2 October 2017: Review of Q3

The stock market euphoria obviously did not hit a ceiling in the third quarter of 2017. This second-longest bull market in history, though showing signs of fatigue, made new highs during Q3 (against a ‘wall of worry‘, we might add.) The atypical volatility, as described in our previous quarterly review, did not come to an end last quarter. The VIX stayed within a bandwidth of exceptionally low values between 13 and historical lows for all of Q3, with the exception of two occasional and short-lived spikes up to around 16, in August. The VIX closed Q3 at 9.51, its fifth lowest recorded close since January 1995. We noticed that the 17 lowest closing levels of the VIX since that date, were all recorded in 2017. And this is where it becomes interesting: of the 55 lowest closing levels ever recorded for the VIX since January 1995, no less than 40 (or 72.7%) were recorded this year. The other 15 were all recorded in 2006 (8 instances, or 14.6%) and 2007 (7 instances, or 12.7%), in the period immediately preceding the Global Financial Crisis of 2007-2008…

No, the graph below does not represent grandmother’s first attempt behind the controls of a flight simulator. It shows the performance of Danny Daredevil over the third quarter of 2017, going south by the sheer lack of volatility for a large majority of the tradings days. Between 1 July and 1 October, the value of Danny‘s portfolio decreased by 68%. Such quarterly losses are not without precedent though: in Q3 of 2011 (in our historical backtesting period), Suzy, Anny and Larry all booked significant losses: of 65%, 68% and 69% respectively. (Danny on the other hand, gained 68% that quarter.) For Danny, all hopes are now set on a return to normal volatility. His performance would then ‘sound’ again more like Status Quo’s second most popular 1970s UK hit single, rather than their most popular one of that decade. Below is the graph of Danny‘s performance in Q3 of 2017.

 

Our model Adventurous Anny was in ‘cash mode’ during most of the third quarter. One week of trading in July, two weeks in August, and four days in September couldn’t make the difference: she had to face a quarterly loss of almost 22%. Her RSS is still positive though: +8.5%. Just like Danny, she is eagerly awaiting better times. Below is the graph of Adventurous Anny‘s performance in Q3 of 2017.

 

Solid Suzy and Lazy Larry are the models that took full benefit of the market’s calm during Q3. As long as this bull market remains in tact, they will flourish. But as soon as the bears take over and dominate the game, Larry, and to a lesser extent Suzy, will suffer. Both Suzy and Larry posted a quarterly gain of almost 17%, 2.5 percentage points more than in the second quarter. Below is the graph of Solid Suzy‘s and Lazy Larry‘s performance in Q3 of 2017.

 

white-chapel-logo-smallUS markets made up their minds at the end of a week marked by a more hawkish tone from the Federal Reserve on monetary policy, and the Trump administration finally unveiling the outline of its long-awaited tax reform proposal. With technology stocks leading the way, all major US indices ended on a high note Friday, posting gains for both the week, the month, as well as the quarter. The S&P 500 and the NASDAQ even reached all-time highs during intraday trading on Friday. The S&P 500 gained 0.37% Friday (+0.7% for the week, +1.9% for the month, and +3.9% for the quarter.) The NASDAQ was up 0.66% Friday (+1.1% for the week, +1.0% for the month, and +5.8% for the quarter.) The Dow rose 0.11% Friday (+0.2% for the week, +2.1% for the month, and +4.9% for the quarter.) Volatility continued its downward trend on Friday. The VIX settled at 9.51 (-0.42%). UVXY ETFs lost 3.96% and XIV ETNs gained 1.85%.
Friday was a profitable day for all our models, as they were all holding XIV ETNs in portfolio. Danny Daredevil saw his RSS rise with 2.5 percentage points, to just over 39%. Adventurous Anny‘s RSS climbed to 8.5%. Solid Suzy and Lazy Larry keep delivering an outstanding performance: their RSS reached 46% and their AAR is rapidly approaching 100%.

Model  Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil UVXY 1 January 2016

39.32%

-65.44%

-67.99%

21%

Adventurous Anny Cash 6 March 2017

8.50%

8.50%

-21.75%

15%

Solid Suzy XIV 6 March 2017

46.28%

46.28%

16.87%

95%

Lazy Larry
XIV 6 March 2017

46.28%

46.28%

16.87%

95%

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

 

Two of our models gave a trading signal at the end of yesterday’s session: Danny Daredevil and Adventurous Anny. Danny switched from XIV ETNs to UVXY ETFs and Anny traded her XIV ETNs for cash at the opening of today’s session.

 

 

The Chapel Family – Episode 12

A stormy Sunday evening in October. The howling wind rattles the windows of the Chapel Residence. The four members of the Chapel Family are chilling in the living room. Danny is struggling to build a fire in the fireplace, but to no avail. No matter how hard he tries, the wood just doesn’t catch fire. He looks over his shoulder to make sure that his bungling attempts to light a fire are not witnessed by the others. Larry is reading a book, titled Bored and Brilliant: How Time Spent Doing Nothing Changes Everything. Or better said, he was: though he is still holding the book, he hasn’t turned a page in more than ten minutes and it looks like he has his eyes closed. Suzy is sitting in her armchair, watching the YouTube video How to Make Spanish Tapas Style Garlic Mushrooms on her tablet. Anny is laughing out loud while watching a television sitcom.
“— Penny. — Yeah? — That’s where I sit. — So sit next to me. — No, I sit there. — What’s the difference? — In the winter, that seat is close enough to the radiator to remain warm, yet not so close as to cause perspiration. In the summer, it’s directly in the path of a cross breeze created by opening windows there and there. It faces the television at an angle that is neither direct, discouraging conversation, nor so far wide as to create a parallax distortion.”
Danny interrupts his fire building efforts, as his attention is drawn to the low rumbling sound of a heavy engine vehicle halting in front of the house. “What’s that?” he asks, to no one in particular. “That’s The Big Bang Theory, a TV show,” Anny replies. “It’s hilarious.” Danny points at the window. “No, I mean outside. It sounds like some kind of a muscle car just stopped in front of the house. Are we expecting someone?” Anny and Suzy shake their heads. Larry is snoring. “Okay, I’m gonna have a look.” Danny walks up to the window and catches a glimpse through the curtains. “It’s… it’s a motorcycle. Someone on a motorcycle. Now stepping off. Removes his helme.. Ah, her helmet. It’s a woman. What the…”
The doorbell rings. All eyes are on Danny, as he opens the door. A tall woman stands in the door opening, dressed in black leather motorcycle clothing with above-the-ankle hard-nosed boots, holding her helmet with both hands. “Hello, Danny.”