So you’ve decided to trade SVXY. You saw that it had dropped 92% in a day and you thought to yourself, “Super Jack,” (you call yourself “Super Jack”)–
“Super Jack, THAT is an over reaction. There is no WAY it really lost 92% of its value in 24 hours. I gotta get in this Unicorn, it has to jump by at least 100%! That wouldn’t even be 1/5th of where it was at last week, easy money!”
Well, you are right, and you are wrong. And I am going to try to explain how in as few words as possible. We all have things to do. But if you decided to trade in SVXY, you really need to know how it works. You know you didn’t read the prospectus, so at the very least read through this.
SVXY has a value that is actually based on REAL ASSETS, not just speculative supply and demand. It’s based on the VIX futures (I will explain what VIX is soon, I promise), and every single day Proshares posts exactly what the value of each share is worth using a statistic called the NAV. It is calculated at 4:15 and generally published shortly thereafter. (Posted HERE)
Market Makers are paid to ensure that the value of SVXY does not venture too far from the NAV value. The variation you see on a day-to-day basis comes from the VIX futures, and the expectation of what those futures will look like after market close.
Think of the VIX as monetary tracker of volatility, (risk, fear, uncertainty, and doubt) in the marketplace. If the VIX goes up, it means traders are scared there will be volatility in the marketplace. If the VIX goes down, it means traders are calm, comfortable, and that the market is headed up.
Graph from INDEXCBOE: BVZ
Two nights ago, Proshares came out and said, “Hey market, each SVXY unit is worth 10.54.” The Market Makers then knew what they had to do, and they worked the supply so that the price would reach that level. But they can’t keep up perfectly, and as the wider market moves, it impacts what the VIX could be.
The VIX starts around 2:00pm ET, so as soon as they are listed Day Traders can push the price in the direction of where they think the new NAV will be, based on what the VIX is doing. Then, at 4:15, Proshares will look at the security, calculate the new underlying value based on what the VIX is at, and publish it on their website.
So the following day, SVXY popped from the previous day close in the low $9, right on up to $10.54, and any subsequent moves it made up or down were based on what Day Traders thought was happening with the VIX and how it would affect the NAV.
So when you hear someone say, “The technicals are lined up perfectly!” Or, “Why wont this wall break?!” They are completely uninformed and have absolutely no clue why SVXY is the price that it is. There is no L2 “Wall” with this security. It can’t be analyzed based on a normal technical analysis. Candles don’t mean much with this one.
The important things that matter when you try to guess where SVXY is going are:
- What was the NAV yesterday? (HERE)
- What direction has the VIX been going since the NAV was stated? (VIX CHART)
- Are there any external factors or events coming up that could influence how scared and jumpy the market is going to get (Like a war, or a FED interest rate hike, for example)?
The market completely freaked out on Monday, the VIX spiked crazy high, and the Market Makers just couldn’t keep up with the NAV. Proshares actually had to restate it from I believe around $54 down all the way to $4.54.
But for the VIX to be as high as it is, in my opinion, we need to see something that is actually detrimental to the economy. The Fed raises and lowers interest rates all the time, that’s their job. The VIX, and the markets jumpiness, will recover from the Fed doing their job.
What it wouldn’t recover from, at least right away, would be a declaration of war, or a major bank going under, or a credit freeze. Maybe a surprisingly high Inflation rate announcement would send the VIX up temporarily too, because it means that the FED would need to raise interest rates. But our FED has always been great at keeping inflation in relative check. It is their number 1 priority.
Here are the facts, the way I see them, which lead me to believe that SVXY is headed up in the near future:
- The VIX spike was based on fear of an Inflation rate hike, NOT because of an actual economic crisis.
- We are in year 9 of a Bull Market that was overdue for a 10% correction (which we achieved).
- Economic indicators are all around very positive, including Unemployment, Productivity, GDP Growth, Wage Growth, etc. A recession is highly unlikely when unemployment is low and still dropping.
- Inflation is currently still very low, and an earlier move by the fed to raise interest rates by a quarter of a percent would actually impede inflation, which, oddly enough, is what would keep the VIX down.
So, Super Jack, you are right to see SVXY down at $12 and interpret it as a big opportunity. And I agree, there is a tremendous amount of upside if the market can calm down. However, it isn’t going to be completely unexpected and sudden. We will know what the last NAV was, and we will know what the VIX is up to (because we will look!), and every day that the market calms down, SVXY will rise.
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Disclosure: I started my position at 10.55, and added at 11.47, starting during after market hours on Monday, Feb 5. Nothing that I write should be taken as investment advice, always do your own DD before making a trade!