Tag Archives: market lab report

Market Lab Report – VIX Volatility Model Drawdowns

The fail-safes of the VIX model were instituted during the beta phase. They are self-learning thus are dependent on data in real-time. That said, I was able to go back over all prior data and adjust the fail-safes accordingly. Even without the fail-safes, the model was able to well outperform but drawdowns were substantially greater in some cases, especially from 8/31/15 to 12/28/15. Up to now, I have refrained from posting any backtested results as greed, a damaging type of investor psychology, tends to entice investors into oversizing their positions as the impressive backtested results bring false confidence to a strategy that can be highly volatile. The most important part of the backtests are the drawdowns, ie, risk since the upside gains more than take care of the drawdowns over any rolling 12-month period.   From the start of VXX on January 30, 2009 to December 31, 2015, the worst drawdown periods (greater than -15%) are : 8/31/15 – 12/28/15 -21.8% = As of 1/8/16, the date the model went to cash, the model has rapidly recovered nearly all of this loss due to the highly profitable sell signal on 12/30/15. The date of this writing is 1/13/16. 10/24/14 – 2/26/15 -19.9% = Back to original high by 4/1/15. Stated another way, it took just over a month to recover all losses buying XIV on SELL signals and buying UVXY on BUY signals had one started investing on the 10/24/14 signal, a worst case scenario, since most members would have already been profiting from prior signals. 3/1/13 – 6/26/13 -16.3% = Back to original high by 7/31/14. 2/3/10 – 5/11/10 -22.7% = Back to original high by 5/24/10.   These results do not include partial or full profit taking should gains spike in a few days or less as they can, thus our suggestion of taking quick partial profits while you have them. 12-month rolling period gains are typically well above 50% and often exceed 100%, especially in 2011 which was a highly volatile year. 2016 is shaping up to be a volatile year given that it had the worst start to the year since 1932, a year when the Dow Jones Industrials fell nearly -55% peak-to-trough.  And again, please do not take these results as a reason to oversize your positions. These instruments can be exceptionally volatile so make sure your position sizing is aligned with your risk tolerance levels. And always remember that prior results are no guarantees of future performance.

Market Lab Report – Premarket Pulse 1/13/16

Major averages rose on mixed volume. Economic news out of China on their export data came in above expectations sending oil and European stocks higher in relief-rally fashion as markets are due for a bounce after the drubbing they have endured. Nevertheless, China’s Shanghai Composite Index fell another 2% continuing its downtrend. Futures are higher by more than half a percent at the time of this writing. Watch for short sale set-ups that may emerge during this bounce which may be short-lived. Most former big-stock leaders have broken down through their 50-day moving averages, and in some cases even their 200-day moving averages, such as PANW and LNKD, for example. As the market rallies we are also watching for potentially shortable rallies in names like FB, AMZN, NFLX, GOOGL, MSFT, and others. Some of these rallies may occur as a function of a perceived “strong” earnings report that sparks a gap-up move that can be shorted into. We saw that in AAPL back in July of last year. Currently, we see NFLX as shortable here using the 50-day moving average as a tight stop. The company announces earnings on January 19th, so one either looks for a quick breakdown from the 50-day moving average before earnings, or looks to hold a small position, at most, going into earnings.

Market Lab Report – Premarket Pulse 1/12/16

Major averages finished mixed yesterday on mixed but above average volume. China’s Shanghai Composite Index finished flat overnight as it was still unable to manage a bounce. It’s sharp downtrend remains intact so any bounce that materializes may be a shorting opportunity. The same holds true for other markets including the US markets. A major top in the US markets has formed but the question is when a more substantial bear market may take shape with averages currently off around 10% for the NASDAQ Composite, S&P 500 and DJIA. The Russell 2000 is off nearly 20%. Of course, should the Federal Reserve step in with a new form of QE, a la QE4, that could also push markets artificially higher once again. But so far, the Fed’s dot plot is for 4 rate hikes this year, so the correction could become a full-blown bear. This would clear the decks and thus be a healthy step towards a restoration of perhaps partial normality in the markets. Futures are up around 1% at the time of this writing on no particular news as the market is due for a bounce. While conditions remain weak, such a bounce may be short-lived and provide shorting opportunities in individual stocks.