24 January 2017: What goes down…

Our model, White Chapel, is based on volatility. It makes a prediction about when volatility will go up and when it will go down. The VIX, also know as the fear gauge, is a widely recognized measure for volatility. If we expect the VIX to rise, we start buying UVXY. In most cases, the VIX and UVXY are like twins. If the VIX goes up, the UVXY will do the same. This is true in more than 9 out of 10 cases. But in 2017 something strange is going on, something unprecedented. As can be seen in the table below, there is a dramatic drop in the number of cases in which the VIX and UVXY closed in the same direction. This is as if you jump off the diving board and instead of falling closer to the pool, you start flying toward the sky. Unfortunately, in our case, the opposite happened: the UVXY went down where we expected it to rise. If UVXY would have followed the regular pattern, our return for the year would have been +3% instead of -21%. What to do about it? Science tells us that what goes up, must come down. Although we are living in an era in which to some the truth is what you state on Twitter, we are convinced that facts will conquer fantasy.

Direction

1994-2016

2017

Equal

91%

57%

Opposite

9%

43%

white-chapel-logo-smallYesterday, US indices went down, the VIX went up and our UVXY ETFs rose…. Uhm, not quite: two-thirds of the previous sentence is correct. Although the VIX added 2%, our UVXY ETFs lost 1.5%. Return for the year dropped to -21%.
White Chapel did not give a trading signal at the end of yesterday’s session and is, in fact, moving away from a trading signal. It is highly unlikely that we will get a signal in the upcoming days.

Accumulated capital at close of previous trading day

Return since start

Return this year

Return this quarter

$31,861

+218.61%

-20.96%

-21.0%

Our initial capital was $10,000 at 1 January 2016. Our average Annual Return is 197%.

RS_v05-small

René watched a short fragment of a gardening program on BBC Two. A vegetable garden was shown, in which beetroot seedlings were growing in dark, fertile soil. You could tell that the enthusiastic gardener could hardly wait for them to be ready to be eaten. Next shot, a couple of days later. A hailstorm had pounded the garden and destroyed most of the fragile young plants. Sadness and despair on the face of the gardener. This meant an unwelcome, huge setback. The beetroots had to be resown, and the waiting for harvest time started all over again. Which was still no guarantee that it would turn out better this time. But the gardener knows all too well that this is part of the game. So she takes a deep breath, gets back to work and doesn’t look back.