13 January 2017: Rumination of drugs

Volatility had a rollercoaster ride during yesterday’s session. Investors were still ruminating Donald Trump’s attack on health stocks. One could tell that they were not sure what to make of the Donald’s latest fury. If the new administration is to take on health companies, it might hurt their profitability. The question is: is that a bad thing? Prices of drugs haven risen much more over the past few years than the prices of other goods. Good for stock owners, bad for the broader public. Lower prices for drugs might boost consumer confidence, which might lead to an impulse for the broader economy. In the end, that might be a good thing for investors at large. In that sense, it would mean that the drug industry would be sacrificed for a higher purpose. Those were the considerations which made volatility go up and back down again yesterday.

white-chapel-logo-smallMajor US indices traded much lower at the beginning of yesterday’s trading session, but recovered in the second part of the day. The S&P 500, NASDAQ and Dow lost between 0.21% and 0.32%. Our UVXY ETFs stood firmly in the green during the session (highest at almost +10%), but ended the session with a small loss nevertheless: -0.26%. Our return since the start lowered slightly to 248%. Return for the year is now at -13.7%.
White Chapel did not give a trading signal yesterday and our model believes that UVXY‘s strong intraday gains could be the way to go for the upcoming days.

Accumulated capital at close of previous trading day

Return since start

Return this year

Return this quarter

$34,790

+247.90%

-13.70%

-13.7%

Our initial capital was $10,000 at 1 January 2016. Our average Annual Return is 233%.

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René’s Reflections @ Friday: Inert Tranquility

The Chicago Board Options Exchange Volatility Index, also known as ‘VIX‘, is a popular indicator of fear in the market. It is also referred to as the “investor’s fear gauge”. When the VIX reaches values below 20, this means that the markets are less stressful, and uncertainty and fear have taken a back seat.
Over the last couple of weeks, my attention was grabbed by a VIX, continuously flirting with extreme lows. During 15 of the last 26 trading days, the VIX closed even below 12. If values below 20 indicate a tranquility in the market, then what would be the right words to describe the sentiment of investors at this moment?
I started asking myself some questions. How often does it happen that the VIX closes below 12? Did this happen many times before, in the history of the VIX? And when it happens, how long does it stay at these extreme low levels, on average? And does the length in trading days of a sub-12 VIX say anything about the probability of a quick rebound soon after that?
So I ran some statistics, based on the historical (closing) data of the VIX, over the period of 25 December 1994 up to and including 12 January 2017. I found that when the VIX closes below 12, it does so during 4.86 trading days in a row – on average. Also, I found that it is extremely rare for the VIX to stay at levels below 12 during a period longer than 14 consecutive trading days. This happened only three times: on 29 July 2005 (16 consecutive trading days), on 24 November 2006 (37 consecutive trading days), and on 26 February 2007 (33 consecutive trading days).
In the first case, the VIX rose up to just over 16, to fall back to below 12 again, during the three-month period that followed.
In the second case, the VIX stayed in a bandwidth between 10 (!) and just over 12, for three months after that.
In the third case, the VIX quickly rose up to just over 20 in the weeks that followed, only to fall back to around 13, for two more months.
Some say that when the VIX breaks below 12, history shows a 50% jump is coming. No doubt, they are right. But the question is: when? As far as I’m concerned, I expected to see some correlation between long periods of extreme low levels in the VIX, and fast rebounds shortly after that – but alas, to no avail.
Well, at least it helped me find the right words to describe the sentiment of investors at this moment: “Inert Tranquility”.

© 2017 These Dutch Guys