The Covid-19 virus is exploding across the United States, with over 50,000 new cases reported in a single day. Dr. Fauci warns that those numbers could double.
In spite of this terrible news, the stock markets have been remarkably resilient.
Granted, the stimulus of CARES Act funds and PPP loans are helping to keep the economy afloat. The Fed is stepping in and buying stocks and corporate bonds to further help stave off a market selloff. In spite of these measures, many wonder how long these relief efforts can prop up a fragile global economy.
Still, the S&P 500 has made an impressive recovery from the February/March selloff, which dipped as low as 2,200.
On Thursday, July 2 the monthly Nonfarm Payroll Report showed an increase of 4.8 million jobs against 3 million jobs fore cast. This was largely due to employees returning back to work, led by the leisure and hospitality sectors.
The major indices spiked on the monthly employment report but gave back much of their gains going into the long 4th of July holiday weekend.
What does this mean?
Stocks are edging up into overbought territory. Meanwhile, many states are re-imposing Covid-19 shutdown procedures. Texas, Florida and Arizona, among other states are shutting down bars, gyms, water parks and other businesses that pose a high risk of Covid-19 disease spread.
If there is a wave of bad economic news, it could trigger another downturn in the markets.
How can you trade a potential downturn?
You could trade volatility. The VIX Index, sometimes known as the "fear gauge" spikes upward whenever markets crash, and it comes back down to earth when markets rally and stabilize.
Notice the relationship of the VIX to the red 200-day moving average. Over the past year, it has held up strongly as support.
A good way to trade volatile is with Options. There are several Volatility Options available that mirror the VIX. These include:
- Velocity Shares Daily 2x VIX Short-Term ETN (TVIX)
- iPath S&P 500 VIX Short-Term Futures (VXX)
- ProShares Ultra VIX Short-Term Futures (UVXY)
For this move to happen, the markets will need to sell-off, since the markets and the VIX usually travel in opposite directions.
If you believe the VIX will move to the upside over the short-term, then you could BUY an Options CALL on any one of the instruments listed above.
Trading involves risk, and potential loss of capital. Always make sure to exercise proper risk management.
