3 July 2017: Review of Q2

The remarkable rise in optimism following the election of Donald Trump as US President November last year, led to euphoria in the markets. This renewal in business confidence had a soothing effect on market volatility, an effect that lasted even up to the present day. The average value of the CBOE Volatility Index (VIX), also known as the stock market’s fear gauge, was 16.3 from January 2016 to 7 November, the day before the election. The standard deviation of the VIX over this period was 4.07. From 8 November 2016 to 30 June 2017, the VIX’s average, as well as its standard deviation, were both significantly lower at 11.88 and 1.46 respectively. Since the election, the VIX typically moved in a small bandwidth between 10 and 13. It showed occasional spikes above 13 and on the other hand, starting May this year, very low values in the single-digit range on seven occasions. Single digit VIX readings are very rare (1.94 promille of all occasions since January 1995), and they are an indication of market (over) confidence.

Our model Danny Daredevil, the only model that trades UVXY ETFs, needs volatility to thrive. The graph of his performance over the second quarter shows that he is hungry for more action. Between 1 April and 30 June, the value of Danny‘s portfolio decreased by 7.14%. Thanks to a good first quarter (see our review of Q1), his return for the year is still positive though: +7.98%.
In Q2, Danny traded five times: twice in May and thrice in June. Both trades in May were profitable. From 29 March to 26 May, the return over 2017 rose from 11.54% to 27.97%. But on 19 June, Danny sold his UVXY positions with a loss, after the anticipated volatility didn’t happen. The yearly return then dropped to 9.35%. The latest two trades on 23 and 30 June couldn’t make the difference for the final part of Q2. Danny‘s patience is being tested, but he is prepared to explode when nastier market conditions rear their ugly heads. Below is the graph of Danny‘s performance in Q2 of 2017.

 

Adventurous Anny, who always keeps out of volatile trades and holds cash positions between purchasing XIV ETNs, performed very well over the second quarter. The 18-26 May trade made her +14.3% and the 19-23 June trade +0.7%. Her last trade of 30 June is still open, and now stands at -1.12%. Over the second quarter of 2017, Anny saw the value of her portfolio rise with 13.85%. Quite an achievement for a model that was holding cash for most part of the quarter: it held ETNs for only 11 days. Below is the graph of Anny‘s performance in Q2 of 2017.

 

Solid Suzy bought XIV on the first day of her live trading period on 6 March 2017. With no trading signal for her to trade upon, she kept her position. Despite two drawbacks (one in April and one in May), she managed to end the quarter up 14.28%. This quarterly return beats that of both Danny‘s and Anny‘s – mainly due to the lack of volatility during this quarter.

Lazy Larry gained 14.28% in Q2, just like Solid Suzy. Below is the graph of Suzy‘s and Larry‘s performance in Q2 of 2017.

So far, Solid Suzy and Lazy Larry have always moved in line. Are they the same? If not, what’s the difference between the two?
Lazy Larry is a model that never trades. His strategy is plain, simple, and indeed, lazy: ‘buy and hold XIV ETNs’.
Solid Suzy on the other hand, will trigger a trading signal (only) during robust swings in the markets. The average number of trades for Suzy is 7 per year. As long as markets are calm (as they have been since Suzy and Larry started live trading), there will be no trading signal for Suzy. Under such conditions, Suzy and Larry will keep moving in line, and they might appear similar.

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All major U.S. stock indexes were moving gradually upwards Friday, but lost their momentum during the last fifteen minutes of the trading day. The S&P 500 managed to squeeze out a gain of 0.15%. The Dow did better with a gain of 0.29%. The NASDAQ struggled to keep pace. In the afternoon hours it looked like it would be able to sustain its positive momentum, but during the dying minutes of the session it nosedived and lost almost 22 points, closing with a minor loss for the day of 0.06%. Trade on Friday was less volatile than in the previous session. The VIX closed 2.27% lower at 11.18. UVXY ETFs lost 2.50% and the XIV ETNs gained 1.57%.
Although all four models were in possession of XIV ETNs on Friday, the results were mixed. XIV ETNs closed 1.57% higher relative to the close of the previous session. This was profitable for Solid Suzy and Lazy Larry, who already had XIV ETNs in portfolio. But XIV lost 1.11% relative to Friday’s open. Since both Danny Daredevil and Adventurous Anny bought at Friday’s open, they couldn’t profit from the overnight gain.
Danny Daredevil wasn’t too amused with Friday’s trading, as he had to give up most of Thursday’s gains. His RSS dropped from 362% to 335%. Anny‘s first trading day in possession of XIV left her with a bitter taste in her mouth: her RSS dropped from 40% to just below 39%. Solid Suzy and Lazy Larry, the only ones to profit from XIV’s overnight gain, saw their RSS rise from 23% to 25%.
None of our models gave a trading signal at the end of Friday’s session.

Model Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil XIV 1 January 2016

335.29%

7.98%

-7.14%

167%

Adventurous Anny XIV 6 March 2017

38.65%

38.65%

13.85%

177%

Solid Suzy XIV 6 March 2017

25.16%

25.16%

14.28%

101%

Lazy Larry
XIV 6 March 2017

25.16%

25.16%

14.28%

101%

RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return

 

 

Tim’s reflections @ some Mondays: I