May’s Market Panic: Using the VIX Index to Find Hedges

May’s Market Panic: Using the VIX Index to Find Hedges

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Markets reacted negatively to several different economic reports on Friday. The most watched of them being the U.S. jobs report and China’s May manufacturing PMI report.

The U.S. jobs report was incredibly disappointing, revealing that companies added only 69k jobs in May, while economists were hoping for 150k jobs. The unemployment rate raised 0.1% to 8.2%. The report was contrasted by Bank of Tokyo-Mitsubishi UFJ's Chris Rupkey saying, "At least we don't have to hear about how people are dropping out of the labor force." Instead, the labor force rose 642k, while only 220k of them did not find jobs.

China's manufacturing PMI report for May fell to 50.4 vs. the expected level of 52. HSBC noted that their unemployment rate rose the fastest in 38 months.

Spain, Italy, France, Germany, and Greece all reported levels under 50, though lower levels were expected for countries in the Eurozone. A disappointment came from the U.K. though, with a PMI level of 45.9 vs. 50.2 in April and the economist expected 49.7.

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The market plunged in response to the disappointing reports, due to investors and funds selling off positions to manage risk.

When huge sell-offs occur like on Friday, the VIX index, which is a measure of volatility in the S&P 500, usually jumps. When the market becomes highly volatile, stocks that are positively correlated to it have the possibility of acting as hedges.

Below is a list of stocks that are positively correlative to the VIX index. Do you think they can be good protection for you portfolio?

List sorted by market cap.
1. Vertex Pharmaceuticals Incorporated (VRTX, Earnings, Analysts, Financials): Engages in the discovery, development, and commercialization of small molecule drugs for the treatment of serious diseases worldwide. Market cap at $12.67B, most recent closing price at $59.50. Correlation with the VIX index at 0.513 over the last 60 days.

 

2. Nationstar Mortgage Holdings Inc. (NSM, Earnings, Analysts, Financials): Designs, develops, manufactures, and markets analog and mixed-signal integrated circuits and sub-systems. Market cap at $4.86B, most recent closing price at $19.17. Correlation with the VIX index at 0.663 over the last 60 days.

 

3. Dean Foods Company (DF, Earnings, Analysts, Financials): Operates as a food and beverage company in the United States. Market cap at $2.89B, most recent closing price at $15.60. Correlation with the VIX index at 0.545 over the last 60 days.

 

4. AOL, Inc. (AOL, Earnings, Analysts, Financials): Operates as a Web services company that offers a suite of brands and offerings for the worldwide audience. Market cap at $2.56B, most recent closing price at $26.91. Correlation with the VIX index at 0.547 over the last 60 days.

 

5. Investors Real Estate Trust (IRETP, Earnings, Analysts, Financials): Engages in the ownership and operation of income-producing real estate properties in the United States. Market cap at $2.35B, most recent closing price at $27.25. Correlation with the VIX index at 0.58 over the last 60 days.

 

6. Logitech International SA (LOGI, Earnings, Analysts, Financials): Designs, manufactures, and markets hardware and software products that enable digital navigation, music and video entertainment, gaming, social networking, audio, and video communication over the Internet, video security, and home-entertainment control. Market cap at $1.96B, most recent closing price at $10.11. Correlation with the VIX index at 0.549 over the last 60 days

 

7. ARMOUR Residential REIT, Inc. (ARR, Earnings, Analysts, Financials): Market cap at $1.24B, most recent closing price at $6.94. Correlation with the VIX index at 0.523 over the last 60 days.

 

 

8. Arena Pharmaceuticals, Inc. (ARNA, Earnings, Analysts, Financials): Focuses on discovering, developing, and commercializing oral drugs in the therapeutic areas of cardiovascular, central nervous system, inflammatory, and metabolic diseases. Market cap at $1.22B, most recent closing price at $6.60. Correlation with the VIX index at 0.589 over the last 60 days.

 

9. Papa John's International Inc. (PZZA, Earnings, Analysts, Financials): Operates and franchises pizza delivery and carryout restaurants under the Papa John's trademark in the United States. Market cap at $1.11B, most recent closing price at $45.90. Correlation with the VIX index at 0.54 over the last 60 days.

 

10. Standard Microsystems Corp. (SMSC, Earnings, Analysts, Financials): Engages in the design and sale of silicon-based integrated circuits that utilize analog and mixed-signal technologies. Market cap at $821.1M, most recent closing price at $36.62. Correlation with the VIX index at 0.574 over the last 60 days.

 

 

(Written by Danny Guttridge)

 

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