14 August 2017: Bigger threats

Investors were spooked badly by the fiery rhetoric of schoolyard bullies Donald Trump and Kim Jong Un last week. But is the North Korea problem really the biggest thing to worry about at the moment? Aren’t there other dangers lurking in the closet? According to Michael Brush, columnist at MarketWatch, there are. In his article ‘North Korea may not be the biggest worry for this ailing stock market’, published Friday, he foresees a bumpy ride as volatility returns. Historically, August is the most volatile month. And September and October are the months when often the deepest market declines occur. Technical analysts are now beginning to see divergences inside the market that indicate a directional shift: narrow indices continue higher while fewer stocks participate. Also, the Dow Jones Transportation Average (DJTA) is flashing red. When the Dow is rising while at the same time the DJTA is falling, this indicates that economic weakness may be ahead. And years ending in 7 historically have a reputation to have the worst July-December returns, reporting a median return of negative 9.29% (see Sue Chang’s article on the so called “7” years). But technicals and superstition aside, and since These Dutch Guys are more into sentiment than anything else, Brush’s mention of ‘a troubling twist in investor sentiment’ is what really makes them lean forward.

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Friday marked the end of a 3-day losing streak in US stocks. The Dow and the S&P 500 meandered about on Friday before ending slightly up: +0.07% and +0.13% respectively. The NASDAQ was the only index to show a strong direction to the upside. It gained 0.64% for the day. The rising tensions between the US and North Korea, starting on Tuesday and lingering on into the weekend, made all the major indices dive into losses for the week. The Dow stepped back 0.8%, the S&P 500 1.2% and the NASDAQ 1.3%. Volatility stayed below Thursday’s level during most of Friday’s trading, but rose substantially in late afternoon trading. Just before the close of the session, it eased again. (Literally) saved by the bell, the VIX closed 3.3% lower at 15.51, far away from the single digits that we were almost getting used to. XIV ETNs and UVXY ETFs showed an atypical price movement Friday. It seemed that keeping pace with the VIX was kind of a challenge that day. XIV ETNs usually go up when the VIX goes down, but they lost 4.6%. UVXY ETFs, which usually follow the opposite pattern, gained 5.28%. This was another bad day for all models. Since they all held XIV ETNs in portfolio Friday, the value of their portfolios dropped 4.6%. Danny Daredevil‘s RSS is now 131%. Adventurous Anny saw her RSS slide to below 5%, Solid Suzy and Lazy Larry to below 12%.
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

131.09%

-42.67%

-46.91%

68%

Adventurous Anny XIV 6 March 2017

4.64%

4.64%

-24.53%

11%

Solid Suzy XIV 6 March 2017

11.85%

11.85%

-10.64%

29%

Lazy Larry
XIV 6 March 2017

11.85%

11.85%

-10.64%

29%

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

 

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René starts to see patterns everywhere. Compare the two graphs below: