10 August 2017: Small changes, big effects

Is the North Korea crisis a game changer for the stock markets? Although the effects on volatility are substantial, the major stock market indices have hardly moved. The movements in volatility are very likely exaggerated because of the holiday season: many traders are not present at the (virtual) trade floor. In regular stock trading, there will be enough traders available to have a balance between people who are more brave and those who are more anxious. But in options and futures trading, the number of traders will be much smaller during this season. Small changes of mood then have much bigger effects. One should not be surprised if inverse volatility instruments would spring back strongly at the end of this week or the beginning of next week. To value this crisis truly, we will have to wait and see what happens when most traders return from their holiday addresses in one and a half week.

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North Korea was still on the mind of investors yesterday. But they were not completely worried about the tension between the Asian country and the United States. The major US indices recorded only small losses. The S&P 500 closed 0.04% lower. The Dow (-0.17%) and the NASDAQ (-0.28%) took some more pain, but were well off their session lows. Volatility was on the rise for the first part of the trading session, but eased somewhat in the second part. Moreover, its rise for the day almost vanished during the after hours. The VIX closed with a rise of 1.37%. UVXY ETFs could record another substantial gain: +5%. And XIV ETNs lost 2.6%.
As a result, all of our models had to take another loss. Danny Daredevil‘s RSS dropped to 180%. Adventurous Anny saw her RSS slide to 27%. The return of Solid Suzy and Lazy Larry since their start closed at 35%.
None of our models gave a trading signal at the end of yesterday’s session.

Model Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil XIV 1 January 2016

179.92%

-30.56%

-35.69%

90%

Adventurous Anny XIV 6 March 2017

26.75%

26.75%

-8.58%

74%

Solid Suzy XIV 6 March 2017

35.48%

35.48%

8.24%

103%

Lazy Larry
XIV 6 March 2017

35.48%

35.48%

8.24%

103%

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

 

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Dark clouds gather over our heads.
It might get dark.
But in between us and the clouds
there is a lantern pole.
Something to hold on to.
And behind the clouds
there’s always the sun.
A reassuring thought.