11 August 2017: Fear

After a mildly euphoric period which was characterized by steadily rising stock prices, investors are now gripped by something that could be called fear. This fear finds its roots in the verbal saber rattling between the United States and North Korea. But investors who had been skeptical about the almost uninterrupted advance of stock prices since the election of Donald Trump November last year, see confirmation for a correction in the markets that they thought was long overdue. The usual pattern is that after the source of the unrest dies out, the majority of investors pick up their pace where they left it before the turmoil started. Today could well be another troubled day, but often a weekend brings a change to the mood of investors.

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All three major US indices finished sharply lower on Thursday for their worst day since May, due to the growing tensions between the United States and North Korea. The Dow closed almost 1 percent lower. The S&P 500 lost close to 1.5% and the NASDAQ plummeted 2.13%. Volatility skyrocketed: the VIX rose more than 44%. UVXY ETFs profited firmly, rising 27%. XIV ETNs had to pay the price: they lost 13%.
All of our models lost substantially, because they are holding XIV ETNs. Danny Daredevil‘s RSS dropped to 142%. Adventurous Anny saw her RSS drop to just below 10%. The RSS of Solid Suzy and Lazy Larry is back below 20% at 17.25%.
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

142.25%

-39.91%

-44.35%

73%

Adventurous Anny XIV 6 March 2017

9.69%

9.69%

-20.89%

24%

Solid Suzy XIV 6 March 2017

17.25%

17.25%

-6.33%

44%

Lazy Larry
XIV 6 March 2017

17.25%

17.25%

-6.33%

44%

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

 

 

RS_v05-smallRené’s Reflections @ Friday: Brexit revisited

Of all the weeks that I would rather have skipped, this one ends up high on my list. I am a human being with feelings and emotions and all that comes with it. To see my investment dwindle by eighteen percent in just three days, is nothing short of nauseating. Weeks like these evoke a strong mental resistance to stay cool and collected. Sticking to an investment strategy in times of setbacks is not easy, to say the least. Any lack in determination, commitment or steadfastness, and it will get inside your head. But a state of laconic imperturbability is a privilege, reserved to robots only, I am afraid.
Having said that, I realize all too well that there is one thing even worse than patiently enduring the inevitable drawbacks. Which is to surrender to your fears and to act accordingly. Also known as: to act in a panic reflex. Fear and doubt are very expensive emotions, when you let them drive your investment decisions (as is greed, for that matter). They make you buy at the top and sell at the bottom (I’ve been there before.)
So let’s put things into perspective. Last time we experienced such a sudden drawback was in June last year. Our model (at that time, we only had Danny Daredevil) was trading an ‘inverse signal’, meaning it wasn’t expecting any volatility in the market at that time. All of its portfolio was invested in XIV ETNs. Then there was the totally unexpected outcome of the Brexit referendum in the UK on 23 June, and volatility exploded. As a result, the value of Danny’s portfolio dropped by no less than 26.8% in just two days. Without a trading signal (Danny kept his XIV ETNs), it took 16 trading days before Danny fully recovered from this blow. On 18 July, his portfolio was back at its pre-Brexit value:

You can only imagine what would have happened to Danny’s state of mind, in case he would have sold his XIV ETNs in panic, shortly after the Brexit. (Regret is one of the other human emotions involved in investing, besides fear, greed and doubt. There was also a human virtue involved, but it escapes me which one at the moment.)
Adventurous Anny, Solid Suzy and Lazy Larry were not around at the time of the Brexit dip. They were all introduced on 6 March this year. But how would they have withstood the test? Here is how Anny would have done during the Brexit and its aftermath (according to our backtesting data):

Just like Danny, Anny recovered in 16 trading days (also without a trading signal). Here’s Suzy:

And Larry:

Both Suzy and Larry fully recovered from the Brexit in 16 trading days, just like Danny and Anny. In times of fear, uncertainty and doubt, I take a look at these graphs. Are they reassuring enough so that we can put aside all our anxieties? No, they’re not. Our trading model(s) may have recovered from the Brexit pretty quickly, this doesn’t mean that nastier drawbacks never occur. Take, for example, the China Crisis of 2015. The effect of this crisis on the value of Danny’s portfolio was spectacular: it increased fivefold in six weeks time. Anny (in backtesting) stayed virtually flat. But Suzy and Larry (also in backtesting) on the other hand, needed almost a year in order to fully recover from it. Whether or not you hold volatility ETFs in your portfolio whenever sudden spikes in volatility occur, is of decisive importance. Our models are not clairvoyant. They have no radar for external events that have an impact on the markets, such as (geo)political turmoil. They simply react to what they know, and what they know is all that happened up to yesterday. In times of sudden crises (like the China Crisis, the Brexit, or the rising tensions between the US and North Korea last Tuesday) there is a 50/50 percent chance that your portfolio is positioned right to profit from it (or not to suffer from it). Drawbacks will be overcome, but your mileage may vary. Over time, they will ripple out. Oh yes, I remember now: ‘patience’ was that human virtue.

Now I’m going to forget this week as quickly as I can, and enjoy a sunny weekend. I wish you the same!