The Deals You Could Have Made in the New Year

The global financial markets experienced one of their most turbulent starts to a year ever this past January. Asian and European markets entered into bear market territory, while US stocks plunged to multiyear lows. All this while oil prices plumbed 13-year lows amid deepening oversupply concerns.

In retrospect, January 2016 was an opportune time for short-selling. Using the power of hindsight, below we look at five profitable trades that could have made you a lot of money in January.

Shorting WTI Crude

Oil prices sold off at an unprecedented rate in January, plunging nearly 30% in the first three weeks amid signs of a slowing Chinese economy and expectations for a ramp up in Iranian crude production after US-led sanctions were lifted. Short-selling the West Texas Intermediate (WTI) benchmark at the start of the month could have made you a lot of money. WTI closed at $36.76 a barrel on January 4. By January 22 it was trading at $26.55 a barrel. You do the math.

Shorting Any Major Stock Index Through ETFs

January was absolute carnage for every major stock index around the world. The Shanghai Composite (China), Nikkei 225 (Japan) and FTSE 100 (London) all entered into bear market territory within the first three weeks of the year. Wall Street’s S&P 500 and Dow Jones also experienced their worst two-week start to a year on record. If you had the foresight to short the markets, any exchange traded fund (ETF) that tracks a major index would have made you a handsome profit.

Buying USD/CAD

Although the North American currency pair lost some steam in the latter half of the month, it put up monstrous gains through the first three weeks. The USD/CAD climbed nearly 5 percent – a whopping 600+ pips between January 1 and January 18 – reaching a 13-year high of 1.4578. As a key energy exporter, Canada has been hit especially hard by the oil price collapse. This has pushed the value of the loonie significantly lower.

Shorting the Nasdaq Biotechnology Sector

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.

The post The Deals You Could Have Made in the New Year appeared first on Forex.Info.

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