The Volatility Index Has Become Eerily Calm

Jul 31, 2023

Fear may be about to return to the market.

Not only are the major indices technically overbought, the Volatility Index (VIX) has become far too complacent. If you take a look at a three-year chart of the VIX, you can see that every time it dipped below 17 (a sign of too much calm in the market) it would push higher shortly after. Most times, a pop in the VIX would lead to a pullback in the major indices.

At 13.94, the VIX is now eerily calm, as the major indices become aggressively overbought. That tells us it’s time to protect against the potential downside in the markets. In fact, we’d rather be set up for a potential pullback, than have no safety net at all. That being said, there are a few ways to bet on the potential for a pullback, including:

ProShares UltraShort QQQ (SQQQ)

With an expense ratio of 0.98%, the Pro Shares UltraShort QQQ (SQQQ) seeks to profit from declines in the NASDAQ-100 Index. Its goal is to produce a return that is -3x the return of its underlying benchmark for a single day. Since the year began, the SQQQ dipped from about $55 to $16.96 because the NASDAQ-100 has been trending higher. However, if we see a pullback in the index, the SQQQ would run higher.

ProShares UltraShort Dow 30 (DXD)

We can also use the Pro Shares Ultrashort Dow 30 (DXD). With the Dow gaining momentum, the DXD fell from about $42 to $38.11. However, with the Dow likely to correct, near-term, the DXD could push higher. With an expense ratio of 1%, the ETF seeks to produce a return that is -2x the daily performance of the Dow Jones Industrial Average.

ProShares UltraShort S&P 500 (SDS)

Or, take a look at the Pro Shares UltraShort S&P 500 (SDS). With an expense ratio of 0.90%, the ETF seeks to produce a return that is -2x the daily performance of the S&P 500.

Or, you can always buy a put option on the major indices, too.

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