a man needs to know stuff.
P.S. That 110% gain is just one part of the income stream Manward Trader has created thanks to our proprietary Liberty Indicator. It’s all part of our supercharged retirement income plan. Click here for the full details of the system.